BRAZIL & VENEZUELA IN SHOCK
South America's two largest oil producing nations face bigger threats from political turmoil than depressed crude prices, but reforms in their national oil companies (NOC) and energy ministries may be essential for their governments to survive, speakers suggested at an Apr. 12 discussion at the Center for Strategic and International Studies.
Their observations came before more than two thirds of Brazil's Lower House voted to impeach President Dilma Rousseff on Apr. 17 less than 2 years after her reelection. The removal effort now moves to the Senate, which has 180 days to conduct formal impeachment hearings but could force her out with a simple majority.
"Brazil is going through a critical juncture in its political and economic history," Christopher Garman, who heads Eurasia Group's country analysis and leads the firm's coverage of Brazil, said at the CSIS event. He predicted that Rousseff will not finish her term, and said the country faces huge economic and social challenges amid corruption investigations of the government including national oil company Petroleo Brasileiro SA (Petrobras).
Venezuelan President Nicolas Maduro's government, meanwhile, must deal with huge financial obligations following years of ambitious social reforms instituted by his predecessor, Hugo Chavez, which essentially were financed by revenue from national oil company Petroleos de Venezuela SA (PDVSA).
"Growing shortages are creating public pressure," said David Voght, managing director of energy consulting firm IPD Latin America. "But the government has decided that financial default is a bigger risk than domestic social and political unrest. If it defaults, it will have a harder time selling its oil because payments could be subject to attachment in certain countries."
A third speaker, Luisa Palacios, who heads Latin America macro and energy research at Medley Global Advisors in New York, said, "There's a need in both Brazil and Venezuela for political stabilization before there's economic stabilization." But Voght said that problems at the two countries' NOCs may put potential private sector partners in a better bargaining position.
Petrobras heavily in debt
Brazil's energy problems involve not only corruption at Petrobras but also the NOC's heavy debt—the world's largest for an oil company—after it spent so heavily over the last 10 years, according to Lisa Viscidi, who directs the Inter-American Dialogue's Energy, Climate Change, and Extractive Industries Program. It also must deal with obstacles to private investment and political paralysis and a total lack of clarity in its energy sector, she said.
"Profits have declined because of lower oil prices," Viscidi said. "Production from the offshore presalt has increased slightly, but mature field declines have accelerated. Most important, it lacks leadership. I expect [Petrobras] to shrink and become a more focused company. It probably will have to sell controlling stakes in some of its businesses such as natural gas distribution and pipelines."
New regulations will be necessary for non-state entities to provide these services, and local content requirements may need to be adjusted, she said. Companies that won concessions in the last presalt bidding round are watching in the meantime, Viscidi said. "If presalt reform is approved, I think we'll see some unitization agreements. Reservoirs over 2-3 blocks may hold billions of barrels. New spaces could open up for investments by foreign companies, but it all will depend on politics," she said.
Palacios said Venezuela's government has decided financial default is a bigger risk now than public unrest since PDVSA's transfers to the national treasury fell from $40 billion to $12 billion in a single year. "It cannot export its way out of this crisis because its crude oil production continues to decline," she said. "The gravity of its oil continues to grow, requiring more mixtures with lighter crudes that it imports."
Voght said while the US effectively has become the world's swing producer with its blossoming crude production from tight shale formations, its rebound from the present price slump may not occur as quickly as anticipated. That could make Venezuela's 300 billion bbl of reserves attractive to foreign investors in a more stable political environment, he said.
"We may be going in a useful direction," he said. "Royalty rates at 30% could come down to 20%. But the shadow tax needs to be reformed. Joint venture contracts are acceptable to foreign partners. They just need to be applied, which hasn't happened. Venezuela also needs to start needs to start exporting gas, and could send some of it to Colombia. It's also negotiating with Trinidad and Tobago to start taking offshore gas for liquefaction and exports."
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