Bolivia's recent about face on LNG projects intended to supply the U.S. has prompted thoughtful investors to reexamine the pitfalls that might lie just below all those turmoil that best describes South American political economics at the most recent NG O&G Summit in Panama.
So what does Bolivia's nationalization of its oil and gas industry mean for the future of South American LNG projects? It emphasizes more than ever the political risk factors that companies will increasingly face. No matter how detailed a contract, a new political regime could change the rules and the conditions under which you made your investment virtually overnight. So adhering to a well outlined policy was discussed in detail at the most recent NG O&G LA Summit (hosted by GDS International).
New investors in Latin America arriving from other countries like China and India have already started the snowball of growth but here are still countries that are strongly market-oriented such as Colombia and Mexico. By and large, no LNG deal should be exempt from a deep analysis, particularly on the sovereign and regulatory environment and its associated risks.
Representatives such as Gregory Hebertson GM Exploration Latin America Anadarko Petroleum Corporation, Hector De Santa Ana Director of E&P ANCAP, Jose Vicente Zapata Lugo President Columbus Energy Sucursal Colombia, Steve Benedetti VP Latin America Petro Vista Energy and George Lusco New Ventures Manager Repsol YPF also discussed how to deal with this level of risk? In any deal, every aspect much be defined of risk right from the start with a deep understanding of the host jurisdiction and its track record. That includes currency conversion risk, sovereign risk, financing guarantees and supply and customer agreements. Companies need to develop sophisticated risk management expertise, have great investment and technology capabilities and possess an understanding of the global market and the balance of gas and LNG supplies.
“Any given LNG project requires a rigorous permitting process involving different levels of government action from federal to local agencies. Environmental and safety issues should be addressed in a framework of fairness for all parties involved.” Scott Turner project director was quoted.
Another area which was championed by the NG O&G LA committee was the belief in the large number of new energy investors that were formerly government-owned entities who are now looking for new market opportunities, as well as the current government-owned ones. That includes companies like Chile's ENAR Colombia's Ecopetrol and Brazil's Petrobras. With the exception of Petrobras and ENAP, these companies typically do not have extensive know-how on technical aspects of an LNG project. Government-owned companies are usually less experienced in dealing with and understanding the needs of private investors, especially the newly created ones. Thus, they will benefit from working with experienced industry partners in developing markets and projects.
It is agreed though that with large natural gas reserves, Peru has designed the conditions to develop the Camisea project. One of its main features is to export LNG to the U.S. and Mexico. Today, Peru LNG is the most advanced project in South America. Other growth region recognized by the NG O&G committee are Chile and more recently Brazil and Argentina may consider alternative LNG projects to reinforce their energy matrix.
The NG O&G LA Committee have agreed that to continue growth into the future they must look for stable supply opportunities and to clearly assess the political, regulatory and market realities.
