energy advisor - Institute of the Americas

LATIN AMERICA ADVISOR

ENERGY ADVISOR A PUBLICATION OF THE DIALOGUE

www.thedialogue.org BOARD OF ADVISORS Mary Rose Brusewitz Partner, Strasburger & Price Jeffrey Davidow Senior Counselor, The Cohen Group Ramon Espinasa Consultant, Inter-American Development Bank Luis Giusti Senior Adviser, Center for Strategic & International Studies

For the week ending July 24, 2015

FEATURED Q&A

TOP NEWS

Was Mexico’s First Round One Tender a Major Flop?

Jonathan C. Hamilton Partner, White & Case

Jorge Kamine Counsel, Skadden Arps

Mexico last week held the first of five public tenders in its Round One oil auction, part of the historic opening of the nation’s energy sector. // Image: Mexican Government.

Craig A. Kelly Director, Americas Int’l Gov’t Relations, Exxon Mobil

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Charles Shapiro President, World Affairs Council of Atlanta R. Kirk Sherr President, Clearview Strategy Group Garrett Soden Director, Etrion Corporation Mark Thurber Partner, Andrews Kurth Alexandra Valderrama Manager, International Government Affairs, Chevron Lisa Viscidi Program Director, Inter-American Dialogue Max Yzaguirre President and CEO, The Yzaguirre Group

Three executives at Brazilian construction conglomerate Camargo Corrêa were convicted Monday of money laundering, corruption and other charges, becoming the first construction industry leaders sentenced in connection with the scandal.

OIL & GAS

James R. Jones Co-chair, Manatt Jones Global Strategies

Larry Pascal Chairman, Americas Practice Group, Haynes & Boone

Three Execs Convicted in Petrobras Scandal

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Raul Herrera Partner, Corporate & Securities Practice, Arnold & Porter

Jeremy Martin Director, Energy Program, Institute of the Americas

OIL & GAS NEWS

Mexico on July 15 held the first of five public tenders as part of its Round One oil auction. Only two of 14 areas available were auctioned off, falling short of the 30 percent rate the government had said would make the auction a success and putting a damper on enthusiasm about the opening of the nation’s oil sector to foreign and private investors for the first time in decades. Was the first tender a flop, and why were so few blocks auctioned off? Will the other scheduled rounds attract more bids and investment? What needs to be done to ensure the other bid rounds go better?

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John Padilla, managing director of IPD Latin America: “Although officials have tried to put a good face on it, Mexico’s first tender was clearly a huge disappointment. Many aver that low oil prices were to blame. That is not the case, though they may have prevented the more aggressive bids the government had hoped for—and has benefited from for decades in the energy sector space. It was not a lack of prospectivity either. Government officials appear to have concluded that it was size (one of the largest blocks, Block 7, received multiple bids—that block also benefited from 3D seismic) and the required guarantees. The government has now said that it will resize the blocks and lower required guarantees (which were indeed excessive). Though these changes may help, they still do not address all that ails Round One. The principal three variables that prevent significant round success continue to be: 1) Materiality (larger blocks will help to some extent, but size is not the only variable); 2) The contract is not a true production-sharing agreement, but rather a hybrid with a service Continued on page 3

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Bolivia Opening Protected Areas for Oil Exploration Bolivia will allow oil exploration in seven of the nation’s 22 protected reserves, President Evo Morales said Tuesday. Page 2

POWER SECTOR

China’s State Grid to Build Brazil’s Longest Power Line China’s State Grid Corp. has won a contract to build the second transmission line that will connect the massive Belo Monte dam to Brazil’s national power grid. Page 3

Belo Monte // Image: Brazilian Government.

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LATIN AMERICA ENERGY ADVISOR OIL & GAS NEWS

Three Construction Execs Convicted in Petrobras Scandal Three executives at Brazilian construction conglomerate Camargo Corrêa were convicted Monday of money laundering, corruption and other charges, becoming the first construction industry leaders to be sentenced in connection with a price-fixing and bribery scandal at state oil company Petrobras, Reuters reported.

The individuals were the first construction industry executives to be convicted in the Petrobras scandal.

Judge Sérgio Moro of Brazil’s Federal Court in Curitiba convicted company chairman João Ricardo Auler, senior executive Eduardo Hermelino Leite and Dalton dos Santos Avancini, chief executive officer of Camargo Correa Construções e Participações, of corruption and participation in a criminal organization. Avancini and Leite were also convicted of 38 counts of money laundering each. Avancini and Leite were both fined 1.3 million reais ($406,250) and given a 16-year and four-month sentence, but the judge reduced the sentences because of their assistance in the case. Auler faces a fine of 627,150 reais and a sentence of nine years and six months, which may be adjusted if illegally obtained funds are returned. The executives’ convictions come a day after Brazilian federal police decided to formally accuse Marcelo Odebrecht, CEO of Odebrecht, of having a role in the scandal. Prosecutors are expected to present evidence to Moro this week to seek an indictment. Odebrecht and Camargo Corrêa, two of Brazil’s largest construction companies, are accused of fixing contracts

with Petrobras to inflate their value and siphon off money for bribes and kickbacks.

