Consultancy: LatAm Attitude Shift Bodes Well for Upstream Investors
Argentina and Mexico's governments are setting a trend in Latin America that should extend through 2020 toward maximizing rather than nationalizing oil and gas resources, making the region more hospitable to investment by foreign energy companies.
That is the key finding of a recent analysis from Wood Mackenzie's Asset Risk Index (ARI) Service, which observed that governments in Mexico City and – to a lesser extent – Buenos Aires are leading efforts in Latin America to rein in the regulatory volatility, heavy state intervention and dominance of national oil companies (NOC) that have become more commonplace in the region during the past decade. By introducing significant reforms and incentives over the last year, however, Argentina and Mexico are trying to cultivate a more investor-friendly environment. The shift stems from a desire to reverse production declines, achieve greater industrialization and garner more tax revenues, pointed out the author of the study.
"States are signaling more pragmatism regarding local content requirements and more receptiveness to foreign investment," stated RoseAnne Franco, Country & Asset Risk Manager for Wood Mackenzie. "While NOCs will continue to play an important role in the industry, governments are also demanding more transparency and accountability."
Franco recently shared her insights with Rigzone about the evolving upstream investment outlook for Argentina, Mexico and other countries in Latin America. Read on for excerpts from the conversation.
Rigzone: How is the shift from resource nationalism to resource maximization manifesting itself in Argentina and Mexico? Anywhere else in Latin America?
Franco: After years of a relatively hostile investment environment for the oil and gas industry, Latin America appears to be at the cusp of a paradigm shift to a more investor-friendly environment. The new phase of resource maximization is defined by four conditions:
- First, governments are taking a more holistic view of the oil and gas industry and focusing on maximizing value, rather than simply rents. Value is exemplified by employment generation and industrialization, coupled with higher revenues from expanding oil and gas output.
- Second, governments are signaling more receptiveness to foreign direct investment.
- Third, states are pursuing more pragmatism with regard to local content requirements. While local content may still remain part of the equation, governments are increasingly wary of onerous mandates stifling development.
- Fourth, while NOCs will continue to play an important role in the industry, governments are also demanding more transparency and accountability from their state enterprises.
At the vanguard of this shift are two of Latin America's most strident resource nationalists – Mexico and Argentina. Both countries have introduced favorable upstream measures over the last 18 months, including energy reform and investment incentives, which are set to offer myriad investment opportunities over the near- to medium-term. There a number of countries in the region that have a lot of these conditions, such as Colombia and Peru, but in many ways, we're finally reaching critical mass. What makes the trend all the more salient is that two of Latin America's most strident resource nationalists – Mexico and Argentina – are emitting clear signals of a break towards resource maximization.
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