Latin American Upstream: Progress and Pitfalls

By Ali Moshiri, Managing Director, Upstream Latin America Business Unit
ChevronTexaco Overseas Petroleum Inc.

Cambridge Energy Research Associates Conference

Houston, Texas

Thank you for this chance to give an overview of the energy outlook in Latin America and its role in what you rightly call "a changed world."

As you know, ChevronTexaco is a new company, only five months old. Both companies, Chevron and Texaco, were major players in Latin America from the first years of the 20th century.

Today, ChevronTexaco produces 10 percent of Argentina's oil production, and ranks as that country's second-largest oil producer and exporter. We are the largest private foreign producer in Venezuela in terms of daily oil production. We operate the largest natural gas fields in Colombia. We have gas production in Trinidad and currently have interests in nine offshore exploration blocks in Brazil.

So Latin America is a region of vital interest to us. We watch the developments there very closely and try to stay in close and continuous dialogue with the governments, national oil companies and our partners.

Let me begin my overview by noting that the potential of Latin America is hard to overstate. It could one day exceed that of the former Soviet Union.

After a decade of opening to the free market, Latin America is poised to make the most of this potential. Yet, progress can only continue through a commitment to open markets and continued liberalization.

Opening of these markets kicked off in the beginning of the last decade with the privatization of Argentina's national oil company and the deregulation of its upstream production.

After a decade of opening to the free market, Latin America is poised to make the most of this potential

In 1995, Venezuela began opening parts of its petroleum sector to foreign investment, including the Orinoco Belt Heavy Oil deposits -- the world's largest petroleum reserve.

Bolivia followed suit by restructuring its national oil company, allowing a major influx of foreign investment and "capitalization" of the state company.

Brazil swiftly liberalized its petroleum sector through a constitutional amendment. Since 1998, Brazil has offered three offshore oil-lease licensing rounds, with a fourth expected later this year. Brazil further opened up the downstream market just last month -- eliminating the state monopoly on fuel importation.

Wherever markets have been opened, the results can be summed up in two words: success stories.

Consider the following:

  • Argentina has seen a 70 percent increase in oil production. Once a net importer of oil and gas, Argentina is now an exporter.
  • In Brazil, scores of international oil companies bid against one another for the honor of paying for offshore blocks. New commercial discoveries are putting Brazil on a trajectory to achieve its long-cherished national goal of self-sufficiency. In addition to the influx of capital, the national oil company Petrobras has had the opportunity to diversify investments into other worldwide oil opportunities.
  • In Bolivia, the oil and gas sector -- once in stark decline -- has become a major supplier of natural gas to Brazil.
  • Venezuela has begun to bring Orinoco heavy oil into production and for sale to international markets -- heading towards a goal of 620,000 barrels per day by 2006.

Why are we seeing results like these?

As you know, in our industry, exploration and production are always in a race against time and depletion. One must commercialize new discoveries and maximize existing assets in order to stay ahead of dwindling reserves. This can only be done with huge infusions of capital. Today, only countries that are open to global investment can hope to attract capital investments of sufficient magnitudes.

Will Latin America remain open to such investments?

That is a question I can pose but am not fully able to answer for you today. Although privatization and deregulation of the energy sector have made progress in some areas, a troubling lack of free-market conditions throughout the region persists.

Why is this happening?

In Latin America, cross-border transactions have always been hampered by red tape and by regional trade agreements that amount to managed trade.

While the Bolivia-Brazil pipeline stands as a shining success, other projects of tremendous promise have been stalled at the border by a narrow view of the national interest.

Consider the proposed pipeline between Bolivia and the Chilean coast. Despite interest from Repsol, BP and TotalFinaElf, this deal and a related LNG project are proving to be a challenge. Regional politics play a major part.

Bolivia and Chile do not maintain formal diplomatic relations as a result of a long-standing territorial dispute over the region where such a pipeline would be constructed. Meanwhile, Peru has begun to press Bolivia to route the pipeline to its coast, very likely with the aim of including Peruvian gas in the bargain.

Or consider the Venezuela-Colombia pipeline, a natural linkage between gas-rich Northern Colombia and the power markets of Venezuela. For all its promise, this obvious matching of supplier and customer cannot seem to cross over a common border.

Nations, no less than individuals, in times of hardship have a natural tendency to turn inward. With living standards hit hard in the last year, some countries are resorting to a kind of nationalism we have not seen in years. As a result, steps toward further privatization are becoming difficult. We are also seeing levels of taxation that could make exploration and production uneconomic.

Argentina is seeking to impose an export tax on hydrocarbons. The government is also seeking immediate cash with an offer for a one-time payment from the oil companies. International firms are clearly worried about maintaining decent margins.

At a time when oil prices are already low, margins are about as thin as they can be. Such a level of taxation -- whether explicit or extracted as a so-called "voluntary contribution"-- could have an impact on further investment in Argentina.

Venezuela has recently passed a new law requiring all upstream investments to be represented by entities with 51 percent national ownership. This new law may raise royalty rates to levels that could possibly make new projects unattractive to foreign investors.

In Brazil, Petrobras -- while searching the world for oil -- seems unwilling to relinquish its monopoly at home. Despite a court order from the Brazilian Supreme Court in support of common-carrier rules for pipeline access, unused capacity in the Brazil-Bolivia pipeline has yet to be released.

Without a rapid pace of change and consistent legislation, the benefits of liberalization will not be realized. Even Mexico -- under the leadership of its pro-market president -- is finding it hard to make rapid change and hold to the commitment to the free market.

With abundant resources and ready access to the largest worldwide market, Mexico has always been well recognized as having enormous potential. President Fox and his administration appear committed to an opening of markets and have proposed the multiservice contract, an interesting mechanism for foreign participation. Yet, political resistance to liberalization of the petroleum sector is deep rooted, and the government will have to work hard to convince the public of the significant economic benefits for Mexico allowing greater foreign participation in its energy sector. Meanwhile, potential investors are standing by.

In short, reform and regression are in a foot race in Latin America, and it is by no means clear which side will win out. At a time when world oil prices are low, misguided nationalism could lead any country to bid itself out of the market.

If one were to accept a worst-case scenario, social incomes and national revenues could be hit hard. I'm thinking of Argentina, where that 70 percent increase in oil production has generated 10 percent of all government revenues. I'm thinking of Venezuela, where oil revenues account for 30 percent of the gross domestic product, at least 50 percent of government tax revenues and 90 percent of export earnings.

I did not come here, however, to offer gloom and doom. I want to be candid but also to be open to dialogue -- to listen and work with our Latin American partners to find the right terms for a true partnership.

For the long term, I remain optimistic. We have already seen tremendous progress in Latin American energy markets. We have seen unprecedented openings and progress.

The Center for Strategic and International Studies (CSIS) experts predict that world energy demand will increase by 50 percent by the year 2020. This enormous increase in world demand is a great opportunity. It can allow Latin America to become a preferred provider to an energy-hungry world.

All Latin America will need is the capital to do the job.

If we work together as partners, we can explore the value hidden in these assets to the benefit of all.

Hernando de Soto, the great Peruvian economist, reminds us that capital is far more than just money. Capital, he says, can be represented by money and captured by money. But what capital really is "are all those values that are hidden in assets and only come forth when property is well defined."

I believe that a partnership is an asset with tremendous hidden value. To echo the remarks of Peter Robertson this morning: A partnership reveals its value only when it is built upon mutual benefits. If we work together as partners, we can explore the value hidden in these assets to the benefit of all.

Speech in Spanish

Go to CERA speech by Peter Robertson, vice chairman of ChevronTexaco.

Updated: February 2002