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ExxonMobil bids adiós

As investment conditions worsen, private-sector oil companies are pulling out of Latin America. ExxonMobil is leading the way

When ExxonMobil's chief executive lambasted resource nationalism at November's World Energy Congress in Rome, he did not point the finger of criticism at individual countries. But had he done so, Rex Tillerson's accusatory digit would probably have been levelled at Venezuela.

 
 

Earlier this year, the supermajor abandoned the country, leaving behind a 41.7% stake in the 115,000 barrels a day (b/d), Cerro Negro extra-heavy-oil project, which accounted for 2% of the company's global oil production. Having refused to accept the government's demand for private-sector investors to cede control in Venezuelan oil projects to state-owned PdV, among the options left open to ExxonMobil are a lawsuit or arbitration against the country.

ConocoPhillips, which abandoned around 5% of its global oil production when it exited Venezuela's Orinoco oil patch in June is still seeking an "amicable" resolution with the government of President Hugo Chávez. This would include negotiated compensation for the loss of the assets, chief executive James Mulva said in late November. Separately, ConocoPhillips is considering working with PdV on an offshore gasfield. However, together, the two US companies had investments of more than $3.5bn in the country.

Unpredictable environment

Oil majors, including ExxonMobil, have operated continuously in South America for a century. But although the region holds more than a tenth of the world's oil and gas reserves (see Table 1), and despite its biggest economic growth spurt in decades, they are either leaving or scaling back operations – deterred by the unpredictable regulatory environment.

Following its acrimonious exit from Venezuela, ExxonMobil is also considering pulling out of Brazil, Argentina, Uruguay, Paraguay and Chile, according to Petrobras' international director, Nestor Cerveró, who says the Brazilian firm is interested in buying the assets. In Cerveró's words, ExxonMobil "wants to leave not just Argentina, but the whole region" – although the US supermajor has, so far, refused to comment on whether this is true or on its motives for contemplating a partial or full withdrawal.

ExxonMobil's downstream assets in South America include a wholly owned 85,000 b/d refinery in Argentina, with associated chemicals units. It also owns or holds shares in smaller refining and chemicals assets in Central America and a petrochemicals unit in Brazil. The firm also has around 4,200 service stations spanning Latin America – including owned, leased or franchised sites.

Upstream assets include: stakes in two Argentine gas blocks; a 40% stake in a promising deep-water gas-prone block, Tayrona, in the Colombian Caribbean, where exploratory drilling is under way; and a 40% stake in a deep-water exploration block (BM-S-22) in Brazil's Santos basin. The supermajor has already largely abandoned Brazil's upstream, after only modest exploration success – in early 2006, it sold its 30% stake in a Campos basin discovery with estimated reserves of 400m barrels of heavy crude to India's ONGC.

However, any attempt by Petrobras to buy ExxonMobil's Brazilian assets would face stiff regulatory opposition because it would strengthen the state-controlled firm's dominant domestic position, while the Argentine government wants Petrobras to increase investment in its existing assets before sanctioning further acquisitions. Additionally, Petrobras would probably find itself in competition with PdV and local companies for the Argentine assets, while, in Brazil, Grupo Ultra, a large fuel distributor, has expressed an interest in ExxonMobil's retail network.

Mounting insecurity

If Venezuela's oil nationalism is, by now, well established, Chávez has found willing allies for his energy policy in Ecuador, the latest addition to Opec, and Bolivia. Since 2006, both countries have sharply increased taxes on foreign oil companies and, in some cases, expropriated fields – such as Ecuador's 100,000 b/d Block 15, seized from Occidental Petroleum in 2006.

Energy nationalism has also been evident in Argentina, which has capped private-sector profits with price controls that have been in place on gas and liquid fuels since 2002. Then, in November, concerns that Brazil might also alter its open policy towards private-sector investment in the energy sector emerged, when the government removed 41 blocks from an upstream auction, following a large oil discovery by Petrobras (see box). The government said it needed time to assess how to raise more proceeds for the state in future concessions, especially in the country's new sub-salt oil play.

