Latin America Energy Advisory

MEXICO

We will be closely following developments in Mexico's energy industry, post-reform, with our partners at Southern Pulse. Energy reforms have opened up oil sector development to outsiders by removing restrictions on foreign investment that had been in place for 75 years. Confidence in the sector is at an all-time high right now, with prospects outshining the earlier pre-salt potential of Brazil. Key recent developments include:

•    This week, state-run Pemex announced that Mexico would begin shipping extra light Olmeca crude oil to European customers this month, which marks the first diversification of export following efforts at opening up the industry. We can also expect Mexico to increase exports to Asian markets in line with an announcement it made last summer. The bulk of Mexico crude exports go to the US from three Gulf coast terminals; however, officials said crude exports should be resumed shortly from a fourth terminal, Salina Cruz.

•    Six brokerage firms in Mexico are predicted that the Mexican Stock Exchange's 35 leading stocks (the IPC) will reach a historic high by the close of 2014. The brokerages point to improved economic stability, better business prospects for IPC companies, and reduced external volatility.

•    Through our partners at Southern Pulse, we are closely following developments concerning Pemex. On 16 December, in the municipality of Tezoyuca, Mexico State, approximately 42 kilometers northeast of Mexico City, an explosion occurred on a Petróleos Mexicanos (Pemex) pipeline, allegedly caused by a leak from an illegal tap in order to steal liquefied petroleum gas. The explosion injured seven and forced the evacuation of approximately 800 families. Tezoyuca Mayor Arturo Ahumada Cruz affirmed that the pipeline that runs on the border of his municipality is perpetually tapped to steal gas. We will examine this issue at length in our next executive report.

BRAZIL

Overall, we are increasingly concerned about the prospects for Brazil's oil industry, and particularly about the ability of state-run Petrobras to handle its deep-sea commitments. Developing Brazil's pre-salt finds comes with a very high price tag, and we believe that Petrobras is too overburdened financially to handle this. We will be closely monitoring pre-salt developments in the coming months, as well as developments within Petrobras. Of note on the Brazilian energy scene recently:

•    Brazil has agreed to finance 80% of a new deep-water port to be built in Rocha, Uruguay via Mercosur grants. The port represents a challenge to Argentine control of south Atlantic trade.

•    GE Oil & Gas has opened a new $10 million logistics base for the Brazilian oil and gas sector in Rio de Janeiro state. The base is designed to load and unload installer ships that can carry heavy equipment for the mobilization and maintenance of oil wells. It will service the offshore sector as well as land transportation infrastructure for Petrobras.

•    In late December, the Brazilian government announced that any future bidding rounds for pre-salt plays would be in accordance with local industry capabilities to supply demand for equipment and services to the sector as local industry has been struggling to keep up with demand. The government has commissioned a study to define the appropriate exploration pace for pre-salt development that would allow local industry to keep up with demand. The intention is to avoid the sidelining of local industry on this level as we have seen happen in Venezuela and Mexico.

HONDURAS

•    Reports coming out of Honduras in late December/early January indicate that in February construction will resume on the ambitious Patuca III hydroelectric dam, expected to produce 104 megawatts upon its scheduled 2017 completion. Progress has been stalled for six months due to a lack of funds until the Honduran government brokered a deal with the Commerce Bank of China for $297 million in financing.

VENEZUELA

•    On 31 December 2013, the Secretary General of the Petroleum Workers Syndicate of Falcón, Iván Freites, reported that a fire the previous day in the refinery at Amuay affected operations and would have an impact on the production of 300,000 barrels of oil per day. There were no injuries, and no damage to the environment or adjacent buildings. Freites warned that the frequency of accidents in Pdvsa refineries will cause a major loss of skilled employees.

•    The Democratic Unity Roundtable (MUD), Venezuela's main opposition party, released a statement on 31 December 2013 warning of a deterioration in the country's external relations over the past year. The MUD release also stated that Venezuela had fallen to the lowest ranks in global development indices.

COLOMBIA

•    On 2 January 2013, rebel group National Liberation Army (ELN) detonated explosives at four oil pools along the Caño Limón-Coveñas pipeline in the state of North Santander. The explosions caused fires and many local residents were forced to flee their homes. They are ELN's first attacks of the year.

•    On 3 January 2014, the Superintendency of Ports and Transport, Environmental Licensing Authority and the Environment Ministry reported evidence that U.S. mining company Drummond violated a new ban on loading coal for export by barge. The ban went into effect on 1 January, and was immediately violated by Drummond, which has determined that paying the fine is preferable to ceasing production while alternate methods of coal loading are being constructed. Environmental Minister Luz Helena Sarmiento warned that the fines will increase.

Experts at Southern Pulse provided the content for this Oil & Energy Insider Advisory.