Hedging ballots in LatAm

Author Patricia Garip, Senior Contributing Editor

What is at stake for the private-sector oil and gas investment that has been flowing into Latin America with recent and upcoming elections demonstrating the region's young democracies are shifting?

Much of Latin America threw open its doors to private-sector oil and gas investment in recent years. Mexico brought up the rear with a watershed 2014 constitutional reform. Yet as recent and upcoming elections demonstrate, the doors could now swing shut — probably not all the way, but enough to resuscitate resource nationalism, alienate investors and leave reserves underground.

Take Brazil. President Michel Temer, an old-school politician who might have cruised through as a caretaker after Dilma Rousseff was ousted in 2016 for juggling government funds, ended up a champion of oil industry reforms. Among the most consequential was the scrapping of a quixotic law that forced state-controlled Petrobras to operate all pre-salt projects with at least a third of the equity. Wishlist fulfilled, foreign oil companies gobbled up acreage offered in a steady stream of tenders. And they would pick up a lot more in a so far-elusive auction from the 15bn-20bn bl Transfer of Rights (TOR) zone.

Now comes next month’s elections featuring a colorful field of presidential rivals ranging from extreme right Jair Bolsonaro, who is recovering from a knife attack, to former Sao Paulo mayor Fernando Haddad, leftist heir to imprisoned ex-president Luiz Inacio Lula da Silva. Investor-friendly Geraldo Alckmin, former governor of Sao Paulo, hardly blips in voter polls.

Technocrats are trying to insulate Brazil’s oil and emerging gas business from politics, with some success. They are still pushing for a TOR round next year. And in the gas sector, LNG developers, power generators, midstream firms and distributors are stepping into the void left by Petrobras. But no one can say whether Temer’s successor will topple the fragile legal and regulatory structures that made it happen.

In Argentina, those structures look even more vulnerable. A vast shale play is finally reviving gas production, and exports of pipeline gas, and maybe even LNG, could be next. Investors could not have picked a chummier president than Mauricio Macri, but heading into his final year in office, the former construction industry magnate was forced to resort to the IMF to check a currency crash. Inflation is climbing. And the clannish price-control deals and subsidy schemes espoused by his Kirchner foes are now the stuff of his own legacy as well. Despite the exposure of a sweeping Kirchner-era corruption scandal worthy of Hollywood, it’s not hard to picture a Peronist revanche in October 2019 elections.

In Mexico the left has already made a comeback, where incoming president Andres Manuel Lopez Obrador is reviewing all upstream contracts signed under the energy reform. The messages from the populist president-elect are mixed so far, stirring hope among foreign oil companies and local fledglings that the new administration heading to power in December will bring a pause, not a reversal of Mexico’s opening in the tragic way that Hugo Chavez dismantled Venezuela’s apertura.

Investors might take solace in Ecuador, where president Lenin Moreno is restoring production-sharing and mending fences with investors after a decade in the cold. Tackling the corruption that left a trail of defective infrastructure projects is among his top priorities. But Quito’s turnaround could prove fleeting as well if voters don’t perceive any benefit.

A common anti-corruption theme coupled with broader emerging market capital flight makes these Latin American polls particularly rocky affairs. But oil companies are used to political volatility. The challenge everywhere is to render steady and transparent investment conditions a matter of state policy, rather than a passing phase of individual governments. For companies operating in Latin America’s young democracies, the ultimate peril might not lie in the ballot box, but in the risk of losing it.

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