3. Latin American Petroleum Privatization


Privatization in the Latin American petroleum industry has occurred in an atmosphere of radical economic transformation. In the early 1990's, Latin American countries, almost en masse, embarked on a series of free market-based economic reforms. These policy reforms have in many cases been universal, covering virtually the entire range of economic activities--fiscal, monetary, commercial, trade, and industrial. Central to Latin American economic reforms has been the privatization of a range of formerly state-owned industries, from phone companies to electric utilities to petroleum companies. Legal reform has also been key to privatization efforts in the region, particularly with regards to treating foreign companies equally with domestic companies under the law.

For several reasons Latin American countries were persuaded to privatize national petroleum companies. In addition to obtaining badly needed investment capital and increasing state revenues, privatization is also a means of introducing free market economic reforms. Much of the Latin American petroleum sector had become characterized by bloated payrolls, outdated technology, under investment, and poor provision of services. Further, Latin American state petroleum companies are among the largest petroleum companies in the world (Table 1). As such, their privatization presents a singular opportunity for Latin American governments to raise enormous sums of revenue.


Developments surrounding the numerous 1980's debt crises also had much to do with recent Latin American efforts to privatize their petroleum industries. In particular, these crises greatly hindered the ability of Latin America's state petroleum companies to attract much needed outside capital without providing investors with added incentives and reduced risks. Similarly, the debt crises left many Latin American governments not only in need of raising revenues through privatization to fund other spending priorities. Perhaps more important erratic tax regimes also served to discourage foreign investment in Latin American exploration and production operations.

By 1990, largely due to privatization and other economic liberalization measures, Latin American nations had restored international investor confidence sufficiently that net capital flows into the region increased nearly 250 percent from 1989, growing from $8.9 billion in 1989 to $21.5 billion in 1990 {see Endnote 32}. Between 1989 and 1994, U.S. foreign direct investment in Latin America nearly doubled {see Endnote 33} . Privatization of state-owned industry appears to have played a major role in reversing Latin American capital flight. Approximately 130 Latin American and non-Latin American companies currently have petroleum ventures in Latin America.

That is not to say that political risk has disappeared from Latin America, or that the possibility of future privatization reversals are an unlikelihood. Even though the Peruvian government has achieved some noteworthy success in suppressing its Marxist guerrila insurgency, Shining Path has yet to disappear. The recent uprising in Chiapas, Mexico and Colombia's long-standing war with its insuragency movement underscore some of Latin America's enduring political problems.

The U.S. major oil companies have increased their exploration and development expenditures in Latin America, nearly doubling their expenditure level between 1987 and 1994. With some exception, most Latin American exploration and development activity involving U.S. companies historically has been, and still is, conducted by the majors {see Endnote 34}. Although amounting to only 6 percent of their total foreign exploration and development spending in 1994, Latin American exploration and development spending by the U.S. majors has grown at twice the rate of their exploration and development expenditures in other foreign locales {see Endnote 35}.

However, interest in Latin America has not been limited to U.S. companies. Latin America's indigenous petroleum companies, foreign multinational oil companies, and some U.S. independents have shown greater interest in developing the continent's petroleum resources. One evidence of the increased level of exploration and development activity in Latin America is the petroleum drilling rig count. The number of drilling rigs operated in Latin America are continuing to increase, as they have yearly since December 1992, reaching 271 in December 1995 {see Endnote 36}. The following sections highlight some of the more important recent foreign company activity due to Latin American petroleum privatization, on a country-by-country basis, beginning with Argentina, which has undergone the most substantial recent petroleum privatization of any Latin American country.

Argentina

Argentina embarked on a series of petroleum privatization efforts which began in 1985 and continued through 1993, when the final step in privatization was achieved with the sale of Yacimientos Petroliferos Fiscales (YPF), the state oil company of Argentina. Since the liberalizing of rules governing foreign participation in Argentine oil and gas, the benefits realized from new sources of investment and technology have been substantial and have been responsible for reversing years of declining oil production in Argentina. In terms of crude oil production, YPF is relatively small when compared to such giant Latin American petroleum companies as Mexico's Pemex and Venezuela's Petroleos de Venezuela SA (PDVSA). During 1994, YPF ranked 37th and 50th respectively, in terms of the world's crude oil producing companies and refining companies.

