Francisco Monaldi, Ph.D. Visiting Professor and Roy Family Senior Fellow, Harvard Kennedy School Non-Resident Fellow, Baker Institute, Rice University Faculty Associate, School of Government, Tecnologico de Monterrey Director, Center on Energy and the Environment, IESA ESADE, Madrid, November 2014
The Oil Industry in Latin America In 2003 Latin America produced 11 mbd, in 2013, 10.17 mbd. A decline during the largest oil boom in history? All other regions increased their production. The region lost more than 1% in the world s production share to less than 12%, even though it has around 20% of the proved oil reserves (the largest outside the Middle East). Divergent trajectories. In which countries production declined? México (- 700 tbd from 2002 and -900 from peak in 2004), Venezuela (-300 tbd, - 700 from peak in 1997), and Argentina (-250). Ecuador (and Bolivia to a lesser extent in natural gas), stagnated. In which went up? Brazil (+650 tbd), Colombia (+400), and slightly in Peru. Why? Political economy of resource nationalism and NOCs are the main culprits. Geology and ideology also relevant, but less so.
Oil Production: The Big Three 4500 4000 3830 3500 3480 3000 2875 2500 2000 2193 2623 2114 Mexico Venezuela Brazil 1500 1000 500 0 Source: BP Statistical Review of Energy
3500 Net exports 3000 3007 2500 2000 1886 1846 1500 1000 500 855 Venezuela Mexico Brazil 0-500 -1000-858 -1500 Source: BP Statistical Review of Energy
thousands barrels daily The Rest: Net Exports 800 700 670 600 592 500 505 400 300 200 373 271 Argentina Colombia Ecuador Peru 100 0 52-100 -200 Source: BP Statistical Review of Energy
Political economy of resource nationalism: key drivers Characteristics of the oil industry (rents, high sunk cost, obsolescing bargain) 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 (a cycle of expropriation), 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 and strengthen property rights. Other factors that tend to increase resource nationalism are: easy geology, weak political institutions, political shocks, and oil fiscal dependency. Ideology can sometimes be a relevant factor, but generally it is not the driving force. In fact, sometimes the very existence of large rents is a factor promoting a populist ideology.
Political Economy of Resource Nationalism in the Latin American Oil Industry: 2000-2014 Argentina, Bolivia, Ecuador and Venezuela. After an investment cycle that led to increases in production and investment in the 1990s and 2000s, and during the high price cycle; expropriated and nationalized. The effects of the expropriations are now noticeable and they have been eager to attract new investment. Particularly, Venezuela in extra-heavy and Argentina in shale. The determinants of the expropriation cycle: high oil prices, high sunken investments, regressive tax systems, and weak institutions. Colombia, Brazil, and Peru, who needed to attract more investment went in the opposite direction. However, after large discoveries, Brazil became more resource nationalist. Mexico, with declining production and reserves, tried to move towards opening, but until this year it was unable to do it. The recent Mexican oil reform is a major event.
