The Political Economy of Oil in Latin America:

Transcription

1 The Political Economy of Oil in Latin America: Endowments, Institutions, and Incentives Francisco Monaldi Director, Center on Energy and the Environment, IESA, Caracas Robert F. Kennedy Visiting Profesor, Harvard Kennedy School Energy Policy Seminar, Harvard Kennedy School, February 2013

2 Huge potential: Reserves / Production (R/P) years Source: BP Statistical Review of World Energy 2012

3 Trends in the region: high policy volatility Between 1990 and 2000: Many countries in the region opened the oil sector to private investment (Argentina, Bolivia, Brazil Ecuador, Venezuela), and some NOCs were privatized (YPF, YPFB, Petrobras, Petroperu). Investment increased despite low oil price : A new wave of resource nationalism characterized the region: with tax increases, expropriations and nationalizations, increasing state control over the oil sector. This trend was strongest in Argentina, Ecuador, Bolivia, and Venezuela. In contrast, Colombia, Peru, and until recently Brazil, moved in the opposite direction, promoting private investment and contract sanctity. Mexico has been trying to open up, but political obstacles have been significant. Today, Brazil is at a crossroads, with political forces pushing for more state control. Amazingly, Argentina, Ecuador and Venezuela are trying to attract back foreign investment after very contentious expropriations. Many analysts have focused on the ideological drift to the left to explain energy policy in the region. However, oil prices and incentives are a more relevant in explaining policy decisions. Oil markets, endowments, and the characteristics of the oil industry, combine to determine political incentives, often resulting in shortsighted policies. According to Wood Mac more than 30 countries increased the government-take during the last decade. Most wind-fall taxes and increase state participation through expropriations and nationalizations. Important to distinguish retroactive changes. Historically, in the region the oil sector has evolved in cycles of investment and expropriation.

4 Oil Government-Take (%): 2003 vs Before After USA-GOM Belize UK Argentina Jordan Mozambique Ecuador T&T Nigeria Ven Heavy Oil Angola Russia Kazakhstan China Algeria Venezuela Libya Source: Cambridge Energy Research Associates. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 4

5 Oil sector features High and volatile rents High sunk costs / time consistency Regressive tax systems Evolving risk profile / obsolescing bargain Endowments / net exporters vs. importers Price cycles Investment cycles Institutions (domestic, international)

6 Can prices be predicted? Oil Price (US$ per barrel) and World Bank Oil Price Forecasts Oil prices tremendously volatile, close to random walk. Real Oil Prices: coeff. of var. = 0.7 Futures prices have little predictive power predictions for 2012: $ Source: Gelb (2012), Ecoanalitica

7 Fuente: Nolan (2009) Risk profile of investments

8 Fuente: Nolan (2009) Evolution of risks

9 Key drivers of recent trends Some characteristics of the oil industry (high rents, high sunk costs, price volatility, and evolving risk profile of the sector) in a context of: a) a cycle of high prices, b) the end of an investment cycle, and c) regressive taxation systems; tend to generate resource nationalism, particularly in net exporters with increased reserves and production. In contrast, net importers or countries with declining reserves and production tend to be eager to attract investments. Other factors that tend to reinforce resource nationalism are: weak political institutions, political shocks, and resource dependency. Ideology can sometimes be a relevant explanation, but generally it is not the driving force. In fact, the existence of large rents sometimes breeds ideological radicalism.

10 Key drivers (2) Argentina, Bolivia, Ecuador and Venezuela. After an investment cycle that led to increases in production and investment in the 1990s and 2000s, and in the middle of the high price cycle of the last decade, expropriated. The effects of expropriation are now visible and they want to attract new investment. Colombia, Brazil, and Peru, who needed to attract more investment went in opposite direction. But now after the recent discoveries Brazil is changing. Mexico, with declining production and reserves, has tried to move towards opening, but until now, it has been politically difficult.

11 Oil Reserves Proven Oil Reserves (billion barrels) % Argentina >1% Brasil % Colombia >1% Ecuador % Mexico % Peru % Venezuela % Total % Source: BP Statistical Review of Energy,

12 Latin America: Relative endowments Net exports per thousand inhabitants (barrels per day) Argentina -0.1 Brasil -2.4 Colombia 14.8 Ecuador 20.7 México 27.4 Perú -1.9 Venezuela 66.6 Oil proven reserves / domestic consumption Years of domestic consumption Argentina 11,4 Brasil 15,5 Colombia 21,5 Ecuador 74,6 México 15,8 Perú 16,7 Venezuela 976,4 12

