Latin America Shifts from Nationalization to Maximization

Latin American governments are proving to move beyond resource nationalism and towards resource maximization, according to a recent assessment by Wood Mackenzie’s new Asset Risk Index (ARI) Service.  By taking a more holistic view of the oil and gas industry, governments are focusing on maximizing value via employment generation and industrialization, coupled with higher revenues from expanding oil and gas output.

“States are also signaling more pragmatism regarding local content requirements and more receptiveness to foreign investment,” explains RoseAnne Franco, country and asset risk manager for Wood Mackenzie. “While national oil companies (NOCs) will continue to play an important role in the industry, governments are also demanding more transparency and accountability.”

The last decade has been defined by resource nationalism in Latin America, which was characterized by regulatory volatility, heavy state intervention and a return of the NOCs.   However, according to Wood Mackenzie’s outlook, there also appears to be an ebb and flow to these shifts in the regulatory environment. As an example of the shift, Mexico and Argentina, two of the region’s most strident resource nationalistic countries, have introduced reform and incentives over the last 18 months. 

Mexico

In Mexico, President Enrique Pena Nieto has successfully passed ambitious energy reform that liberalizes the oil and gas sector. Discussion is currently underway over associated secondary legislation, which is anticipated to be completed before the next congressional ordinary session in September. 

“Mexico will offer a variety of opportunities – deepwater, tight oil, heavy oil and unconventional plays, among others,” notes Franco.  “The first licensing round is expected in 2015. Wood Mackenzie forecasts Mexico’s risk environment will improve in the near term, but the increase in oil and gas activity will also likely raise risks over the forecast period, which are important for new entrants to monitor,” Franco adds.

Argentina

The re-nationalization of YPF, the Argentinian national oil company, in May 2012 proved to be an inflection point, according to Wood Mackenzie: “Within months of the nationalization, the government of President Cristina Fernandez de Kirchner was seeking to re-engage with the oil and gas industry. Over the last 18 months, the administration has introduced incentive programs and critically reached a resolution with Repsol over compensation for its nationalized interests. Recent efforts have yielded early results with state-controlled YPF signing agreements with Chevron and Dow Chemical.  In mid-2014, the Fernandez de Kirchner administration is discussing an expansion of exploration and production incentives.  

While there is downside side risk in the near term due to economic uncertainty and a possible default, Wood Mackenzie anticipates further improvement in Argentina’s risk environment over the forecast period.  The velocity of the improving environment will be defined by the October 2015 presidential election,” says Franco.