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Latin American power play

Politics again dragged down Venezuela's oil industry, but helped lift up Mexico and Argentina

Petropolitics was the dominant force in Latin American energy in 2017.

Start in Venezuela, where utter mismanagement of the nation's oil industry and petro-wealth continued to plunge the country into a deep economic and political crisis. The descent has been extreme. The economy shrank by 12% in 2017 bringing the total contraction to a third since the 2014 oil price collapse, while inflation galloped to more than 650%.

The government was short on cash, and imports of vital food and medicines plummeted, giving a humanitarian dimension to the crisis too. Many Venezuelans, once among the wealthiest in the region, fled for neighbouring Brazil, Colombia, or Miami—if they could afford it.

Through the descent, president Nicolás Maduro faced down widespread opposition street protests and tightened his grip on power. In July, the president held an election for a new Constituent Assembly that, in effect, replaced the opposition-controlled National Assembly. The new body was stacked with chavista loyalists, and was supposed to rewrite the constitution. In the meantime, it acted as a rubber-stamp legislative body for the president.

The power grab sparked outrage at home and abroad. The US, still Venezuela's most important oil-trading partner, slapped sanctions on the country, targeting individuals and complicating state-run PdV's financial dealings with American customers. Opposition leaders warned Russia and others that any new oil deals struck with the government and approved by the Constituent Assembly would be voided if the opposition returned to power.

The oil industry deteriorated. Output fell to around 2m barrels a day, down close to 300,000 b/d throughout the year and 0.7m b/d since the start of 2015. With large debt payments always on the horizon, cash flow was always a concern, and default a persistent risk.

While petropolitics dragged Venezuela down, it lifted others up. Mexico's oil opening racked up successes in 2017. A string of licensing rounds brought dozens of new private companies into the country's exploration and production business, with pledges to invest tens of billions of dollars. The capstone was a major shallow-water discovery at the wildcat Zama prospect by a consortium led by Houston-based Talos Energy. The find, the companies said, could hold as much as 2bn barrels, making it a top-10 discovery anywhere this decade. Italian major Eni also totted up shallow-water exploration successes and started pushing forward Mexico's first private oilfield development in 80 years.

While the reforms showed successes, they mainly pointed to the future. Mexico in 2017 also grew far more reliant on imports of fuel and natural gas from the US, and oil production continued to slip—by August, it was beneath 2m b/d, 10% lower than in the same month of 2016.

Argentina, too, saw its energy reforms start to pay off. The country has courted foreign investors with incentives and economic changes to help it pump life into the promising Vaca Muerta shale play. It saw progress: billions of dollars of new investment pledges arrived. Shell promised $450m at a pilot project. BP's Argentine subsidiary announced plans to spend $0.675bn at a prominent shale gas block alongside state-run YPF and Total. ExxonMobil pumped hundreds of millions of dollars into its own slice of the Vaca Muerta. Statoil was the latest international major to enter Vaca Muerta. Output from the play continued its slow yet steady rise and YPF, still the dominant producer, reported further declines in well costs.

Brazil's political crisis rumbled on, yet some positive news for the oil industry emerged from the morass. President Michel Temer instituted a raft of investor-friendly reforms aimed at luring drillers back to Brazil's deep waters. Local content requirements, long blamed for high costs and delays, were relaxed. Rules requiring Petrobras to operate all pre-salt projects were dropped, opening those projects to foreign control for the first time. The country also ended its long licensing-round drought, with new auctions for pre-salt fields.

Yet Temer's tenuous hold on power, after claims that he was implicated in the Lava Jato corruption scandal, and the reforms' lack of broad support, left them vulnerable. As ever in Latin America's big petronations, politics lingered in the background.

This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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