CHAPTER 1 A DISCUSSION OF MAJOR CURRENT CHALLENGES FACING OIL AND GAS PRODUCING STATES IN LATIN AMERICA

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2015)
CHAPTER 1
A DISCUSSION OF MAJOR CURRENT CHALLENGES FACING OIL AND GAS PRODUCING STATES IN LATIN AMERICA
Monika U. Ehrman ^*
Associate Professor of Law
University of Oklahoma College of Law
Norman, Oklahoma

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MONDCA U. EHRMAN is Associate Professor of Law at The University of Oklahoma College of Law, in Norman, Oklahoma. Her scholarly interests lie in the area of oil and gas law, including perspectives on energy policy and environmental impacts. Her courses include Oil & Gas Law, Energy Law, Oil & Gas Contracts, and Oil & Gas Environmental Law. Prior to teaching, she served as general counsel of a privately held oil and gas company in Dallas; senior counsel with Pioneer Natural Resources; and an associate at Locke Lord LLP. She practiced oil and gas litigation and performed transactional work in such areas as the Eagle Ford shale, Barnett shale, Permian basin, and Hugoton basin. Prior to law school, Professor Ehrman worked as a petroleum engineer in the upstream, midstream, and pipeline sectors of the energy industry. In addition to her experience with the technical aspects of the industry, she also worked as an analyst in the areas of commodity risk management and energy trading. She is a Trustee-at-Large for the Rocky Mountain Mineral Law Foundation, an Editor of the Oil and Gas Reporter for the Institute for Energy Law, and serves on committees for various oil and gas conferences. Professor Ehrman received her B.Sc. in Petroleum Engineering from the University of Alberta; J.D. from SMU Dedman School of Law; and LL.M. from Yale Law School. Her articles include the formation of a natural gas OPEC, a response to the major arguments against hydraulic fracturing, and the impact of flaring regulations on Bakken operators.

Introduction

Latin America has a rich history of oil and gas exploration and development, full of political intrigue, technical and engineering achievements, and economic and social volatility. But its member states currently face a wide variety of challenges that may hinder or drive economic growth depending on their responses. This article will examine a few of the major challenges facing the oil and gas sector in Latin America, focusing on the South American countries of Brazil, Colombia, Ecuador, and Venezuela.

Low Commodity Prices

Like much of the oil and gas producing world, Latin America has been deeply affected by the sudden and sharp decline of commodity prices. After peaking at US $110 per barrel, the Brent price for crude oil decreased almost fifty percent to its current position, hovering just under US $60.¹ Both political scientists and pundits alike theorized on the cause of the precipitous fall. These theories range from basic supply and demand to geopolitical maneuvering. For example, some believe that the Organization of Petroleum Exporting Countries ("OPEC") wants to quash American shale petroleum producers and restore the OPEC cartel to its original dominance.² After all, the United States' recent energy renaissance has catapulted it to its current position as

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the top oil and gas producer.³ This renaissance is due to prolific shale hydrocarbon exploitation, achieved primarily using hydraulic fracturing. Still, others postulate that Saudi Arabia and/or the United States are using oil prices to effectuate change in an increasingly volatile Iran and Russia and curb those spheres of influence.⁴ Using oil prices to affect geopolitics would not be a first. The "oil weapon" is a familiar tool and well-described in Daniel Yergin's "The Prize."⁵

Whatever the reason, one truth is certain--revenue streams from oil and gas exports are in decline and energy exporters are suffering. For many Latin American states, revenues are built around the export of crude oil.⁶ Of these exporting states, Venezuela is the most affected.⁷ One such effect is its recent credit rating downgrade to Caa3 (the closest to default).⁸ According to Petróleos Venezuela S.A. ("PDVSA"), for each one dollar decrease in the price of crude oil, Venezuela "loses approximately US $700 million per year in earnings." Considering that the Brent price of crude oil has fallen almost 50 dollars since last year, the effects are devastating. And surely, Venezuela is carefully reconsidering its PetroCaribe arrangement, which accounts for three percent of its gross domestic product.⁹

The PetroCaribe settlement is an agreement entered into between Venezuela and seventeen member states, most from the Caribbean region. This hydrocarbon-based political alliance guarantees purchase of oil based on preferential payments and acts as a type of "layaway". Members may purchase crude oil at market prices, paying a certain amount up front

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and paying the remainder within an agreed timeframe. At the time, Energy and Petroleum Minister and President of PDVSA Rafael Ramírez said that the deal sought to eliminate the traditional costs associated with "financial facilities, direct deliveries of products, [and] infrastructure."¹⁰ It was widely believed that then President Hugo Chávez intended PetroCaribe to induce like-minded economic and social ideologies in the region.

Venezuela's fellow OPEC-member, Ecuador, is facing similar challenges. It slashed its annual budget and is borrowing from China to make up deficits.¹¹ In January 2015, Ecuador cut its annual fiscal budget by four percent, using the (now optimistic) Brent oil price of US $79.70 in its forecast.¹² But like many petrostates, public spending is rampant in Ecuador. "Since the beginning of [President Rafael] Correa's administration in 2007, the state has not saved any part of the revenues generated by the 2008 oil boom[, where oil peaked] ... at US $133 per barrel."¹³ In fact, Ecuador is heavily indebted to China, borrowing close to twenty billion dollars.¹⁴ And crude oil prices still show no signs of recovery.

Distinguishing itself from its hydrocarbon neighbors, Colombia is better-situated than either Venezuela or Ecuador, even though crude oil makes up half of all exports.¹⁵ Colombia instituted "a series of measures such as reducing investment costs, lowering the amount of royalties paid to the government, and [reducing] charges paid by companies." But these protocols do not guarantee Colombia's insulation from price decline.¹⁶ In fact, low crude oil prices have devalued the Colombian peso, "and Ecopetrol's market value has contracted from

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$129 billion in 2013 to $31 billion by the end of 2014, cutting its investment budget by a quarter for this year."¹⁷

Brazil, the region's third largest producer, will likely see its pre-salt projects postponed, canceled, or withdrawn. "The drop in oil prices will prevent the country from taking full...