Latin America Energy Advisory – 7th February 2014

This week we're stepping back to focus on Latin America again due to the volume of energy developments in the region. This week and last we were debriefed by our partners at Southern Pulse on these latest developments of concern to current and potential investors in the region.

Panama

The Grupo Unidos por el Canal (GUPC) consortium warned on 20 January it would halt expansion work on the Panama Canal unless the government paid the US$1.6 billion in overruns incurred because the canal authority allegedly gave the builders incorrect geological information. Canal administrator Jorge Quijano emphasized that construction would go ahead with or without GUPC. On 22 January, Panamanian Finance Minister Frank De Lima said Panama was exploring alternatives should GUPC abandon the project, though he refused to say whether other builders had been contacted.  On 5 February, the Spanish building company leading the Panama expansion project denied that work has been halted and said no date had been set for a halt to construction. Earlier that same day, the Panama Canal Authority (ACP) announced that talks with the Spanish-led consortium behind the project had broken down.

We are watching these canal developments closely, because there are plans for a rival Nicaragua canal as well, which would have significant geopolitical consequences.

Panama has decades of experience managing maritime operations. The Panama Canal expansion will allow for larger "post Panamax" ships to travel through its locks, but does not match the Nicaraguan plans that would even be able to handle aircraft carriers and other super-sized ships. While we do not believe that the Nicaragua canal is feasible in the timeframe and budget set forth by its initiators, if it DOES happen, much of the financing is likely to come from the Chinese government, which may consider the project a worthy strategic goal of planting a "flag" in Latin America and helping facilitate global trade on their own terms. (We examined this topic at length in an earlier Executive Report for Oil & Energy Insider).

Mexico

On 27 January, Vagit Alekperov, President of Russia's second largest petroleum company, Lukoil, announced that his enterprise would begin exploration in the Gulf of Mexico with state oil-giant, Petróleos Mexicanos (Pemex) in the fall of 2014. The news is framed by an agreement to share knowledge and technology, signed between the two companies the previous week at the World Economic Forum in Davos, Switzerland.

Also, this week, Pemex's commercial arm, PMI Comercio Internactional, is set to deliver its first-ever shipment of 500,000 barrles of valuable light Olmeca oil to India, along with 1.5 million barrels of heavy Maya crude. The shipment will take place later this month, and represents part of Pemex's plan to diversify its export markets away from the US.

Nicaragua

On 28 January, the National Assembly ratified a controversial constitutional amendment eliminating the presidential two-term limit and eliminating the 35 percent minimum needed to win without going to a second round. The amendment, which passed 64 to 25, paves the way for President Daniel Ortega to seek reelection in 2016. Opposition lawmakers left the Assembly room in protest as the majority party read each article of the amendment.

Nicaraguan Central Bank (BCN) President Alberto Guevara was fired on 20 January at the behest of President Daniel Ortega, with spokeswoman and First Lady Rosario Murillo stating that Guevara would leave the Central Bank and fill an undisclosed governmental role. Ovidio Reyes, who served as a Central Bank manager, will replace Guevara.

Venezuela

On 29 January, Minister of Petroleum and Mining and President of Petróleos de Venezuela (Pdvsa), Rafael Ramírez, announced the signing of two separate energy agreements, one with Uruguay, the other with Argentina, at the Community of Latin American and Caribbean States (CELAC) Second Heads of State Summit in Havana, Cuba. The agreements will allow the two Southern Cone countries to replace portions of their energy payments to Venezuela with foodstuffs. Long-term Uruguayan payments for 20,000 barrels per day, which equates to $160 million annually, can now be paid via short-term food supplies and other needed products.

The previous week, Venezuela's sovereign debt fell to a two year low, after the announcement of a modification to the currency exchange controls, introducing a dual exchange system. The rate for priority goods like food and medicine will remain 6.3 bolivars to the dollar, while travel prices and remittances will now trade at 11.3 bolivars to the dollar. The government has stressed that this does not constitute devaluation, but economists have cautioned that maintaining an artificially high currency will cause depreciation

Colombia

The Conservative party turned its back on current president Juan Manuel Santos and nominated former Trade and Defense Minister Marta Lucía Ramírez as presidential candidate on 27 January. This nomination contributes to ongoing divisions in the conservative wing of Colombian politics.

On 23 January, Canadian oil company Canacol Energy announced a plan to invest $150 million in Ecuador and Colombia for operations, prospecting, and production. $33 million will go to Ecuador, and $117 million will go to Colombia. Canacol projects an average daily net production of between 11,500 and 12,500 barrels per day in 2014.

Bolivia

According to Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) President Carlos Villegas' remarks on 27 January, the oil industry is likely to see a record US$3.03 billion investment in 2014 from both state and private sources. State-owned YPFB plans to invest US$1.86 billion in 2014, or about 61.4 percent of planned investment for the year, with private companies putting forward the remaining funds. These investments will go towards exploration, drilling, industrialization, and the construction of oil treatment plants.

On the nuclear energy front, on 22 January, President Evo Morales declared in a speech to Congress that the development of a nuclear power program for peaceful energy and medical purposes was a strategic priority. He further indicated that before the program's start, his government would send professionals and specialists abroad to learn from similar initiatives. In a speech in October 2013, President Morales had stated that the governments of Argentina, France and Iran were supportive of the country's nuclear program.

Chile

On 25 January, members of the dockworkers union and government officials reached an agreement to end the three week strike that closed Chilean ports, affecting the agricultural sector. Dockworkers renewed protests on 27 January, claiming the dock managers were not following the conditions set forth in the agreement between the government, the dock managers and the dockworkers union. A new agreement was reached on 28 January, allowing for dockworkers and managers to form a joint working group to protect the rights of workers, and docks reopened on 29 January.

Peru

On 27 January,  the International Court of Justice (ICJ) handed down its ruling on the Chilean-Peruvian Border dispute, largely in favor of the request made by Peru. The ICJ ruling allowed for the current maritime border between Chile and Peru to continue for 128.75 km, with the border then cutting southwest and running parallel to the equidistant line proposed by Peru until 321.87 km from the coast of both countries, the distance allowed by international law. According to Peruvian President Humala Ollanta, Peru received over 70 percent of what they requested.

In another development on 25 January, over one thousand illegal gold miners were evicted from the Mega 13 zone of Madre de Dios region, approximately two kilometers from the Tambopata National Reserve. The illegal mining site that was raided had been in operation since November 2013. Illegal miners utilize approximately 150 tons of mercury annually in the area, thus causing a significant amount of harm to the natural environment.