State of Petro: National oil in the Americas

Energy is ever more becoming the piston driving Latin America to the contemporary world stage.

This reality arrives in lieu of major Chinese and Russian investments in Venezuela’s petroleum belt, Mexico’s intense debate over how to diversify foreign investment in its state-run energy powerhouse, and Brazil’s ever-expanding oil coffers that continue to propel its economy upward in the face of a global economic recession.

These three states lead energy production in Latin America and will increasingly become a lifeline for the world’s swelling consumer demand, and key to its sustainable growth. Petroleum and natural gas have for a time been assets sought heavily by the US and Europe, but now draw clientele from the surging populace of China, India, and wider Eurasia.

Amid this equation, guaranteed global supplies remain variable, tending to degrade in both refining ease and reserve accessibility. This, coupled with security concerns in the Middle East, marks a unique opportunity for the region to fund much needed domestic reform and present viable energy initiatives to the international community, beyond the distant third tier.

A fundamental challenge in scaling these energy companies to meet such global demand will be the state’s ability to balance its investment and revenue model. All three of these Latin American countries highlighted here have state-run energy sectors, though all are not created equal. For a more informative look, see the comparative breakdown below:

Country	México	Brazil	Venezuela
Founded	1938	1953	1975
Petro Profile	Heavy Crude (2/3, Maya), Light Crude (1/3, Isthmus & Olmeca)	Predominantly Heavy Crude (Marlim), although newly discovered, subsalt fields are of Light grade and Sweet substance	Almost entirely Extra-Heavy Crude, of Sour substance (high sulfur)
Proven Reserve Capacity	10-13.68 billion	12.35 billion	99 billion
Largest Reserve	Cantarell	Sugar Loaf	Orinoco Belt
Onshore / Offshore %	20/80	40/60	Predominately onshore reserves, spread across 4 principal fields. Shallow water reserves in the Maracaibo Basin
Production Output	2.8 million bbl/d	2.72 million bbl/d	1.5 million bbl/d
Refining Capabilities	1.5 million bbl/d (6 refineries)	2.223 million bbl/d (16 refineries)	1.28 million bbl/d (Domestic & foreign refineries- Citgo USA)
Annual Revenue	US $98 Billion (2008)	US $118.3 billion (2008)	US $120 billion (2008), est. US $50 billion  (2009)
Foreign Investors	Sparse due to tight regulation by state apparatus, although the Calderón adminstration has opened doors for foreign investment on the deep sea exploration front	Private sector energy (Shell, Cheveron), BP (biofuels), China	Previous investors included major intl. petroleum giants, but after state reappropriation, Russia, Iran, China, & Brazil have agreed to looser terms under the Bolivarian regime
Principal Export Recipient(s)	United States	Largely utilized for growing domestic consumption, biofuels (ethanol) make up bulk of energy export	United States & Europe, China fastest growing consumer

SOURCES: US Energy Information Administration, Oil & Gas Journal, Business Week, CIA World Factbook

These numbers are enlightening in the sense that they present a snapshot of current carrying capacity and orientation of each state’s petroleum sector. However, a deeper study of energy futures can prove to be a bit speculative.

In the case of México, PEMEX has long been the case study on state investment of natural resource and economic autonomy. It relies heavily on taxes from its rich output to fund an array of federal initiatives and deliver energy to the Mexican consumer at a subsidized price. But, wrought with declining output on its principal oil field, Cantarell, the company has a need to exploit deeper off-shore deposits that require sophisticated equipment and a niche expertise– tasks honed upon by transnational powerhouses such as ExxonMobil, BP, and other state companies such as PETROBRAS. Due to this shifting source dynamic, the Calderón administration has worked diligently to promote external investment. This however remains a major political hot button due to historic precedent, as the industry’s sovereignty is seen as a sacred right to the Mexican populace. PEMEX has more than the necessary resources to carry onward, but significant institutional reform will remain fundamental.

