Mexico and Venezuela currently are the third and fourth largest foreign suppliers of crude oil to the United States, and their combined proven reserves of conventional crude total nearly 89 billion barrels. In comparison, Saudi Arabia's proven oil reserves total more than 264 billion barrels, or one-fourth of the world's proven reserves. Mexico also is a vital U.S. commercial partner in the North American Free Trade Agreement (NAFTA), and tankers transporting crude from Venezuela to the U.S. Gulf Coast can complete the trip in five days — compared to a month or longer for oil shipments from the Persian Gulf. Many U.S. oil companies engaged in international operations, however, presently see Central Asia and sub-Saharan Africa as more economically attractive partners than either Mexico or Venezuela. Some STRATFOR readers might disagree with this statement. After all, global giants like ExxonMobil and ChevronTexaco have invested billions of dollars in Venezuela, while smaller U.S. firms like Occidental Petroleum and Hunt Oil are operating or developing large oil and gas projects in countries like Colombia and Peru. Nevertheless, many U.S. oil companies are reticent about developing huge investments in Latin America, and are more willing to work in countries like Angola and Nigeria. Although many Latin American countries have large oil and gas reserves, or are believed to possess such reserves, governments in other parts of the world routinely offer foreign oil companies better deals than they're being offered anywhere in Latin America. STRATFOR reviewed the energy sectors of six Latin American countries — Colombia, Bolivia, Mexico, Venezuela, Ecuador and Peru — to determine why they are not growing in line with their potential as energy producers. We found that government policy is the single biggest factor holding back the growth of the oil and natural gas industries in these countries. In effect, oil policy in these countries, and accompanying legislation, appears to be driven by widespread public perceptions that allowing private investment into their energy industries would result in the wholesale expropriation of the economic wealth derived from oil and gas. Moreover, many Latin Americans believe specifically that U.S. oil companies are leading the imperialist charge on vital oil and gas resources. This isn't a new development in relations between Latin America and the United States. Many in the region have believed for generations that U.S. policymakers want to subordinate Latin America and the Caribbean to Washington's will. From the perspective of people in the region, there's a lot of evidence to support that contention. For nearly two centuries, the United States has intervened repeatedly in the region to further U.S. commercial or geopolitical interests. These old suspicions about U.S. motives in Latin America have been revived acutely in recent years as new generations of populist leaders have taken power in countries like Venezuela, Ecuador, Peru, Brazil, Argentina and Paraguay on platforms that reject globalization, free-market economic policies and closer alignment with the United States. While most of these new leaders have tacked to the center on economic policy after taking power, all of them have sought to reassert the state's primary authority over what they perceive as their strategic national oil and gas industries. The tilt away from linkages with U.S.-centric economic and trade policies has been accompanied by increasing anti-U.S. sentiment. This anti-American mood has been fueled to a significant extent by the disparity between what Washington has been promising the region for many years, and what it actually has delivered in terms of trade liberalization, immigration reform and other matters of concern to Latin Americans. As a result, efforts by some reformist governments in the region to open up their energy sectors to private investment have foundered on the shoals of nationalism and anti-Americanism.
Attempts by Colombian President Alvaro Uribe Velez to restructure state oil company Ecopetrol, and to attract more foreign investment in upstream exploration and production activities, are being opposed by unionized oil workers and by rebel groups like the Revolutionary Armed Forces of Colombia (FARC). Despite improved tax and royalty rules to encourage foreign oil companies to invest in Colombia, the country's proven oil reserves continue to fall, and production is dropping too, because no new major finds have been made in more than 10 years. Between 1997 and 2002, Colombia's proven oil reserves fell more than 36 percent, and its crude oil production fell 11.3 percent over the same period. The Colombian government estimates the country will become a net oil importer in 2008 if no major new finds are made. However, many oil companies aren't keen on making risky exploration and production investments in Colombia because the security risks are too great. Bolivia
Like Uribe, Bolivian President Gonzalo Sanchez de Lozada is considered as a good friend and ally of the United States, both in Washington and throughout the region. In fact, an important reason why he is president today is that in August 2002 the U.S. Embassy intervened in La Paz to forge a political coalition that gave Sanchez de Lozada more votes than his opponent Evo Morales, a fiery indigenous leader who wants to expel the United States from Bolivia. For the past year, Morales and other Bolivian nationalists have blocked Sanchez de Lozada's efforts to complete a governmental process of deciding a pipeline route, part of the $7 billion Pacific LNG project to export liquefied natural gas (LNG) to the United States and Mexico. Pacific LNG's partners — including Repsol-YPF, BG and BP — want to build the pipeline to a northern Chilean port and install an LNG plant at the site to process gas for export. However, literally hundreds of thousands of Bolivian nationalists oppose doing any business with Chile because of lingering ill will related to a war between the two countries 125 years ago. Bolivia lost the War of the Pacific to Chile, in the process losing its land access to the Pacific Ocean, which the Chileans annexed. Bolivia's capital, La Paz, currently is isolated from the rest of the country because thousands of Morales' indigenous followers have blockaded key roads and highways to choke the flow of food and other goods into the city. Morales has vowed a national insurrection if Sanchez de Lozada decides to route the Pacific LNG's pipeline into Chile. The longer this impasse persists, the more likely it becomes that Pacific LNG's partners will abandon the project. Mexico
