Policy shifts in Argentina and Brazil will change the energy situation in the Southern Cone and beyond over the next five years.
Elections in Argentina and Brazil in the coming two years could bring further change to the energy regulations of both countries.
As Argentina and Brazil become less dependent on Bolivia's natural gas, the Bolivian government in La Paz will try to normalize relations with Chile.
The winds of political and economic change are blowing through Argentina and Brazil, and Bolivia may be forced to take cover. Large natural gas shale reserves in Argentina and oil fields in Brazil will become more attractive to foreign and domestic energy investors because of regulatory changes currently underway. Both countries are moving to increase their hydrocarbon production, and their efforts stand to make them less dependent on Bolivia's natural gas in the next five years. The shift will force Bolivia to normalize its long-strained relations with Chile, which has the Pacific ports it needs to exports its gas beyond Brazil and Argentina.
Brazil Loosens the Rules
Over the past year Brazilian President Michel Temer and his administration have been working to cut restrictions on oil and gas production. One of the first economic proposals passed after Temer took office reduced the requirement for the use of local products in energy development and eliminated the exclusive rights of Petroleo Brasileira (Petrobras), the state-owned oil company, to operate Brazil's pre-salt oil fields. (Pre-salt oil, though of good quality, is difficult to extract because it is found under layers of salt in the deep sea.) In addition, the government this year extended a tax incentive program for oil and gas production.
So far, the regulatory changes seem to be paying off. On Sept. 27, Brazil sold 37 onshore and offshore oil blocks for $1.1 billion in its first auction since the reforms took effect. The country will hold a separate auction for its pre-salt fields Oct. 27. Now that Petrobras is no longer required to have a minimum 30 percent stake in all pre-salt operations, the fields appear to be piquing the interest of more investors abroad. More than 30 oil companies, including international giants ExxonMobil, Royal Dutch/Shell, BP, Total SA and Rosneft, have signed up to participate in the auction. The surge of interest suggests that Brazil's hydrocarbon sector may at last live up to the great expectations that have surrounded it since the pre-salt fields' discovery in 2006. Energy production in the country already was on the rise, despite lower oil prices, as projects started years earlier began coming online. Total oil and gas production in Brazil reached 3.16 million barrels per day in 2016, representing a 3.8 percent increase from the year before.
And Temer isn't done with the energy sector yet. The president is expected to send a new regulatory framework for the natural gas industry to the legislature by the end of the year. The measure will include changes to privatize natural gas distribution in nine states and to allow private companies in Brazil to negotiate the import of Bolivian natural gas directly instead of buying it through Petrobras. (The state-owned firm currently holds a monopoly on negotiating the import of natural gas from Bolivia, but the Brazilian government has no interest in renewing its contract, which is set to expire in 2019.) At the same time, however, Brazil likely will curb its imports of natural gas as its domestic production rises. For Bolivia, which depends on Brazil to buy up more than 90 percent of its natural gas exports — a major source of revenue for the country — this is a troublesome prospect.
Argentina Has a Dream
Losing business in Brazil is all the more worrisome for the Bolivian government in La Paz considering the recent developments in Argentina's energy sector. For the past decade, Argentina, once an exporter of natural gas, has relied on Bolivia — and, at times, Chile — to fill in the gaps in its domestic natural gas supply, particularly during the winter. The energy situation in Argentina seemed to change for the better with the discovery of the Vaca Muerta shale gas formation, announced in 2011. With estimated reserves of over 22 billion barrels of oil equivalent, Vaca Muerta is a boon for Argentina's natural gas sector. But regulatory hurdles, the drop in oil prices and the partial nationalization of Spanish energy firm Repsol's assets have stalled its development. Argentina will need substantial capital from foreign companies to tap into the shale formation's abundant reserves.
Now the investments are starting to pour in, thanks to the economic policies President Mauricio Macri has implemented since taking office in late 2015. Macri lifted foreign currency restrictions and allowed hydrocarbon companies to raise natural gas prices, enticing investors to the country. Furthermore, energy firms are significantly less concerned that the government will seize their assets than they were under previous administrations. Chevron Corp., Shell, BP and Argentine energy company YPF already have committed $5 billion to develop Vaca Muerta.
Their investments will help Argentina reclaim its status as a natural gas exporter. On Sept. 9, the country's energy minister reported that the government expects gas production to reach 140 million cubic meters per day by 2021-22, up from its current level of 105 million cubic meters per day. He also confirmed that starting in 2019 Argentina would resume natural gas exports to Chile, which it suspended in 2004. Initially, the exports will take place only during the summer months, when Argentina's domestic consumption is lower. As production picks up over the next four years, however, Buenos Aires will set its sights on exporting year-round.
Politics and Black Gold
Despite the progress in their energy sectors, Brazil and Argentina could still face setbacks in the years ahead. Brazil will hold a presidential election next year, and the next president could decide to reverse Temer's policy changes. Similarly, Argentina's upcoming legislative elections in October, and its next presidential vote in 2019, could determine whether the liberalization in its energy sector continues. A weaker ruling coalition after October could hinder Macri for the rest of his term as he works to loosen his country's economic restrictions. The president already has made early indications that he will run for re-election in 2019, and he will need stronger congressional support to defend his office and keep developing Argentina's energy potential. Considering how quickly shale wells decline, moreover — and the continuous investment they need to keep production up — Argentina's energy projects will be even more sensitive to politics than Brazil's pre-salt oil ventures will be.
Still, the promise of rising hydrocarbon production in Argentina and Brazil over the next four years will put more pressure on Bolivia to find alternative markets for its main export, natural gas. The landlocked country will also work to diversify its economy by pursuing investment from abroad to speed up the development of its lithium reserves. But for any of this to happen, La Paz will first have to redefine its relationship with Chile. The International Court of Justice will probably issue a final ruling over Bolivia's territorial dispute with Chile by the end of next year. If La Paz loses, it will have to accelerate negotiations with Santiago for sovereign access to a Pacific port so that it can reach natural gas markets outside South America.