Latin America Bonding Around Oil

The oil industries of Venezuela and Brazil are doing more for Latin American unity than Venezuela’s Bolivarian regional integration pipedream, in a nascent yet encouraging signal for the global energy security.

The state-controlled energy mammoths PDVSA of Venezuela and Petrobras of Brazil are investing heavily in the oil and gas industries in South American and the Caribbean, as well as signing deals to further deepen the trend in coming years.

PDVSA is helping Ecuador, Cuba, Argentina and Caribbean nations develop their hydrocarbon production and refining industries, while Petrobras is involved in just about every South American country across the entire value chain.

The two companies, which also work together in several joint ventures across the continent, are leading the drive, but they are not alone. YPF of Argentina is also planning to invest in Venezuela. Ecopetrol of Colombia is helping Venezuela and Peru, and the list goes on.

To be sure, Latin America appears to have finally found a strong shared interest to bond around, and it’s not ideology or politics. It’s the shared goal of developing the region’s rich oil and gas reserves, the second biggest in the world after the Middle East, most of which remain untapped.

The trend appears solid, although it’s gaining steam, and the outcome remains far from certain. Still, it’s an encouraging sign of Latin America’s evolution, one that could offer some welcome oxygen to a tight oil global supply in the midterm, and more importantly consolidate the region’s march toward political and macroeconomic stability.

Love affair around oil, not politics

For over a decade, Ch’avez tried unsuccessfully to use his oil wealth to create a common front against the US. Many countries benefitted, but most of them also were suspicious of the political baggage.

In the process, Petrobras offered more attractive partnerships, not in the form of handouts, but investment and knowhow.

And it appears that Ch’avez, who failed to inspire a regional revolution he was bankrolling with oil profits, learned that the continent prefers economic partnerships, not aid. Countries, recent deals show, prefer their national oil companies to do the bonding, as opposed to political leaders.

And it’s not too surprising. A successful model to develop Latin America’s energy resources has been slippery. Last century, corrupt governments pillaged the wealth of energy resources, while offering foreign companies very favorable terms.

Ch’avez’s rise in Venezuela, as well as a broader regional political transformation to accommodate a populist left, was a direct result of the failure of traditional elites to deliver a sustainable economic development model and more income distribution, despite increased cash from the commodity-rich region.

Ch’avez’s answer was to nationalize the industry and others like Bolivia and Ecuador mirrored the example. But the model failed as countries lost much-needed foreign investment and knowhow. And starting this decade, even the more radical Bolivarian countries, including Venezuela, are gradually adopting Brazil’s model.

Brazil last decade under President Lula da Silva was the first to balance free-market practices demanded by the oil industry, with social devolution to secure the necessary political stability to invest in the energy sector. Colombia and Peru followed its example and are showing good results for it. Argentina is still seeking its own middle ground.

The deals

Petrobras is spread throughout Latin America from exploration to downstream. PDVSA has signed agreements with recently expropriated YPF, Argentina’s biggest oil company, to mutely seek investment in the oil value chain. YPF is considering investing not only in exploration in Venezuela’s Orinoco Belt, which could hold more than 200 billion barrels of recoverable oil, but also in the country’s biggest oil upgraded which transforms the heavy crude into exportable liquids.

PDVSA and Petrobras are exploring options in Argentina’s Vaca Muerta, which holds some 20 billion barrels, and PDVSA said it will consider exploration in the disputed Falkland Islands.

Petrobras and PDVSA are also planning to build a massive refinery in Brazil. PDVSA is also investing in Ecuador’s and Cuba’s refining industry. And PDVSA will soon start exploring Cuba’s Gulf of Mexico’s untapped reserves.

Ecopetrol of Colombia, one of the region’s biggest oil companies in terms of market capitalization, wants to invest in reversing plummeting output in Venezuela’s mature fields both countries are considering building an oil pipeline to connect Venezuela’s Orinico Belt to Colombia’s Pacific Coast. Ecopetrol is already investing in Peru and Brazil.

The list of agreements and contracts is much longer and years old. And it’s picking up, and more importantly, trickling down increasingly to mid and small size companies and contractors in oil and gas sector. It’s also spreading to other sectors, benefiting the metallurgic and other industries.

Hype or trend?

Many of the deals will fall through. Cuba’s oil potential has not been confirmed yet, with two strikes so far in exploratory wells. Venezuela has a long history of failed promises too.

Moreover, the expropriation of YPF in April triggered a wave of concern, some of it justified, that a new round of populist, market-bashing policies was taking hold in Latin America.

But Argentina’s move cannot be understood as a simple populist move. It had been expected for some time and fits neatly into the country’s -indeed the region’s- resource nationalism and economic empowerment over the previous decade.

That is not necessarily a bad thing though. As the case of the expropriating champion Venezuela illustrates, foreign investors -increasingly from within the region- are still welcome and often offered attractive terms.

It’s just a question of adapting to whole new game in Latin America driven by populism, one that is not so different from the long-standing norm in Middle East and North Africa oil producing countries.

Iraq is an example. Many Western companies, especially American ones, shunned the economic terms offered by Baghdad. But Iraq is successfully undergoing perhaps the most ambitious overhaul in decades.

Furthermore, this time around Brazil is acting as a regional overlord that is making sure investment risks are controlled.

There is still plenty of politics involved in Latin America’s energy business, but as many foreign companies are learning, it just requires adapting to a new reality. Ultimately countries need to attract more investment to their energy sectors, as much as corporations need to adjust to new rules.

And while China has been the big winner so far, intra-Latin American cooperation among national energy companies is on the rise for mostly economic reasons, that is, to get a foothold in each other’s energy sector to profit from an expected oil boom and more importantly more knowhow that they can use in their own operations.

So even if there is a large component of politics involved, as announced exploration in the Falklands illustrates, there is solid momentum, boding well as cross-country investment and economic ties grows.