Latin America: Energy boost | Global finance magazine

Although economic growth in Latin America has slowed, a healthy energy sector is fueling a recovery.

The Latin America and the Caribbean region will see growth slow in 2022 to 2.1% after averaging 6.2% last year, according to projections released in January by the Economic Commission for Latin America and the Caribbean. (ECLAC).

One of the sources of dynamism for the economies of the region is the oil and gas sector. Oil prices in early 2022 soared above the previous year, with Brent crude surging above $100 a barrel in late February as the Russia-Ukraine conflict erupted, more than 150% above average of 2020 of 42 dollars. Fitch Ratings predicts that conditions for Latin American oil and gas companies will stabilize in 2022, after last year’s substantial improvement, and help keep regional economies afloat.

Yet rising energy prices are creating a complex situation in many Latin American countries. Increased production will help Latin American energy companies – and their owners, public or private – benefit from higher export prices. Higher prices mean more royalties and revenue. But when it comes to domestic supply, higher prices can also trigger inflation, restrict production in other sectors, and make citizens unhappy, prompting government owners to sacrifice some profits for domestic peace.

“Inflation is going to have a big impact,” says John Padilla, managing director and partner at energy consultancy IPD Latin America, pointing to Mexico and Colombia as particularly vulnerable. “They’re not ready to handle it.”

In addition, some of the largest power sector entities in the region are deeply indebted and/or need large capital investments before they can scale up production to take advantage of higher prices. Petrobras is committed to long-term semi-privatization; while Mexico is dealing with Pemex’s debt with a series of more modest measures, including a reduction in the tax burden.

Pemex, like many power producers in this region, is government-owned; domestic conditions, as well as politics, therefore have an impact on how debt is repaid and prices set. “Latin American countries are struggling with their economies,” said Rodrigo Nishida, an economist at the São Paulo-based consultancy LCA. The Brazilian government, through Petrobras, “will likely moderate prices to keep consumption balanced,” he adds.

Yet Nishida believes long-term underinvestment in exploration and extraction is a bigger problem than politics, one that will require large capital expenditures (capex) to address. At the same time, many of these companies are seeking to diversify into new businesses and new geographies in order to strengthen the sustainability of their activities; and these extensions also require investment.

Ecopetrol develops and modernizes

This year, the Colombian state company Ecopetrol, to take an example, has allocated nearly $30 million to fuel improvement projects and $6 million to green and blue hydrogen development and pilot projects. and other technologies to be applied in refineries. Such improvements will help Ecopetrol achieve nearly 5% growth in oil and gas production this year, the company says, and allow it to maintain exports while focusing on higher-value markets to drive growth. the best of high crude prices.

At the same time, Ecopetrol will invest more than $200 million in water management projects and more than $50 million in decarbonization projects, as well as additional investments of approximately $1.1 billion in energy transport, telecommunications and road transport in Brazil, Peru and Chile.

In total, the Ecopetrol group plans to invest between 4.8 and 5.8 billion dollars in 2022, 30% of which will be spent outside Colombia, in the United States and closer to home. The Caribbean region will be the main recipient of exploration investments – 78% of Ecopetrol’s investments focused on natural gas exploration will be executed in the Caribbean.

Petrobras, Pemex and others have their own investment, expansion and diversification plans. But will it be fast enough? The energy sector generally requires long-term investments, with a return on investment in four to five years. Yet global energy problems are not going away.

Master the debt

The massive debt of Latin American energy producers is another obstacle to their fiscal health. Some of the major oil and gas companies in the region – Ecopetrol, Petroperu, Pemex and Petrobras – need to clean up their balance sheets.

The Mexican company Pemex, in particular, holds the honor of the most indebted oil company in the world. Last year, production increased by only 3%, which is below government projections and followed many years of decline, mainly due to aging fields and a lack of exploration and development of new sources. The government led by President Andres Manuel Lopez Obrador has generously backed a three-party plan to reduce tax burdens, debt and business risk.

In September, the government lowered the “shared utility right” tax that Pemex pays from 52% to 40%. In December, it was announced that he would give the company $3.5 billion in cash to pay off its debt. At the same time, the company will swap some of its debt, giving bondholders the option to swap short-term (2024-2030) maturing bonds for new 10-year bonds plus cash, and , separately, to redeem longer-term bonds. time range (2044-2060). The government is even seeking to modify the structure and direction of the company, in order to strengthen consensus around the objectives, according to Treasury Secretary Rogelio Ramírez de la O.

Petroperu enjoys similar support and owes its BBB+ rating from Fitch in part to “strong incentives from the Peruvian government to support the company, as it is one of Peru’s largest liquid fuel suppliers”. Fitch also believes that “Petroperu will maintain structural debt in excess of $5 billion over the rating horizon, with average leverage measures in the 15x range over the 2021-2023 period, still high for the rating category” .

Petrobras, however, rather than attempt to take advantage of the current situation to repay debt, has embarked on a long-term piecemeal privatization, hoping to raise between $15 billion and $25 billion by selling some assets, and will globally invest $68 billion in higher investments. return of assets by 2026.

“There’s a pretty aggressive divestment going on,” says Marcelo Assis, head of upstream research for Latin America at energy consultancy Wood Mackenzie. “There is no full privatization, but it is a coherent strategy that will increase profitability.”

The company remains focused on the rich “pre-salt” oil reserves (deeply buried under layers of rock, sand and salt below the ocean floor) that the company first explored in 2006. Oil & Gas Journal estimates that in January 2021, Brazil had 12.7 billion barrels of proven oil reserves, second in South America only to Venezuela.

The sale is expected to continue throughout the year. The October 2022 elections could have some impact, depending on the circumstances; but the plan lasted through contrasting administrations. “It started with President Dilma Rousseff but got stronger with Michel Temer and now Jair Bolsonaro,” Assis notes.

Rodolfo Saboia, Director General of Brazil’s National Petroleum, Natural Gas and Biofuels Agency (ANP), also says that the divestment program, by opening up the local market to new players, will not only bring in fresh capital, but also more competition.

“The Brazilian population is used to oil prices as a government decision, and it shouldn’t be like that,” Saboia says. “The more competitors we have, the better it will be for consumers.”

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