Discoveries of large gas and oil reserves in Argentina and Brazil during the past five years have boosted Latin America’s hydrocarbon riches and the region’s attractiveness as an energy producer at a time when demand for energy has been rising in emerging countries, especially in China.
As a result, Chinese investments in the region increased to $15 billion in 2010, with the biggest chunks going into the hydrocarbon sector, according to the United Nation’s Economic Commission for Latin America and the Caribbean.
Latin American economies, which now account for about 20% of the world’s known oil reserves, benefited from the trade and investments. The region’s GDP grew 6.2% in 2010 and 4.5% in 2011, according to the International Monetary Fund. The global slowdown in demand will limit the region’s GDP growth to 3.7% this year, the IMF estimated. But economic growth is projected to accelerate to 4.1% next year.
“The result is an emerging trade powerhouse,” a Deloitte report on Latin America’s oil and gas reserves states, “but one that faces issues.”
Problems cited in the report include: shortages of experienced and skilled work forces in the oil and gas industry; road and rail transportation networks that are deteriorating or not keeping up with expanding needs; regulations and tax policies that can differ widely from country to country; and cross-border violence that largely stems from drug trafficking and related organised crime.
But a couple of the problems are tied directly to the region’s hydrocarbon riches and the global demand for them. The oil wealth can be tempting to Latin American governments, which control about 80% of the region’s oil and gas business through national oil companies, or NOCs. “Resource nationalism represents the single largest wildcard in Latin American economies today,” according to the report.
Governments imposing new requirements, such as export bans and foreign ownership limits, to seek a greater take is also a problem in the mining and metals sector, according to an Ernst & Young report. The report ranked resource nationalism as the top risk for mining and metals companies.
“There is no doubt projects around the world have been deferred and delayed, and in some cases investment withdrawn altogether, because of the degraded risk/reward equation,” Mike Elliott, E&Y Global Mining & Metals leader, said in the report.
And focusing too much on foreign investments into energy production could push up countries’ exchange rates, stifle other exports, draw capital and labour out of manufacturing and agriculture, and ultimately drive down economic growth.
To tackle the problems, the Deloitte report suggests:
Oil and gas companies invested in Latin America identify future talent gaps and plan to address them, for example, by establishing in-house research teams of scientists who work on long-term research projects and share knowledge and resources with colleagues at regional universities, laboratories or other companies.
Foreign investors focus on regional rather than small localised markets to reduce trade barriers.
Latin American regulators and tax authorities cooperate.
NOCs diversify their energy portfolio through renewable energy sources and their ownership by accepting foreign investors.
Countries embark on regional infrastructure projects, such as the construction of a 230,000-barrels-per-day refinery that Brazil and Venezuela are planning.
Latin American governments incorporate foreign direct investment policies into comprehensive strategies aimed at developing fully diversified economies.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.