Bolivia Opening Protected Areas for Oil Exploration Bolivia will allow oil exploration in seven of the nation’s 22 protected reserves, President Evo Morales said Tuesday, Agence France-Presse reported. The president, who said the government had conducted “consultations” before deciding to more forward with the search for oil in the protected lands, said the move would not harm the environment. “We have every right to conduct explorations... and we will do it with all our strength,” Morales said. However, environmentalists criticized the move, saying oil exploration could harm vulnerable communities as well as flora and fauna. “These measures threaten protected areas and do not respect... the rights of communities and peoples who live in these protected areas,” said Marco Gandarillas, the head of the Center for Documentation and Information (Cedib). The head of state oil company YPFB, Guillermo Achá, said the company had spoken with local communities and

Morales // File Photo: Bolivian Government.

offered compensation. “Bolivia has two processes of consultation and participation with the regions where it plans to perform these activities,” Achá said. Last week, Achá said the seven parks where exploration will occur are Amboro, Pilon Lajas, Carrasco, Madidi, Iñau, Aguarague and Tariquia, according to EFE. Approximately 0.04 percent of the land of the seven parks has been opened to exploration. Analysts told the Advisor earlier this month that exploration in protected areas will move


NEWS BRIEFS

Colombia Vows to Cut Carbon Emissions by 20% Over Next 15 Years Colombia’s government said Tuesday that the country will reduce carbon emissions by at least 20 percent by 2030, Reuters reported. The commitment is a contribution to fighting climate change globally, President Juan Manuel Santos’ government said. The government is planning to present the plans in coming weeks to the United Nations Framework Convention on Climate Change. [Editor’s note: See related Q&A in last week’s Energy Advisor.]

Pemex to Pay $295 Million to Settle Dispute With Siemens-SK Joint Venture Mexican state oil company Pemex has reached a $295 settlement with Conproca, a Mexican joint venture between Germany’s Siemens and South Korea’s SK Engineering & Construction Co., in a dispute over a refinery project, a person familiar with the matter told Reuters on Monday. Pemex said earlier in the day that it had struck a deal to end the 14-year disagreement, but did not disclose financial details. The dispute centers around allegations of graft and corruption at a project to reconfigure the Cadereyta refinery, and the money will go to anti-corruption, environmental and social development projects in Mexico.

SunEdison Buys Part of Renova Energia’s Portfolio Brazil’s Renova Energia has sold part of its renwables portfolio to U.S.-based SunEdison, Wind Power Monthly reported July 17. The deal includes a $141 million cash deal for five of Renova’s wind projects in Bahia with a total of 19.2 megawatts. SunEdison also acquired nine wind projects worth $321 million that will be paid with shares in the yieldco TerraForm in addition to purchasing Renova’s 2.2 gigawatt renewable energy pipeline for $4.2 billion. PAGE 2


LATIN AMERICA ENERGY ADVISOR F E A T U R E D Q & A / Continued from page 1

contract foundation, which as a result is overly cumbersome, highly bureaucratic and leaves room for excessive government discretion (the opposite of the necessary contract certainty industry looks for); and 3) Perverse, less-than-globally attractive fiscal terms. The current contract does not incentivize maximizing production. In fact, if a winning bidder discovers more resources, its return on additional barrels produced goes down. Such a mechanism flies in the face of the dynamic that has made hydrocarbons activity so successful just north of the border. The extent to which the government addresses these three issues will determine the level of success that future Round One tenders achieve.”

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Jeremy M. Martin, member of the Energy Advisor board and director of the energy program at the Institute of the Americas: “July 15 will not go down as the most momentous day in Mexico’s storied oil history. But there is more to the story than just the number of bids. Indeed, the government’s emphasis on the success of the ‘process’ and the transparency of the bid round is praiseworthy. And the tender did produce some results. Nine international and Mexican firms participated, and two blocks were awarded to Mexico-based Sierra Oil & Gas in a consortium with Talos Energy from the United States and Premier Oil from the United Kingdom. Yet there should be no doubt that the overall uninspiring bid round only serves to increase the pressure on the Peña Nieto administration’s energy and finance team. Specifically, the outcome ups the ante in two ways. First, it increases the burden on the government to improve competition and the fiscal and contractual attractiveness for future tenders. In particular, the highly-anticipated deepwater opportunities, which are considered the real prize of the new energy landscape in Mexico. Second, the pressure on the government and state oil company Pemex to further develop and deliver on the

pending farm-out opportunities has now been greatly elevated. The proposed farmouts will include large investment price tags across a wide range of oil and gas reserves onshore and in deepwater. The success of Mexico’s historic energy reform measures will not be determined by the first tender of 14 blocks in shallow water. Though knocked

There is reason to be optimistic about future bidding processes...” — Duncan Wood

back on their heels, the government still has time to regain momentum. To borrow from the cycling action underway in France, July 15 in Mexico City was not the final stretch down the Champs-Elysees in Paris. There are plenty of hills and legs still to race for Mexico. But they cannot hope to regain momentum merely by coasting.”