13 Source: BP Statistical Review of Energy Oil: Net exporters and importers

14 Source: BP Statistical Review of Energy Oil: Net exporters and importers

15 Oil: Net The exporters rest: net and exports importers Source: BP Statistical Review of Energy

16 Institutional Quality Brazil Mexico Colombia Peru Bolivia Argentina Ecuador Venezuela Overall Policy Index Source: IDB 2005 Rule of Law (Percentile rank) 2008 Brazil 46.4 Colombia 37.7 Argentina Mexico Peru 25.8 Bolivia 11.9 Ecuador 9 Venezuela Source: World Bank 2009

17 Venezuela: oil rigs in operation Oil Production per Rig/month Venezuela Production per Rig/month Levels Break oil price trend 1995m1 2000m1 2005m1 2010m1 Period Data Source: Baker Hughes Inc, IEA and author calculations

18 Venezuela Venezuela Oil Production supply (thb/d) Break oil price trend 1995m1 2000m1 2005m1 2010m1 Period Data Source: IEA and author calculations

19 Extraction rate: Production/Reserves Venezuela would produce, at the extraction rate of: Iran -> 8.4 MMBD Saudi Arabia -> 12.2 MMBD Russia -> 34.5 MMBD 6% 5% 4% 3% 2% 1% 0% 4.25% 0.334% 1.5% 1.04% Venezuela Arabia Saudita Rusia Iran Source: BP Statistical Review of World Energy 2012

20 2 0 Venezuela: A sleeping colossus? Venezuela has the largest (or second largest) oil reserves in the world. A hundred year-old industry and relatively good infrastructure. However, about 86% of its reserves are of extra-heavy oil (<10 API). Extraction costs are low, but transportation and processing require huge sunk cost investments (about 40-80K per b/d of syncrude). The legal framework is not a significant obstacle to develop the industry. The big obstacles are: the credibility of the government, the poor quality of governance, and the diminished NOC capacities. Still in the medium run, Venezuela should become a more significant exporter than it is now.

21 Mexico: oil rigs in operation Oil Production per Rig/month Mexico Production per Rig/month Levels Break oil price trend 1995m1 2000m1 2005m1 2010m1 Period Data Source: Baker Hughes Inc, IEA and author calculations

22 Mexico supply (thb/d) Break oil price trend 1995m1 2000m1 2005m1 2010m1 Period Data Source: IEA and author calculations Mexico Oil Production

23 Mexico: Oil has macroeconomic implications

24 After the collapse of Cantarell, the political system is finally facing reality after years of postponing change. Investment has increased and there has been relevant new off-shore discoveries. But production decline has been barely contained and net exports will keep declining. It is difficult to sustain the levels of investment required to increase production. Foreign investment is key to develop very significant potential in deep off-shore and shale gas. The new president offers a more open oil policy. He may be able to deliver. Constitutional change? Risk sharing contracts in deep offshore? Liberalization in non conventional gas and downstream? It appears Pemex keeps 100% state-owned for now, but that may change in a few years. Political obstacles have diminished, but remain important.

25 Brazil: oil rigs in operation Brazil Production per Rig/month Levels Oil Production per Rig/month Break oil price trend 1995m1 2000m1 2005m1 2010m1 Period Data Source: Baker Hughes Inc, IEA and author calculations

26 Brazil supply (thb/d) Break oil price trend Brazil Oil Production 1995m1 2000m1 2005m1 2010m1 Period Data Source: IEA and author calculations

27 Brazil: The oil products trade balance has been worsening as the domestic price subsidies increase month Average Gap (0.10) Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 (0.20) Source: ANP (0.30) Gasoline 12-months Gap Diesel 12-months Gap

28 Brazil: Already behaving like an exporter? Brazil has been considered a model for energy policy in the region. Production and investment still keep increasing rapidly. However, the discoveries in pre-salt appear to be changing the government s perspective on the oil sector, beginning to behave more like its exporting neighbors. Requiring more government control and giving precedence to other policy goals instead of focusing on the development of the oil industry. Domestic subsidies to tame inflation and national content policies have hurt Petrobras, reducing its cash-flow, production targets and market value. Investment in domestic refineries compete for resources with E & P projects of higher value. Foreign operators still play a minor role and Petrobras is not able to execute all the potential investments in its portfolio. Nationalists pressures and rent distribution conflicts have significantly increased in the last 5 years. Still the politically system is managing them better than in other countries in the region. 28

29 Ecuador supply (thb/d) Break oil price trend 1995m1 2000m1 2005m1 2010m1 Period Data Source: IEA and author calculations Ecuador Oil Production

30 Argentina Argentina Oil Production supply (thb/d) Break oil price trend 1995m1 2000m1 2005m1 2010m1 Period Data Source: IEA and author calculations

31 Colombia supply (thb/d) Break oil price trend 1995m1 2000m1 2005m1 2010m1 Period Data Source: IEA and author calculations Colombia Oil Production

32 Thanks for your attention 32