The Reputational Legacy Texas 5 Qatar 33 United Arab Emirates 39 Colombia 48 Alberta 51 Trinidad and Tobago 58 Brazil 66 Alaska 83 Angola 118 Nigeria 124 Algeria 126 Russia 127 Libya 128 Iraq 129 Kazakhstan 132 Iran 133 Bolivia 134 Ecuador 135 Venezuela 136 9
Institutional Quality: Rule of Law Percentile rank VEN 1 ECU 12 BOL 16 ARG 29 PER 33 MEX 36 COL 43 BRA 52 0 10 20 30 40 50 60 Source: World Bank 2013
Proved reserves (billion barrels) 1993 2003 2013 % Argentina 2.2 2.7 2.4 >1% Brazil 5.0 10.6 15.6 4.5% Colombia 3.2 1.5 2.4 >1% Ecuador 3.7 5.1 8.2 2% Mexico 50.8 16 11.1 3% Peru 0.8 0.9 1.4 0% Venezuela 64.4 77.2 298.3 88% Total 128.7 114.8 338.4 100% Source: BP Statistical Review of Energy, 2013
Source: EIA
BRAZIL Brazil has been considered a model for energy policy in the region. Production and investment have systematically increased. However, the discoveries in pre-salt appear to have changed 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 the oil industry growth. The government increased taxes, their equity participation in Petrobras, and created Petrosal, a state holding to have a stake and monitor the pre-salt projects. 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. Conditions for pre-salt auction put heavy burden on Petrobras. Operator of all blocks, minimum 30% share in equity, high national content, high signing bonuses. Foreign operators play a minor role and Petrobras is not able to execute all the potential investments in its portfolio. Recent corruption scandals have affected Petrobras reputation. 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. 13
COLOMBIA The Colombian oil sector had a spectacular turnaround. Investment and exploration boomed. Production increased close to two-fold and exports even more. Colombia is the 3 rd largest oil exporter in Latin America. Ecopetrol market capitalization increased from around US$30 billion to close to US$140 billion, surpassing Petrobras and Total in early 2013, despite having a small fraction of their reserves. However, the success cannot be attributed only to Ecopetrol. Private companies played a big role (e.g. Pacific Rubiales). Ultimately the problem is that despite the increase in exploration activity Colombia has not been able to significantly increase proved reserves. Recently there have been some tamed signals of resource nationalism, but nothing close to Brazil.
VENEZUELA Chavez takes full control of PDVSA just in time to receive the oil windfall in 2003-2008. He uses PDVSA as a social and development ministry, spending directly without going to the national budget. PDVSA loses all autonomy from the government and the president s party. Corporate governance changes significantly. Chavez becomes highly popular. Wins reelection two times. PDVSA is heavily politicized and declines in capacity. PDVSA s IOC partners are partially nationalized. Some service contractors are also nationalized. Production declines rapidly. PDVSA becomes heavily indebted in the middle of oil boom. PDVSA tries to attract IOCs back, as well as Chinese and Russian NOCs. 16
MEXICO 3500 Miles de Barriles Diarios 3000 2500 2000 1500 1000 500 Other Chicontepec Delta del Grijalva Chuc Ixtal-Manik Antonio J. Bermúdez Crudo Ligero Marino Cantarell Ku-Maloob- Zaap 0 2005 2006 2007 2008 2009 2010 2011 2012 Source: HBS Pemex Case, Secretaría de Energía, Mexico
MEXICO Break oil price trend
MEXICO 19
MEXICO What could happen in Mexico The Gulf of Mexico on the Mexican side could experiment a great expansion in well drilling activity in the next decade.
MEXICO PEMEX keeps 100% state-owned. Allows PEMEX to have JVs with partners. Allows for four types of contracts: service, profit sharing, production sharing, and licenses without state equity. State is owner of resources, but companies can book reserves. Round zero, PEMEX kept most areas in production with the approval of SENER (100% of the production areas requested 20.5 bn barrels, equivalent to 83% of 2P reserves, and 67% of the prospective areas it requested, estimated at 22 bn. barrels). Pemex will associate in 10 fields (deep off-shore, heavy, natural gas, marginal mature fields), CNH auction, and migrate 22 existing service contracts Round one to open deep-offshore and other marginal areas to private investors. Estimate 2P reserves of 3.8 bn barrels and 14.6 bn resources CNH is independent regulatory agency, powerful, but still SENER and Finance keep policy role. PEMEX more financially and operationally independent. Transparency. Oil Stabilization and Investment Fund. 21
ARGENTINA 22
ARGENTINA 23
The region has experienced cycles of investment and expropriation that have harmed the development of its potential. We were again in an opening face, even before the recent decline in oil prices. The price decline will reinforce this trend throughout the region. Pragmatism is the result of decline in Venezuela, Argentina and Mexico. Brazil will probably move to more pragmatism again.
Thanks for your attention francisco_monaldi@hks.harvard.edu Twitter: @fmonaldi 26