Economic Crisis Could Deepen Latin America's Energy Woes

Orinoco Heavy Oil Belt
(Click to Enlarge)

LA JOLLA, Calif. (Dow Jones Newswires), May 14, 2009

The current economic crisis may exacerbate the slow growth of Latin America's crude oil and natural gas output, which has lagged as the region has struggled to exploit its abundant energy resources.

Venezuela and Mexico missed out on the massive investment boom that flowed into the global oil patch following this decade's ramp-up in energy prices due to regulatory roadblocks and fiscal regime uncertainty. Now that oil prices are hovering around $60 a barrel, well below their summer 2008 record of more than $145, both international oil companies and the state-run giants that control most of Latin America's reserves are seeing their revenues plummet.

Latin America's struggle underscores how shifting regulatory and political sands can dampen a region's potential to produce energy despite the presence of massive oil and gas reserves. These untapped deposits could be key to quenching the world's thirst for energy once the recession is over and economic growth resumes -- and could fulfill international oil companies' quest for reserves with which to replace their declining production.

Petroleos de Venezuela S.A., which owes billions to its service contractors, is acutely feeling the pinch, and observers and analysts fear that its oil output might suffer from delayed payments and obstacles to investment. The Mexican government's bid to reform Petroleos Mexicanos, or Pemex, to lure foreign investment and stem a rapid decline in the country's top fields is modest, and long overdue.

"Petropolitics don't work anymore," said Ali Moshiri, Chevron Corp.'s (CVX) president for Latin America and Africa. National governments should work more closely with international oil companies, he added.

During the energy boom Venezuela, Russia and other energy-rich countries, emboldened by high energy prices and the oil companies' thirst for access to reserves, strengthened their grip over their natural resources, which brought them more revenue but deterred investment, contributing to the price spike. Some analysts point out that low oil prices could turn the balance in favor of international oil companies once again -- but that remains to be seen.

"The cycle of investment should not slow down," Moshiri told reporters on the sidelines of the Institute of the Americas' Latin American energy conference in La Jolla on Wednesday.

Oil production in Mexico and Venezuela has stagnated in recent years while output in places like Canada and West Africa has blossomed.

"African nations honor the contract," Moshiri said. "Latin America is a dynamic environment where the political, social and economic always come together and form the perfect storm."

That stagnation has meant that these Latin American countries have received less revenue than they could have realized, and now that prices are falling too, the revenue shortfall could threaten their internal stability. Moreover, it means that supply that could contribute to assuage a global oil spike once the world economy recovers could be delayed.

In Latin America, said BP PLC (BP) Chief Executive Tony Hayward, "the problems are not below ground, they're above it."

The Brazilian Example

Oil executives pointed to Brazil's relatively transparent oil investment regime, which has resulted in booming oil production and new discoveries, as the model other countries should follow. The country's partly privatized, state-run giant, Petroleo Brasileiro S.A. (PBR) is forging ahead with a massive investment program to develop deepwater offshore resources, with foreign help.

BP's Hayward called Brazil "a good example." Chevron's Moshiri said that "the most collaboration you ever see between an international oil company and a national oil company is Brazil."

Colombia is also aggressively seeking investment -- and investing abroad. Its national oil company, Ecopetrol S.A. (EC), wants to increase output to 1 million barrels of oil a day by 2015, acquiring assets in Peru, Brazil and the U.S. Gulf of Mexico in order to achieve that goal. The country is also courting investors to develop its heavy oil reserves. Despite low oil prices, "the investment continues," said Armando Zamora, director of Colombia's National Hydrocarbons Agency.

Although regulatory fickleness has hindered development, some of Latin America's oil deposits are so massive that major oil companies still jump through hoops to maintain a stake there. Major oil companies eagerly await an opening of Mexico's oil patch.

Chevron, the sole U.S. major to remain in Venezuela after the government took majority control of oil operations there, said that it cannot overlook the Orinoco Belt's heavy oil reserves, one of the largest in the world. The company must look toward maintaining access to this reserve base "50 years down the road," Moshiri said.

Copyright (c) 2009 Dow Jones & Company, Inc.

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