Consultancy: LatAm Attitude Shift Bodes Well for Upstream Investors
Rigzone: What are the driving forces behind the shift?
Franco: In response to escalating technical and capital requirements in their domestic oil and gas sectors, governments across Latin America are recognizing the need for more foreign engagement. Declining hydrocarbon output is also placing critical pressure on government budgets and trade balances. At the same time, resident NOCs may not be able to develop unconventional, deepwater and heavy oil opportunities. Moreover, a global trend in corporates shifting from a volume to value strategy supports a sustained move away from resource nationalism, which characterized the last decade, towards resource maximization. Recent energy reform and potential new incentives – most notably in Mexico and under discussion in Argentina – will open the door to a variety of opportunities across the spectrum of energy companies, from majors to small-caps.
Rigzone: The governments are ushering in changes, but how solid is the popular support for the reforms?
Franco: At times, popular opinion can be years behind the consensus among the political establishment for major reform. In the Mexican case, effective and transparent implementation of the energy reform will help foment good will; successful execution of inaugural Round One in 2015 will be key. Moreover, improvements in social welfare and better infrastructure can help bolster support. In Argentina, there is consensus between the provinces and the central government over deepening incentives; popular opinion may be more receptive as long as the larger issue of provincial autonomy is resolved.
Rigzone: At first glance, Mexico's efforts to woo private investment in its oil and gas sector and Argentina's ongoing attempts to attract private firms with incentives sounds promising for industry players; but, surely there are some trade-offs. What do you see as the advantages, and potential pitfalls, of gaining access to these countries' energy sectors?
Franco: Wood Mackenzie's ARI assesses country risk across the asset life cycle through 2020. In the short term, economic uncertainty continues to cloud the picture for Argentina. Presidential elections in October 2015 will provide more clarity over the pace of this favorable shift. Notably, President Fernandez de Kirchner is not permitted to run again. More pragmatism over the longer term is expected to improve access and commercialization for unconventionals. Likewise, Mexico is also anticipated to register improvements in access and commercialization. Nevertheless, the interim development stage which encompasses operational issues is vulnerable to rising risk. As oil and gas activities pick up pace over the forecast period in Mexico, rising expectations among local communities will have to be managed.
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