Latin American Oil & Gas The Race to the Top RoseAnne Franco, Head of Oil & Gas Risk April 2017 1
Agenda I. Latin America regional trends II. A look at key countries Argentina, Brazil and Mexico III. Competitiveness emerges front and center 2
From resource nationalism to resource maximisation Turning the tide Resource Nationalism (2000s) Resource Maximisation (2010s) Policies to capture more rent Maximize VALUE from natural resources (not just rent) States reassert control over oil & gas, nationalisation Push for local content Recognition of need for FDI/foreign expertise Local content is only one part of the equation Revitalised NOCs NOCs: Push for efficiencies & better corp governance 3
From resource nationalism to resource maximisation Drivers Declining liquids production Mexico ( 000 b/d) WTI Crude Prices Annual Average (Real 2016US$) 4000 120 3500 100 Falling hydrocarbon output placing economic pressure on governments 3000 2500 2000 1500 1000 500 80 60 40 20 1970s Nationalism 2000s Resource Nationalism Oil prices receding from record highs 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 US$/bbl Source: Wood Mackenzie Source: Thomson Reuters Datastream, Wood Mackenzie Among some major producers oil output has been declining or stagnant Falling output places pressure on fiscal accounts and trade balances There is an ebb and flow to these shifts in energy policy as they tend to be correlated with oil price fluctuations Governments seek to reach new equilibrium with operators 4
From resource nationalism to resource maximisation Drivers End of easy oil From volume to value strategy Mexico U U M D H D Cuba NOCs cannot go it alone D Venezuela U D U H Guyana Colombia Fr. Guiana H Suriname U M H Ecuador U M H Peru U Brazil The shift in strategy lifted Hess s share price performance in 2013 Bolivia U H Chile Paraguay D D Deepwater H Heavy & extra heavy oil U Unconventionals Argentina U Uruguay D U U M D U M Mature fields Falkland islands/malvinas 5
Latin America reached an inflection point in 2016 Commodity price collapse Political map incumbents largely fall out of favor Index (Jan 2012 = 100) 120 100 80 60 40 20 0 2012 2013 2014 2015 2016 Mexico O Cuba Venezuela E Guyana E Colombia Fr guiana E E Suriname Ecuador E Elections 2015/ 2016 Peru Other (e.g., referendum, impeachment) E Chile Bolivia O Argentina E Trinidad Uruguay Brazil O LME-Copper Grade A Iron Ore(Fe63.5%) IN CIF China Coal ICE API4 CIF SA Steel HR Coil Beijing Crude Oil Brent Source: Thomson Reuters, Wood Mackenzie 6
Argentina s political economy Country offers useful case study on transition in the region Historical and Forecast GDP Argentina Argentina s political opposition have framed the legislative October midterm elections as a referendum on the president. Much of the president s popularity rests on the speed of the country s economic recovery. His Cambiemos bloc should increase its seats in the election due to its expected strong performance in Buenos Aires province, but will remain short of a majority. 7
Argentina s oil & gas sector Recent Vaca Muerta deal is a step in the right direction Incremental gas pricing extension of shale incentives to 2021. Labour flexibilisation will help increase efficiencies and reduce costs. While favorable developments, these incentives have largely targeted one sub-segment of the industry unconventional/ shale. 8
Brazil s oil & gas sector Despite near term volatility, favorable changes underway Brazil s pre-salt Gradual improvements in the works - Pre-salt operatorship mandate was relaxed end-2016 - Increased flexibility regarding local content - State presence to diminish While supply chain issues and the courts inject some uncertainty, need for foreign investment remains. 9
Mexico s oil & gas liberalisation But is a snapback possible? Landmark energy reform promulgated end-2013 and inaugural Round 1 launched in 2014. Multiple phases of Round 2 are currently underway. Recent results of US elections open up the possibility of potential uptick in nationalist rhetoric. 10
LatAm competitiveness increasingly front & center Licensing rounds abound in 2017 Cuba Mexico Trinidad & Tobago Suriname Peru Brazil Uruguay Argentina 11
Oil & gas risk select Latin American countries Overall, an improving risk profile 2012 2017 Uruguay 1.75 1.50 2.25 5.5 Uruguay 1.75 1.75 2.25 5.75 Chile 1.75 2.25 2 6 Mexico 2.5 2.5 1.75 6.75 Colombia 2.5 3.0 1.75 7.25 Colombia 2.25 3.5 1.5 7.25 Mexico 4.25 2.0 3.5 9.75 Chile 2.25 2.75 2.75 7.75 Brazil 3.25 3.75 3 10 Argentina 3.5 3.25 2.75 9.50 Peru 3.75 3.75 3.25 10.75 Brazil 3 4 2.5 9.50 Argentina 4.5 2.75 5 12.25 Peru 4 4 3.25 11.25 Venezuela 5.75 3.0 3.5 12.25 Venezuela 5.5 3.75 3.75 13.00 0 7 14 21 Lowest risk Highest risk Access Development Commercialisation Source: Verisk Maplecroft and Wood Mackenzie 0 7 14 21 Lowest risk Highest risk Access Development Commercialisation Source: Verisk Maplecroft and Wood Mackenzie 12
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