PETROBRAS has gained measurable authority in the international energy sector both for the diversification of its investments, and the expertise of its workforce. President Luiz Inácio Lula da Silva has worked diligently to build a state model that profit shares with private enterprise, while promoting a solid domestic refining infrastructure. Recent offshore discoveries in sub-salt reserves via the Tupi fields continue to grow the Brazilian lot, while Brazilian officials are aiming to funnel revenue to direct state initiatives and maintain energy independence. For the time being, Brazil appears to be playing its cards right to promote sizable production in means to maximize internal growth. It will be interesting to see when it goes net positive in its production, to which countries it will direct its resources.

Turning to the more volatile petroleum sector, Venezuela has seen its share of production ebbs and waves in the past decade. President Hugo Chávez has too tapped into the ‘petro vein’ to fund large swaths of state initiatives, however often with a playbook at odds with much of its professional workforce. Lack of international investment (due to restrictive reappropriation efforts) and flight of expertise have reduced export capacity and bogged down exploratory projects in the Llanos sector and Orinoco Basin. The state energy company, PDVSA, however sits upon perhaps the world’s largest crude reserves in the Orinoco Belt, rivaling fields in Saudi Arabia. Due to its heavy tar-like viscosity though, special refining capabilities are needed to extract petroleum from sand and sludge– a role the United States currently fulfills. This is where large investment by China and Russia will float PDVSA initiatives in the near future despite waste from within. This, while the Venezuelan state maintains institutional direction and pads its GDP.

Overall, with the exception of Brazilian offshore reserves, it appears that most new petroleum pools are of heavier grade crude. This will require a more expensive refining process and specialized facilities, promoting favorable conditions for foreign direct investment (FDI) and transnational partnerships.

The manner in which each of these companies respond to its new role in the world energy sector will be developments watched closely by all, but seems to present favorable prospects to a long-forgotten region.

PRI greases electoral machine in Mexican midterms

A number of weeks ago I happened to be visiting some friends in the Coahuila state of northern Mexico, just in the run-up to yesterday’s midterm, regional elections. Let’s just say you’d have to be living in a very deep hole to forgo the propaganda for its PRI governor candidate, Rodrigo Medina de la Cruz. In fact, between PRI’s luminous billboards and the beehive of Oxxo convenience stores, I had little trouble directing a taxi driver to distant locations in the city of Saltillo by pure landmark (psss, GPS, for what?). Well, it paid off.

After quite unsettling results in 2006, PRI yesterday gained critical traction nationwide, but specifically in Mexico’s federal congress, pulling rank among a divided legislature. It now carries 36% of its seats, allowing them to slingshot president Calderón’s party, PAN (27%), with the working consent of the minority party, PRD (12%). The result is a rather uncharacteristic power share in a traditionally unilateral Mexican government.

For a concise and introspective brief on the shifts implications for the Calderon’s administration, check out Alberto Saracho’s analysis on America’s Quarterly blog, reporting from Mexico City. One particular point that drew my eye came in lieu of the national budget:

Government efforts to improve the level of tax collection—one of the lowest such rates in Latin America—will also be affected by yesterday’s vote. Although it was not widely publicized, the PAN has been working with the executive to approve changes in the fiscal law that would improve public money collection. This was on target to go through after the elections, but its future may now be in doubt since one of the PRI’s main campaign promises was to not raise taxes. Either way, a solution must be found to find new revenue streams for the federal government—recent reductions in oil prices and the worldwide recession have hampered the government’s ability to obtain resources for to pay for basic functions.

Yea, a faltering tax base might pose a bit of a challenge to match cartel revenue in the billions of dollars and reign in a throbbing economy– amid shrinking remittances from abroad, a reeling tourist industry, and oh yea, the lack of technical investment in Pemex. Ouch.

While some analysts pinpoint PRI’s electoral gain to reactionary voter vengeance, maybe the old party cowboy can turn things around for Mexico. Certainly never hurts to be an optimist.