On February 10, Venezuelas president Hugo
Chávez announced the countrys first oil
exploration deal with foreign companies in over a decade.
We dont care about the size, or the ideology, of
the government of their country, Chávez said,
referring to a consortium led by US oil major Chevron and
Spains Repsol YPF, who will spearhead the project.
Less than three years ago, Chávez had instructed the
military to seize oil operations in the oil-rich Orinoco region
of the country. But his new-found liberal posture towards
western private oil firms seems, at first blush, to fly in the
face of his drive to establish 21st century
Forced nationalizations and raids on energy companies have
accompanied the socialist firebrands 10-year project,
which has sought to ramp up social spending while in
theory ensuring the proceeds of natural resource wealth
are distributed equitably. Exxon Mobil and Conoco Philips are
currently pursuing international arbitration for compensation
over seized Venezuelan assets.
In contrast, the consortium last month pledged $15 billion
of investment in the oil-rich Orinoco Belt. Further
headline-grabbing deals with foreign oil companies are
reportedly on the cards.
But Chávezs new pact with the West is no
road-to-Damascus conversion to free market liberalism. The
Venezuelan presidents hand has been forced by market
reality: oil prices collapsed from a high of $150 per barrel
(pb) in July 2008 to $35pb a few months later, stabilizing more
recently in the $7080pb range. All bets are off on future
pricing, analysts say.
So does Chávezs courtship of foreign firms
sound the death knell for resource nationalism in a world of
lower oil prices?
Yes and no. Chávez personifies the highly
cyclical nature of energy politics in Latin America, says
RoseAnne Franco, senior Latin American analyst at PFC Energy.
In this new equilibrium of lower oil prices, the
power has shifted moderately in favour of oil firms, she says.
But dont expect this to last in Venezuela if oil
prices jump up.
Such dynamics are well known. As commodity prices rise,
energy producing states seek to boost their share of the
windfall; when they drop, governments have traditionally
relaxed contractual terms in favour of oil companies, in order
to encourage investment and thereby boost production and oil
revenues. Equally, if oil prices fall to precipitous lows or
oil exporting governments face bankruptcy, politicians may
expropriate oil proceeds to shore up the public coffers and,
thus, their hold on power.
In the seven-year surge in global oil prices, energy
nationalism reached new heights among Latin American oil
exporters, says Paul Isbell, energy researcher at the
Inter-American Dialogue, a Washington-based think tank.
The most violent, extreme and confrontational strain of
state nationalism has occurred in Latin America, not Russia,
Africa or the Middle East. He cites the seizure of assets
of foreign oil companies and pro-cyclical revisions to
contracts by the governments of Bolivia, Ecuador and Venezuela
in the commodity bull run.
But the bursting of the commodity price bubble is not the
end of the road for energy nationalization, says Mark Weisbrot,
co-director of the Center for Economic and Policy Research. He
argues the global crisis has boosted the legitimacy of greater
state control of the energy sector while discrediting any moves
towards resource liberalization in the region.
Although prices may be cyclical, the shift to the
political left is a structural one, driven by the failures of
liberal economic orthodoxy to address poverty over the decades,
while the financial crisis has confirmed the moral failure of
free markets. Although oil prices have moderated from
their giddy heights, stronger state control of resources is
here to stay, he argues.
But the risk of regulatory uncertainty in the energy sector
across Latin America looms large. For example, Ecuadors
left-wing president Rafael Correa has demanded oil companies
surrender profit-sharing contracts and comply with fixed-fee
oil service contracts. Then, on March 3, Correa was forced to
extend the deadline for negotiations with international oil
firms by one month to the end of this April, as firms contest
IDEOLOGUES INTO PRAGMATISTS
Magdalena Barreiros, a former Ecuadorian economy minister,
says commercial realities will force the president to soften
his anti-market stance. Ecuador faces the threat of
fiscal catastrophe in a couple of years, if the current policy
stance runs its course. She adds: Petroecuador [the
state-owned oil firm] does not have the resources or expertise
to reverse the downward trend in oil production. These
factors will transform the ideologues into
pragmatists, says Barreiros, who was also a deputy to
Correa during the latters earlier stint as economy
In any case, Correa will seek exports to state-owned oil
companies of emerging market nations, at the expense of the
West, in order to cement political and economic relationships
and demonstrate his deep-seated hatred of the private
sector, she says.
In Bolivia, nationalist ideology is also hitting the wall
due to the limits of state-owned companies. In his first term,
president Evo Morales nationalized much of the energy and
mining sectors, in a so-called indigenization push. But a drive
to open up gas markets to the Pacific either via Peru or
Chile together with the need to attract international
capital to support the ailing state oil company YPFB, may call
for a more pragmatic approach from the government.
