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South America - the after-party continent

Oil's price bust forced yet more change in Latin America's energy sector. Venezuela was worst hit

For decades, oil's boom-bust cycles have traced a familiar pattern across Latin America's resource-rich countries. During the good years, cash rolls in, economies thrive and governments squeeze foreign investors. Then comes the bust. Cash vanishes, recession hits and panicked governments discover they need all the investment they can get.

2016 was one of the lean years, to say the least. Oil output across the region plunged as investment dried up. Venezuela, racked by economic crisis and hyperinflation, was hit hardest, with output down by nearly 15% from 2015. Colombia's heavy oilfields saw drilling activity grind to a halt and production fall by more than 10%. Mexico's long-term oil-output decline accelerated in 2016, as state-owned Pemex struggled with heavy losses. Brazil was the lone bright spot from a production standpoint, as Petrobras managed a small rise in output.

But governance was another matter entirely in Brazil. Petrobras found itself at the centre of a multi-billion-dollar corruption scandal, which brought down Dilma Rousseff's presidency of the country and paralysed decision making at the company for much of the year.

The state-owned companies of Venezuela and Mexico, meanwhile, found themselves diminished by financial crisis. A severe cash crunch forced Venezuela's PDVSA not only to slash investment, but prevented it from paying many suppliers and services companies - leading many on Wall Street and beyond to fear an imminent debt default (it restructured its bonds instead). Mexico's Pemex needed a bail out from the federal government to settle its debts and the company's deteriorating finances meant it struggled to navigate Mexico's new post-oil-reform landscape.

Latin America's governments responded in the way they often have, by swinging the policy pendulum away from resource nationalism towards a greater openness, recognising that they would need help from foreign investors to escape crisis.

In Argentina, President Mauricio Macri, who won an election in December 2015, launched several pro-market energy reforms in a bid to lure investors back to his country. Taking his pitch on the road, he tried to convince companies from Houston to London to invest in the vast shale oil- and gasfields the country hopes will help it restore energy self-sufficiency.

The effort didn't see much success in 2016, but the majors are now looking seriously at investing in Argentina for the first time in years.

Mexico's opening continued. In a string of landmark oil auctions, more than a dozen private local and foreign companies won contracts to develop the country's oilfields for the first time in more than seven decades. The process didn't always go exactly to plan, but has laid the groundwork for a far more diverse oil industry less reliant on Pemex's abilities and fortunes. The energy reforms also opened up the midstream and downstream sections of the industry.

Private investors spent heavily on building pipelines to bring cheap American natural gas into Mexico and the country's first non-Pemex petrol station opened for business.

Michel Temer's ascendance to Brazil's presidency after Rousseff's departure brought pro-investor oil reforms to that country as well.

The country's Congress overturned a 2010 rule requiring Petrobras to hold a minimum 30% operating stake in the huge Santos basin pre-salt fields, which are key to the industry's growth. It means foreign companies can run projects in the area. The legislation had deterred foreign investors and become a financial burden for Petrobras, which was struggling to pay for the vast projects. Regulators also indicated that they plan to ease onerous and costly local-content rules.

Venezuela, for its part, largely resisted making the kind of changes to its oil laws that would encourage more investment from outside. For this, it paid the price. The huge Orinoco heavy oil projects the country is counting on to boost output are at a stand-still, as PDVSA's foreign partners hit the brakes on spending in the country.

In stark contrast to oil's dark year, the outlook for Latin American renewable energy was brighter than ever in 2016. Falling costs saw renewables beat out fossil-fuel projects at power auctions in Argentina, Mexico, Chile and elsewhere across the continent as countries looked to keep up with rising power demand while keeping to their Paris climate commitment.

This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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