However, despite its size, the privatization of YPF represents one of the most significant and successful of all Latin American state-oil company privatizations. In 1990, Argentine crude oil production stood at 483,000 barrels-per-day, a level less than that produced a decade earlier. However, by 1995, Argentine production reached more than 700,000 barrels per day, and 1 million barrels of crude are expected to be produced daily in the year 2000 {see Endnote 37}. During 1994, when drilling activity was largely deteriorating in all other regions, the opposite was true in Argentina, which experienced a 66-percent increase in its crude oil and natural gas rig count between 1993 and 1994 {see Endnote 38}.

An influx of private investment largely accounts for the turnaround in Argentine petroleum. For instance, U.S. direct investment in Argentina's petroleum industry has climbed from $452 million in 1989 to $773 million in 1994 {see Endnote 39}.

Foreign companies were involved in Argentina's petroleum industry for several years prior to privatization. In 1994, the Argentine subsidiaries of the U.S. companies Amoco and Occidental accounted for 7 percent and 3 percent, respectively, of Argentina's crude oil production {see Endnote 40}. Exxon and Royal Dutch/Shell (Shell Oil Company's Netherlands/UK parent) also have owned major Argentine refineries for several years.

Privatization is responsible for more recent foreign ventures. In 1993, YPF announced that it would modernize its flagship La Plata refinery with technical assistance from Chevron. In 1992, the U.S. company Enron led a joint venture that won the concession to own and operate one of the two Argentine national gas transmission systems divested by Argentina when the state gas company, Gas del Estado, was privatized {see Endnote 41 and Endnote 42}. Drilling companies from the United States entered Argentina with Pride Petroleum Services' 1996 purchase of Argentina's largest drilling and workover rig company, Quitral-Co. S.A.I.C., for approximately $140 million {see Endnote 43}. In 1996, the former Spanish state oil company, Repsol, purchased a 38-percent controlling interest in Argentina's fifth-largest energy company and fourth-largest crude oil producer, Astra {see Endnote 44 and Endnote 45}.

In addition to encouraging foreign direct investment, privatization also may be responsible for a more outward-looking Argentine oil industry. YPF entered the ranks of major multinational oil companies with its acquisition of Maxus Petroleum in 1994. Maxus, a U.S. independent crude oil exploration and production company, has operations in Asia and the United States, in addition to Bolivia, Colombia, Ecuador, and Venezuela. Other recent actions by YPF also indicate an attempt to broaden its operations overseas:

Mexico

In contrast to Argentina, efforts at privatization of the Mexican petroleum industry and the opening of new business opportunities to foreign companies have been negligible. Electric power and natural gas distribution projects appear to provide the greatest opportunity for foreign investment {see Endnote 50}. Mexico's recent privatization of large nonenergy public firms along with the signing of the North American Free Trade Agreement created some initial optimism among foreign companies that petroleum privatization would ensue {see Endnote 51}. In 1991, Chevron expanded its small representative office in Mexico City in the hope of signing a service deal to gain access to Mexican oil. Similarly, Amoco, Mobil, and Texaco showed an interest in Mexican investment {see Endnote 52}. Both Occidental and Royal Dutch/Shell's U.S. affiliate, Shell Oil, recently made equity investments in petrochemical operations formerly belonging to Pemex, the Mexican state petroleum company and the world's third-largest producer of crude oil and the tenth-largest refiner in terms of crude oil refining capacity.

However, despite some initial efforts, reform in Mexican petroleum has faltered. Foreign participation in the exploitation of Mexico's petroleum resources has long been a particularly sensitive matter in Mexican politics.

