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Political changes in Latin America signal new investments

Economic troubles across the continent have opened the door to a new crop of leaders who could be much friendlier to foreign investors

Hard times hit Latin America in 2015. Falling oil and other commodity prices triggered economic and political crises in some of the region's largest economies. The populist leaders that rode the commodity boom to power bore the brunt of the backlash.

In Argentina, Mauricio Macri's business-friendly campaign easily beat the hand-picked successor of leftist president Cristina Kirchner. Venezuela's centre-right opposition coalition regained power in a sweeping National Assembly victory, the first crack in the Chavismo movement since it came to power more than a decade ago. Brazilian president Dilma Rousseff's statist policies have come under attack amid the country's deep recession and public outrage over the Petrobras Carwash scandal.

This shifting political tide will fundamentally alter the investment landscape for years to come in the region's vast oil plays - the Orinoco in Venezuela, Brazil's deep-water and Argentina's Vaca Muerta shale.

Political change is already visible in Argentina. International oil majors have been keen on the country's Vaca Muerta shale for years, with many establishing a foothold there. But erratic and often punishing policymaking from the Kirchner government has seen most companies keep cash on the sidelines. That is starting to change. Macri has promised measures, including lifting restrictions on moving money and kit in and out of the country, which will prove popular with oil companies. So too will Macri's selection of former Shell Argentina chief executive Juan José Aranguren, a familiar and friendly face to the industry, as the new energy minister.

Future built on change

The moves are paying off. In the weeks since Macri took office, a string of new deals worth more than $1bn initially, and which could lead to billions more in much needed investment, have been announced. American Energy Partners (AEP), led by Aubrey McClendon, the former chief executive of shale pioneer Chesapeake Energy, struck a deal with state oil company YPF to invest $0.5bn in a pilot development project. McClendon has been a controversial and outsized character in the US shale industry, but he will bring genuine expertise and experience leading shale development to Argentina. Dow Chemical finalised a similar $0.5bn pilot shale project with YPF after Macri's election. ExxonMobil has also said this year that it will spend $249m on a pilot project alongside provincially owned Gas y Petroleo Neuquen, which if successful could lead to a $14bn development programme.

In Venezuela, change will be slower to come. The opposition National Assembly victory sets up a period of bitter division between the assembly and Nicolas Maduro's administration that will make it difficult to get anything done. But the National Assembly could push through some much-needed changes on energy policy. Opposition leaders have talked about raising heavily subsidised gasoline prices and bringing an end to the PetroCaribe programme, which sees Venezuela ship cut-price oil throughout the Caribbean. If the opposition is able to capitalise on its election victory and regain control of the presidency, it would lead to wholesale change in the investment environment over the world's largest oil reserves.

Meanwhile, pragmatic steps already taken in the oil patch by the new head of state oil company PdV and energy minister Eulogio del Pino will continue. Del Pino is pushing forward with a heavy oil blending strategy that could help lift production much sooner than the previous plan of building expensive new upgraders. He has also handed more control over the Orinoco Belt projects to PdV's foreign partners in a bid to encourage more investment, though crashing oil prices is starving those projects of cash. After Maduro's stinging electoral defeat, del Pino was one of the few survivors of a cabinet shakeup, indicating continued support for those policies.

While Brazil hasn't undergone an electoral shake-up, the fallout from the Carwash corruption scandal and declining oil prices is forcing policymakers to rethink the country's oil-development model. Petrobras operatorship over all of the pre-salt projects and stringent local-content requirements have been at the centre of oil policy, in spite of complaints from foreign and private domestic investors. President Dilma Rousseff has been a staunch defender of those policies, but she has been severely weakened by the country's economic crisis and efforts to remove her from office. Conservative politicians in Brazil's congress may look to take advantage of this weakness to force change that would be welcomed by private investors.

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