I believe there will have to be doublespeak. [Evo
Morales] is very radical in his words, but more flexible when
it comes to business with the investing companies, former
Bolivian president Carlos Mesa Gisbert tells Emerging
Markets in an interview.
Gas exports to Brazil, Bolivias biggest market, fell
by a third last year. Nevertheless, at the end of 2009,
Spains Repsol and Frances Total unveiled plans to
raise natural gas output by investing $1.5 billion in the
landlocked Andean nation. A new hydrocarbons bill is pencilled
in for this fiscal year.
Mesa, an outspoken critic of Morales, says the law will
offer a new equilibrium, characterized by
greater tax pressure on foreign oil companies but
with clear legal rights that will create more stable
investment conditions for companies.
Latin American governments have been historically prone
towards the unstable regulatory environments for energy, says
Christopher Sabatini, senior director of policy at the Council
of the Americas, a US-based business lobby group. Even if Latin
politicians want energy liberalization, this often conflicts
with the soul of the electorate, he says.
Theres a widespread belief across Latin America that
anything beneath the soil is the sole property of the
nation an emotional impulse Sabatini says has been
shaped by the experience of colonialism. For example,
Mexicos nationalization of US and Anglo-Dutch oil
operations in March 1938 is, to this day, one of the key
patriotic holidays, or fiestas patrias.
Geographic and ideological lines nevertheless divide the
region. Statist resource nationalists govern the volatile
Andean region. Meanwhile, Brazil is seen as the poster child
for a successful public/private partnership as the
government-backed Petrobras is well governed and partially
privatized. In addition, Colombia and Peru have offered
favourable incentives to international firms, even in the
commodity super-cycle, in order to jumpstart investment.
But an apparent nationalist turn in Brazil has raised
eyebrows. Under the slogan the subsalt is ours and
the promise of a new independence day for Brazil,
president Luiz Inácio Lula da Silva kicked off a drive
last year to reshape oil laws. The government is attempting to
push through legislation that would make Petrobras the
principal operator of the deep-sea subsalt projects. Subsalt
crude discoveries could amount to 16 billion barrels of
Lula, who is constitutionally barred from serving a third
term, has chosen Dilma Rousseff as his successor in the October
elections, and the Workers Party candidate has adopted the
banner of energy reform as a key part of her campaign.
After years of exemplary management of its oil
industry through a good private/public sector
balance, these developments are worrisome,
says Patricia Vasquez, a former trade adviser to Argentina and
fellow at the United States Institute of Peace.
The big question is: will Brazil become the next
Nigeria or the next Norway? she says.
Weisbrot argues that, unlike smaller Andean economies such
as Bolivia, Brazil has the bureaucratic and administrative
capacity to nationalize the energy sector. And the
promise of unbounded wealth may have sparked a
structural shift to the left in Brazilian energy politics, says
Sabitini. At the same time, the financial crisis has boosted
the relative strength of Brazil on the global stage and
validated, in the eyes of many, the role of the state over the
economy, he says. Brazil is drunk with a sense of its
new-found power so there is always a risk that nationalist
ideology may trump pragmatism.
Elizabeth Johnson, head of Brazil research at consultancy
Trusted Sources, says the need to attract massive foreign
investment in the subsalt projects, which is estimated at up to
$50 billion, will limit the nationalist push and ensure a
strong role for foreign operatives. But David Thomson, a Latin
America energy analyst for Wood Mackenzie, cautions that the
government views the development as a decades-long project,
which relieves some of the financing pressures in the
near term. Nevertheless, the proposals in their current
form, which marks a shift away from concession-based to a
production-sharing arrangement, will not be applied
THIRD RAIL POLITICS
The global crisis and the commodity price volatility in its
wake have also hammered home the need for energy liberalization
in Mexico. But despite attempts by president Felipe
Calderón, Mexico the third largest oil supplier
to the US has largely failed to open up its rigidly
nationalized oil industry to allow greater private
Energy reform will remain a form of third rail
politics in Mexico as the pro-privatization label is the
kiss of death, says Shannon ONeill, Latin America analyst
at the Council on Foreign Relations. Sharply dropping oil
output and declining reserves could spark a fiscal crisis on
the oil-dependent budget in the coming years, she says, and
such a crisis is needed to trigger energy
The countrys reluctance to court international capital
for its energy sector is yet another example of the internal
conflict facing Latin Americas energy producers a
struggle which shows no sign of abating so long as oil remains
the worlds commodity of choice.