Although, substantial early development of the Mexican petroleum industry was accomplished by British and U.S. petroleum companies {see Endnote 53}, nationalization of all foreign petroleum assets on March 18, 1938 abruptly ended foreign activity in Mexican Petroleum {see Endnote 54}. Foreign participation in oil and gas exploration, production, and refining is still proscribed by the Mexican constitution, which allows only Pemex to engage in these activities. So far, the only substantive reform measures include a restructuring of Pemex's operations (along with substantial reductions in employment), an attempt to sell several chemical units and other non-core operations, and an increased reliance on foreign drilling contractors. Pemex also has undertaken joint ventures abroad. Pemex's downstream operations have focused on reconfiguring and modernizing its refineries to both increase product output and address environmental concerns. Despite refinery upgrades, Pemex's refinery capacity is less than current product consumption, leading to increased product imports and further refinery construction. Pemex also replaced some of its domestic shortfall by gaining a 50-percent share in Shell Oil's Deer Park, Texas, refinery {see Endnote 55}.

Venezuela

Venezuela is the most recent Latin American country to have nationalized its petroleum industry--a point well-known by several of the world's leading petroleum companies. Several of these companies thought they were undercompensated for their petroleum assets absorbed during 1975 by Venezuela's nationalization process {see Endnote 56}. Although Venezuela's liberalization of its petroleum industry is more substantial than Mexico's, it still falls short of Argentina's complete privatization. Venezuela approved a new profit-sharing concessionery program in July 1995 under which private domestic and foreign companies may bid for joint ventures with Petroleos de Venzuela (PDVSA). PDVSA is Venezuela's state oil company and the world's fifth-largest producer of crude oil and the fourth-largest refiner. Heavy oil investment carries tax concessions, as do enhanced-oil-recovery projects, which lower the statutory tax rate to 34 percent from 70 percent {see Endnote 57}. Further, on January 7, 1996, Venezuela's congress passed a law allowing larger new projects with substantial exports and foreign investment to retain export earnings abroad {see Endnote 58}. Although privatization of PDVSA does not seem likely, company president Luis Giusti recently noted that, "it would be very healthy to have 15 percent [of shares] in the capital market." {see Endnote 59} Venezuela also auctioned exploration rights to eight tracts but received no bids for two other tracts {see Endnote 60}.

The most notable result of Venezuela's opening its petroleum industry is its awarding of the first exploration license to foreigners since its nationalization twenty years ago. The initial license was awarded to a consortium of Veba (Germany), Mobil, and Nippon Oil (Japan), which outbid 11 others, including the second-place consortium of Exxon and Royal Dutch/Shell, for a western onshore oil field {see Endnote 61}. Other significant projects opened to foreign companies include the $5.6-billion Cristobal Colon LNG export project of a consortium including Exxon and Lagoven, a PDVSA affiliate. This venture is the first foreign ownership of Venezuelan hydrocarbon reserves since the 1975 oil law that nationalized the petroleum industry and created PDVSA was passed {see Endnote 62}. However, the venture was suspended, awaiting higher natural gas prices. Another project is a joint venture between Conoco (United States) and Maraven (a PDVSA affiliate) to produce heavy oil, which will then be upgraded and refined into products at Conoco's U.S. refineries {see Endnote 63}.

Other foreign companies are either discussing joint ventures, or have formed joint ventures and are awaiting congressional approval to proceed, including:

Foreign companies also are undertaking ventures governed by service contracts with PDVSA and equity ventures that do not require congressional approval. Chevron and Maraven have created a heavy crude production joint venture with an operating contract, while Mobil is a member of a consortium to evaluate exploration and development opportunities in the new areas opened for exploration by Venezuela during 1995. Mobil bought 50 percent of Nacional de Grasas which operates the largest lubricants blending plant in Caracas and is the largest lubricants company in Venezuela{see Endnote 64} . Canadian Occidental has formed a joint venture to bid on exploration and development contracts PDVSA is expected to offer during 1995. Occidental signed a 20-year agreement with Maraven to increase oil production.

Although Venezuela's privatization efforts have lagged those of other Latin American countries, PDVSA has long been an internationally oriented petroleum company. For instance, PDVSA's U.S. subsidiary, Citgo, is the largest retail marketer of gasoline in the United States {see Endnote 65}. In terms of U.S. refining capacity, PDVSA ranks third among foreign-owned companies behind Royal Dutch/Shell and British Petroleum {see Endnote 66}. PDVSA also owns substantial refining operations in Europe and the Caribbean.

