Argentina Winners: Strategies in Latin American Energy
By Andres Cala
A roucous 2012 in Latin American politics ended with a consolidated trend toward resource nationalism, but also with winning corporate strategies -Western and Chinese- that offer valuable lessons about how to capitalize on the region’s populist evolution.
For years, companies, analysts, rating agencies and observers have criticized the obvious: Latin America’s neopopulism and hostility toward market based policies hamper the region’s ability to develop its prized resources, second only to the Middle East and to the US-led unconvetional shale oil and gas revolution.
But that is a years-long reality cemented earlier in Venezuela, Ecuador, Bolivia, and other countries to a lesser degree. More importantly though, this trend will not change in the short term, and companies continue to struggle to find viable strategies to deal with this.
There are obviously no clear-cut recipes to negotiate with populist governments. And the risks will clearly remain. But the prize is also huge. And like in any other business, the winners are always those who best understand who they are bargaining with.
Some investors correctly concluded that surfing Latin America’s populist wave is not so different from managing other challenging environments globally. It’s just a question of understanding the politics and culture that fostered those very policies.
Argentina’s nationalization in May of YPF, the country’s largest energy company, and several preliminary deals it signed in December with CNOOC, Chevron, BP, and other investors offer valuable lessons to that effect.
Argentina’s case also illustrates the limits of populism, and more importantly, that instead of just bashing the obvious, investors are starting to use counterproductive government policies to their advantage.
President Cristina Fernandez de Kirchner is running Argentina’s economy to the ground, but there is little room for common sense in the realm of politics, as every country has experienced. Her populist government is politically unable to backtrack because it would be suicide, much like Venezuela and other before it have shown.
The YPF expropriation and other failed policies of Fernandez are fueled by the country’s growing energy deficit and economic woes that are undermining her popularity, coupled with the huge shale oil and gas resources recently discovered.
But YPF and Fernandez’s government have struggled to balance populism with attracting foreign investment to develop Vaca Muerta, which could hold the world’s third largest shale gas reserves estimated at 774 trillion cubic feet. YPF alone does not have the money or expertise.
Argentina’s dwindling oil and gas production made it a net energy importer. Sooner or later her survival instinct was going to force her to offer more attractive conditions, or risk a disgraceful exit from politics. Spain’s Repsol failed to negotiate and had its controlling share in YPF expropriated.
Policies limiting profits were not only scaring away investment, but also production gains as companies already operating there refused to invest more.
It’s not just the self-defeating energy policies, which also include price regulations limiting profits in both the local and export markets. Argentina narrowly averted a second credit default late last year over its reluctance to negotiate outstanding debt payments stemming from its 2002 default.
But while most have chosen to wait for the unsustainable populist policies to backfire and force a political change, Chevron, China’s CNOOC, and other foreign and Argentinean investors used the country’s desperate need for foreign investment to their advantage.
Instead of confronting the government head on or writing off the country altogether, they waited for Argentina to drag itself into a weaker negotiating position, a process which was only moved forward by the YPF saga.
YPF’s need for cash and expertise, along with falling production, forced Fernandez’s hand. Her government trippled the wellhead price it pays for gas to $7.50 BTU. Argentina is expected to soon implement a new oil export payment plan to increase prices to $70 a barrel from the current plan capped at $42 a barrel, plus a $28 a barrel compensation.
On paper, the two might look similar, but the current program failed miserably. Cash strapped, the government delayed compensation payments last year, and companies decreased production as a result.
The government budged and YPF was able to secure preliminary deals with BP and CNOOC through its subsidiaries, Chevron, and Argentinean investors to initially invest nearly $6 billion to develop new unconventional gas and oil fields. Statoil and other companies are also reportedly negotiating other deals.
Argentina’s case is telling of what is to come. It’s energy deficiency forced the government to negotiate quickly, but unsustainable populist policies in the rest of Latin America will inevitably force its governments to find ways to attract foreign investment.
Venezuela is probably next, considering the semblance of instability as a result of of the frail health of President Hugo Chavez. Ecuador, Bolivia, Peru, and even Brazil will have to balance resource nationalism with the need to attract foreign cash and expertise.
But it’s unrealistic to expect revisionism of neopopulism in Latin America, with or without Chavez, Fernandez, and the likes. Confronting these regimes and their erratic policies is as counterproductive as populism itself.
Chevron, CNOOC, BP, and others are clearly not in the business of propping up populist governments, which means they simply succeeded in doing what most others have failed at.
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