"The majors want out because energy populism is making South America a tough place for them to operate," says Marco Tavares, a former Southern Cone executive for Repsol YPF and now a partner at GasEnergy, a Brazilian energy consultancy. "Once-attractive terms are being sharply revised."

It is not difficult to see why international oil companies (IOCs) are considering leaving Argentina. Formerly an energy exporter, the country now suffers gas shortages in peak months and has been forced to import refined products to make up for shortfalls. The government has put pressure on ExxonMobil and other retailers – including Repsol YPF, Shell and Petrobras – to keep the supply of liquid fuels growing at around 7% a year, or face fines. Yet, occasional modest increases notwithstanding, it has prevented energy prices from rising to anywhere near international reference levels.

This year, the government fined Shell and Petrobras for failing to supply enough diesel and even threatened Shell executives with prison. To ensure there is enough fuel, foreign majors have been sporadically obliged by the government to import diesel at international prices then sell it locally at a loss. An export tax on crude oil, which, in November, was raised to 120% from 45%, makes it unattractive for companies to ship oil out of the country. The tax caps the value of exported oil at around $45 a barrel, forcing producers to sell in a local market rife with government price controls on refined products. The government now imposes an export tax of 35% on gasoline shipments.

ExxonMobil does not produce oil in Argentina, but by far the most distorted price caps in the country are for gas, which the firm does produce. Gas is sold locally for $2.30/m Btu – less than half what Argentina pays for the small volume it imports from Bolivia. The low gas price, coupled with an annual economic growth rate of 8%, has led to a consumption surge. Analysts say demand estimates show Argentina with a shortfall of around 15m cubic metres a day in peak months. The country has significantly reduced exports to neighbouring Chile, threatening to set off an energy crisis there.

ExxonMobil is not alone in its plans to reduce its position in Argentina. Repsol YPF, the biggest private-sector investor in the country's market, wants to sell a quarter of its local company, YPF, but is yet to find willing buyers. "The question is not really who wants to sell assets in Argentina, but who would want to buy them," says Tavares.

Comfort in Colombia

A notable exception in the region is Colombia, an oil exporter that accelerated concession sales to IOCs recently, to help boost falling crude output. The country is also in the process of partially privatising the national oil company, Ecopetrol. A first tranche of 10% of the company's shares, worth nearly $3bn, was offered to Colombians in September and began trading locally in late November. Ecopetrol plans to offer shares to foreign investors as early as next year, with a listing on the New York Stock Exchange.

Brazil raising concerns

Petrobras' Tupi discovery may have transformed Brazil's upstream prospects by identifying a new oil province (PE 12/07 p19), but whether this yields new opportunities for international oil companies (IOCs) remains uncertain.

The UK's BG and Portugal's Galp Energía as shareholders in the Tupi field – which Petrobras estimates may hold 5bn-8bn barrels of recoverable oil – are obvious beneficiaries, but the discovery immediately prompted the government to remove 41 oil and gas blocks with similar geological characteristics from the annual concessions auction, held in late November.

Although Brazil still offered 271 blocks for auction and raised more than $1.1bn, majors including ExxonMobil, BP, Chevron, Shell, Repsol YPF and Total were all absent. Brazil has been open for IOCs to explore and produce oil and gas for almost a decade, but the government is considering new ways to boost state proceeds from oil activities and it is unclear if, or when, private-sector investors will have the chance to explore the sub-salt oil province.

Haroldo Lima, head of the energy regulator, ANP, says Brazil may raise taxes on sub-salt oil production if it offers the acreage to oil majors, or that it could oblige IOCs to enter into production-sharing contracts with Petrobras. After 10 years of meagre findings for the majors in Brazil, despite some large investments, news that access to the country's promising new oil play could be restricted is not going down well. 


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