Brazil

During 1994, Brazil's national government began considering possible privatization plans in order to generate badly needed investment capital. Revision of the constitutional prohibition of foreign involvement in upstream oil and gas to allow foreign joint ventures with Petrobras, Brazil's state oil company and the world's 21st-largest company in terms of oil production and the eighth-largest refiner, also is being considered. However, full privatization of Petrobras, which is chiefly owned by the federal and state governments of Brazil as well as by private enterprises and individuals through local stock market shares, has been categorically rejected {see Endnote 67}. Nonetheless,some erosion of Petrobras' monopoly may be achieved by a proposal to the Brazilian congress that would compel Petrobras to compete with private companies for new exploration areas, leaving Petrobras with 3-year concessions to all known exploration areas and to any new discoveries by Petrobras {see Endnote 68}.

Little foreign activity has ever occurred in Brazilian upstream petroleum. The only foreign commercial discovery occurred during the 1970's and was made by the Shell Oil affiliate Pecten. The discovery was an offshore natural gas field. Petrobras' substantial reserves and refining capacity are a tempting target for potential buyers, but, until further efforts at privatization are made, few opportunities exist for foreign companies in Brazil.

The most significant project currently underway in Brazil by a non-Latin American company is Tenneco Gas's construction of the Brazilian part of the Bolivia-Brazil pipeline and some other natural gas projects {see Endnote 69} . PDVSA and Petrobras also are negotiating a refinery joint venture {see Endnote 70} .

Colombia

Legal reforms to allow privatization of Colombian energy resources are underway. Colombia's government, noting the importance of oil exports, is taking steps to improve the attractiveness of oil and gas exploration and development to foreign investors. The first step was the elimination of a hydrocarbon production tax. Previously, Colombia had one of the highest rates of petroleum taxation in the world {see Endnote 71}. Recent changes in its tax laws have reduced both some loopholes and some fees on investment in the hope of enticing more foreign investment the oil and gas remittance tax {see Endnote 72} may be reduced to 7 percent, which is the rate charged other Colombian industries {see Endnote 73}.

The most significant energy privatization contemplated is the sale of the state's 50-percent share of the Carrejon coal mine. However, reports of privatization of some or all of the state oil company Ecopetrol, the 40th-largest producer of petroleum and 57th-largest refiner in the world, have been denied by the country's energy minister {see Endnote 74}.

Recent privatization efforts created numerous new foreign investment opportunities in Colombia. British Petroleum discovered 2 billion barrels of proved reserves in the Cusiana and Cupiagua oil fields, which will be developed by a joint venture with Triton Energy (United States), Total (France), and Ecopetrol. This joint venture also will spend $2 billion upgrading Colombia's pipelines to transport the additional production. Another joint venture, which includes Ecopetrol, British Petroleum, Total, Triton Energy, and others, will build an oil export pipeline from the Cusiana Field. British Petroleum also purchased Maxus' 53-percent share of a block adjacent to the Cusiana Field, augmenting the 10-percent share it already held.

Recent foreign company activity in Colombia's petroleum industry include the following:

Ecuador

Ecuador is following the more typical course of Latin American countries by privatizing most state-owned nonenergy assets and selected energy assets. The state oil company Petroecuador, which was the 48th-largest producer of petroleum and the 58th-largest refiner in the world during 1993, and other strategic sectors will be privatized through awarding concession contracts instead of direct sale or the sale of equity shares {see Endnote 75}.

During 1995, five production-sharing contracts were signed following the seventh round of contract solicitations. Among the companies awarded contracts were the U.S. companies Oryx and Triton and the Kuwaiti Sante Fe Minerals and Energy {see Endnote 76}. Amoco and Mobil have a joint venture to operate a 25-year concession in a production block in the Amazon Basin. Oryx has taken over the operation of an oilfield joint venture with Ecopetrol, which currently produces 8,000 barrels per day. Oryx also leads a consortium that won a 25-year production-sharing concession for an oil field block.