Mexican President Vicente Fox had been trying to liberalize his country's oil and electricity industries since he took power three years ago. On Sept. 1, 2003 he finally gave up, acknowledging that Mexican cultural resistance to opening its energy sectors to foreign private investment cannot yet be overcome. In his annual state of the union speech to Mexico's Congress, Fox pledged that he would "never" privatize the oil and electricity industries. Fox also warned in his speech that the economic viability of both state-owned industries "is seriously compromised, and the country's future is at risk as a result." Mexico's Congress was not impressed, even though numerous studies commissioned by the Mexican government show that the country's economic growth and development are being undermined by its deeply rooted cultural resistance to allowing foreign oil and power companies into upstream Mexican energy production activities. Venezuela
Venezuela's energy-related troubles are worse than Mexico's. Since 1999, President Hugo Chavez has enacted a new constitution and laws that discourage foreign investment in the energy industry. Chavez has decapitated state oil company Petroleos de Venezuela (PDVSA) by firing about 18,000 company employees since the start of 2003. Approximately three-quarters of those laid off were managers, engineers and technicians. Chavez claims his personnel purge at PDVSA reduced costs by 40 percent and streamlined the company. However, his streamlining efforts have not made PDVSA more productive or efficient. Instead, PDVSA has lost about 1.5 million barrels per day of crude output capacity since Chavez became president and ordered the cancellation of billions of dollars in necessary investment to sustain production capacity. This crude output capacity decline is not immediately apparent to the casual observer, because PDVSA's joint ventures with foreign companies have boosted Venezuela's overall oil production. Nevertheless, the Paris-based International Energy Agency (IEA) reports that in August 2003 Venezuela produced 2.25 million bpd, 1 million bpd less than the government claims were produced that month. Moreover, U.S. oil import data indicates that Venezuela's exports to the United States were down 15 percent in mid-2003 compared to the same period in 2002. This could be dismissed as a seasonal downturn, but reputable oil industry analysts in Europe and the United States warn that Venezuela's oil fields are believed to have suffered irreversible structural damage as a result of improper exploitation activities carried out by PDVSA's new streamlined work force. Ecuador
Ecuador's crude output in 2003 will be the lowest in a decade. On Aug. 20, President Lucio Gutierrez officially inaugurated the new OCP pipeline that was supposed to nearly double the country's production to 800,000 bpd of crude. However, the pipeline is running nearly on empty: Tax disputes caused foreign oil companies to slash their planned investments in Ecuador, and the government's budget deficit killed national oil company PetroEcuador's financial ability to expand its output. Complicating mattes further for Ecuador's energy sectors, Gutierrez lost his ruling coalition as a result of disputes with indigenous allies who opposed the president's attempts to move to the political center on economic policy. Now Gutierrez controls only 10 seats in Congress, and the political opposition is bitterly opposed to any policies to liberalize the economy. Peru
Peru is a net oil importer. However, the $1.6 billion Camisea natural gas project on the edge of the country's Amazon rainforest could make Peru an important LNG exporter — if the project is completed on time and buyers are locked in with long-term supply contracts. Texas-based Hunt Oil is a lead developer of the Camisea fields, which contain an estimated 368 billion cubic meters of natural gas. Another Texas company, Halliburton, is developing plans to build an LNG plant on Peru's coastline just north of the Paracas Marine Reserve. Activist nongovernmental organizations in Europe and the United States are determined to block Camisea. In August, they helped to persuade the U.S. Export-Import Bank to turn down loan guarantees for the project. If Camisea's completion can be delayed long enough, its economic viability could be hurt if other LNG suppliers get to market first in Mexico and the United States. Foreign Oil Companies Watch... And Wait
The silver lining for energy companies is that the oil policies many Latin American governments are implementing — either by choice, or because nationalist opponents force them to do so — aren't working. Development of the energy sectors in the six countries that STRATFOR reviewed is not keeping pace with the overall economic needs of these countries. Instead of greater independence, these policies are actually making the countries more dependent by the day on foreign capital, technology and know-how to develop their energy sectors. The foreign oil companies know this. They also know they can afford to wait because there is no shortage of investment opportunities elsewhere in the world. Latin American governments eventually will be forced to liberalize their oil policies and open their energy sectors to upstream foreign investment. If they don't, some governments might not survive the social and political turmoil that would result from persistently weak economies. However, Latin American governments that do start to liberalize their energy sectors more aggressively could confront nationalist and poor voters who will refuse at all costs to export their oil and gas for fear of losing what they perceive as their national sovereignty and inheritance. This cycle has been happening in places like Bangladesh for decades, and it could easily happen in large developing countries like Mexico and small impoverished nations like Bolivia.