Daily Management Review

Oil giants are betting on Latin America


The world's largest energy companies make big bets on Latin America, although many used to be afraid to work in this region because of protectionist economic policies and the threat of nationalization.

Shelf fields of Mexico and Brazil, shale deposits in Argentina and discovery of large reserves of energy in Guyana, exhibited at auction sites, attracted ExxonMobil, Royal Dutch Shell and other Western companies. Several Latin American countries, including Brazil and Mexico, liberalized their energy markets to halt decline in oil production or solve budget problems.

The companies themselves have little choice. Latin America has remained one of the few places in the world, besides the United States, where they can find profitable opportunities for drilling. Many countries with large oil and gas reserves, for example, Saudi Arabia and Iraq, usually offer the best deposits to their own oil companies, and to make investments in Russia and Iran means to interfere with US sanctions. As Amy Myers Jaffe of the Council on Foreign Relations notes, the energy supply "boom" is observed in the world exclusively in the Americas. At the same time, the participants of the oil market are beginning to worry about the possible supply deficit. The cost of Brent oil in May exceeded $ 80 per barrel for the first time since 2014, and the US Energy Information Administration predicts that this year the world oil demand will exceed 100 million barrels per day for the first time.

However, not everything is good in the region. Venezuela serves as an alarming example for many companies. About 10 years ago, with the late President Hugo Chavez, the country seized assets from Exxon and ConocoPihillips. And over the past five years, its oil production has declined by about 40% due to the economic and debt crisis, corruption and lack of investment, although Venezuela has the world's largest oil reserves.

Some see similar political risks in Mexico, where presidential elections will be held in July. The left-wing nationalist Andres Manuel López Obrador, who in 2013 opened up the energy sector for foreign and private investors after 75 years of state monopoly, is leading the poll. Over the past three years, Mexico has awarded 110 contracts to companies from 20 countries, which allowed it to raise more than $ 2 billion.

Lopez Obrador is not going to cancel the energy reform if he wins the election, but he promised to stop holding new auctions until the benefits of the current contracts for exploration and production of oil have been studied. In March in Mexico City, his fellow employees of the oil company Pemex conducted a march, demanding a "second expropriation of oil." The posters that they carried showed footprints kicking the logos of Lukoil, Exxon and other oil companies, and the words "Russian get out, Americans get out, other foreigners get out".

Oil giants are going to spend tens of billions of dollars in Latin America in the coming years. As Exxon executives said, resources in Brazil and Guyana are among the best that the company has had in recent decades.

To protect themselves from political risks, Exxon, Chevron and other companies are striving to conclude partnership agreements with state oil companies, industry participants say. Exxon and Shell have joined forces with the Brazilian Petrobras for access to several offshore fields. Australian BHP Billiton became the first ever foreign company that began to cooperate with Pemex. They intend to develop the Trion field in the Gulf of Mexico, which oil reserves are estimated at about 500 million barrels.

"By 2025 [the world will need] to increase the supply by 25-28 million barrels a day," says Steve Pastor, president for oil operations at BHP. - The question is where to find this offer. And here Mexico and Brazil enter in the game."

Shell is particularly active in Latin America, winning at auction the rights to lease nine offshore fields in Mexico and three - in a very attractive area in Brazil. "Countries like Mexico and Brazil have created an honest and open fiscal regime where they can compete on certain conditions," said Wael Sawan, Shell vice-president for deep-sea mining. Although he recognizes the existence of risks: "There definitely are political and economic risks. In both countries elections will be held, which we will closely monitor, as this will determine how much we will decide to invest in the future."

The president of Brazil, Michel Temer, who took office in 2016, softened the regulations that restricted foreign players. This allowed Brazil from the fall of 2017 to attract about $ 2.7 billion from the sale of drilling rights at auctions and as bonuses for signing agreements. The next round of auctions should take place in June.

source: wsj.com