Peru

New oil legislation was passed in August 1993, leading to a return of foreign investment and the eventual privatization of the state oil company, Petroperu. Perupetro, a state agency and not to be confused with Petroperu, was established to promote, negotiate, and administer exploration and production contracts, for which Petroperu must compete with private firms. Recently, Peru's government improved the country's legal framework, improved its national economy, and reduced terrorism, all of which activities were welcomed by foreign investors. The privatization activities of Petroperu was anticipated to begin in July 1995, but was delayed due to widespread unrest and rioting. However, the first Petroperu assets were sold in June 1996 {see Endnote 77}. Recent estimates are that privatization of Peru's state oil company will raise $3 billion.

Several foreign investments recently have been made in Peru. In June 1996, Pluspetrol, an Argentine petroleum company was awarded exploration and development rights for Peru's northern oilfields {see Endnote 78}. ARCO received an exploration and production contract for a northern tract in December 1995 {see Endnote 79}. A consortium led by the French petroleum company Elf Aquitaine was awarded an exploration and production contract for an eastern tract in September 1995 {see Endnote 80}. Chevron received approval in June 1995 to begin exploration and development in the large Camisea natural gas field in Peru's southeastern region, while the Coastal Peru Ltd, the Peruvian affiliate of a U.S. company, signed an exploration and development contract with Petroperu for a tract in central Peru. Also in 1995, Occidental won a 20-year development contract for a production tract in a commercially viable field. In August 1994 Mobil's Peruvian subsidiary was authorized to begin exploration of a tract in the southern Peru. Mobil is also a partner in a 30-year exploration and development joint venture in northwest Peru. Mobil and Royal Dutch/Shell have agreed to develop the giant Camisea natural gas field in southeastern Peru through a joint venture. Mobil and Shell Oil are negotiating a contract with Petroperu for exploration and development rights to two blocks that surround two of the major Camisea fields {see Endnote 81}. Downstream, Petroperu sold 60 percent of the equity in its largest refinery (102,000 barrels per day) to a consortium led by Repsol, which included Mobil and YPF, outbidding PDVSA's Maraven affiliate {see Endnote 82}. Mobil also bought several gasoline stations from Petroperu.

Bolivia

Bolivia is privatizing its public industries in an innovative way, selling a controlling 50-percent share of each public company to a single buyer who provides the company with capital for expanding its productive capacity. The remaining 50 percent share is to be deposited in a pension fund for all Bolivians {see Endnote 83}. Bolivia is also attempting to pass a new hydrocarbon law that will attract foreign investment.

However, plans to privatize the state oil company Yacimientos Petrolifieros Fiscales Bolivianos (YPFB) have been frustrated by opposition from Bolivia's confederation of workers {see Endnote 84}. The intent is to divide YPFB into two upstream companies, two downstream companies, and one natural gas transmission company before capitalizing the resulting companies {see Endnote 85}. The financial and production requirements to qualify to bid for one of the companies resulting from the division of YPFB ostensibly exclude the private Bolivian petroleum companies, causing them to join the labor unions in opposing the privatization process {see Endnote 86}. Chevron is negotiating to fund a seismic program on its share of an exploration block {see Endnote 87}. Enron and YPFB have a $400-million joint venture to construct the 350-mile Bolivian portion of the Bolivia-Brazil natural gas pipeline {see Endnote 88}. Exxon completed seismic studies {see Endnote 89}. Mobil has an interest in a production block and is negotiating concessions for two adjoining tracts {see Endnote 90}. Texaco and Mobil are members of a consortium with an exploration and development concession {see Endnote 91}.

Trinidad and Other Latin American Countries

Trinidad's recent privatization of its energy industry has led to numerous investments in its natural gas industry (and electricity generation). Amoco has discovered a substantial natural gas field and is planning the construction of a large liquefied natural gas facility {see Endnote 92}. ARCO, Broken Hill Properties (Australia), British Gas, Chevron, Deminex (Germany), ENI (Italy), Enron, Exxon, Premier Oil (UK), Repsol (Spain), Royal Dutch/Shell, Texaco, Unocal, Veba (Germany), and Wintershall (Germany) all have petroleum investments in Trinidad.

A few privatization-related projects exist in other Latin American countries. In El Salvador, Coastal plans to build and operate a $100-million power plant {see Endnote 93}, which is the first privately-owned plant in El Salvador. A Coastal affiliate will supply fuel to operate the plant. Also, Texaco has a 40-percent share in a production block in Paraguay.