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Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars: “The disappointing reaction to Mexico’s inaugural oil auction reflects two main factors. The first concerns the blocks that were put on offer. Their size and geology left many companies with serious doubts about the economic viability of exploration and production activities in those fields and led most to reject the fields as profitable investment opportunities. The second factor reflects the continuing doubts over the contract terms, legal environment and state of investor protections in Mexico. The contract terms were improved dramatically since their initial publication last December, but there were still issues regarding the company guarantee, regulatory

forward, despite resistance from some sectors. “Exploration in the national parks will advance with difficulty, as long as the environmental impact is decreased to the minimum using non-invasive exploratory techniques,” former energy minister Carlos Miranda Pacheco said.

POWER SECTOR NEWS

China’s State Grid to Build Brazil’s Longest Power Line to Belo Monte Dam China’s State Grid Corp. on July 17 won a contract to build and operate the second transmission line that will connect the massive Belo Monte dam being constructed in the Amazon to Brazil’s national power grid, Reuters reported. The 2,500-kilometer (1,533-mile) power line will be the longest in Brazil and will stretch from the northern state of Pará to the southeastern state of Rio de Janeiro. State Grid won the concession to build the first power line in 2013 and in this auction bid against Spain’s Abengoa for the right to develop the project, which is estimated to have a total cost of 7 billion reais ($2.23 billion). The Beijing-based company offered to operate the transmission line for 988 million reais ($309 million) per year, the lowest offer at the July 17 auction, and said it is seeking a local partner with which to develop the project, according to Bloomberg News. “State Grid is seeking a partner in Brazil, given the complexity of the project,” Ramon Haddad, vice president for operations at the company’s local unit State Grid Brazil Holding, told reporters, according to Bloomberg News. It is considering a partnership with Brazil’s staterun power company Eletrobras, Haddad added. The 11.2-gigawatt Belo Monte dam will be the third-largest hydroelectric facility in the world when it begins operating, which is expected to occur before the end of the year. Only China’s Three Gorges dam and the Brazilian-Paraguayan binational Itaipu dam are larger.

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LATIN AMERICA ENERGY ADVISOR POLITICAL NEWS

Rousseff’s Approval Falls Below 8 Percent Brazilian President Dilma Rousseff on Tuesday saw her government’s popularity rating fall to 7.7 percent, a new low, while 62.8 percent of those polled favor her impeachment, Reuters reported. The survey, by CNT/MDA, also

showed that 70.9 percent of respondents viewed her government in a negative light, as compared to 64.8 percent in March. The poll released Tuesday showed that her popularity rating fell about three percentage points and the percentage who want to see her impeached rose more than three percentage points as compared to March. Before becoming Brazil’s president in 2011, Rousseff chaired Brazilian state oil company Petrobras, which has been shaken by a massive corruption scandal. She

ADVISOR Q&A

How Important Are Ties Between India & Latin America?

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Uruguayan President Tabaré Vázquez is slated to visit India next year, and the country’s foreign minister, Rodolfo Nin Novoa, is expected to attend the India-Latin American conference in October. The moves are seen as efforts by Uruguay to boost trade ties with India, a country whose population is expected to exceed China’s in the decades ahead. Meanwhile, Indian Prime Minister Narendra Modi visited Russia earlier this month for the BRICS summit, along with Brazilian President Dilma Rousseff. How economically important are India and Latin America to each other? What areas and economic sectors present the biggest opportunities for India and countries in the Western Hemisphere? To what extent does India compete against Latin America in terms of global trade and investment?

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Riordan Roett, director of the Latin American Studies program at the Johns Hopkins University’s School of Advanced International Studies: “Relations between India and Latin America have been developing slowly but steadily over the last decade. Over the last year, India’s trade with Venezuela and Brazil were more than its trade with France. Oil dominates trade with Venezuela, but the trade profile with Brazil is more

varied. Brazil has emerged as the ninth-largest global destination for India’s exports. Mexico, Chile, Colombia and Argentina are increasing their trade with India as well. The principal exports from India to the region are diesel, vehicles and auto parts, pharmaceuticals, organic chemicals, equipment and machinery, garments, synthetic yarn and fibers, iron and steel products, chemical products and cotton. Major imports from Latin America include crude oil, minerals, soy oil, gold and precious stones, raw sugar and wood. The trade relationship with India follows the path of the region’s global trade ties—exporting commodities and raw materials and importing higher value-added goods. A more rapid expansion of trade ties will require greater connectivity. India, unlike China, has no direct shipping services to Latin America. Goods are shipped first to Singapore or Europe, which increases both freight rates and shipping time. The absence of direct airline connections makes tourism, cultural and even official contact difficult and expensive...”

EDITORS NOTE: The above is an excerpt of the Q&A published in Thursday’s issue of the daily Latin America Advisor.


has not been personally accused in connection with the bribery and kickback scheme, but more than 50 politicians, mainly from the president’s governing coalition, are under investigation. Many of those polled in the latest survey also cited government accounting mismanagement and alleged campaign finance irregularities dating from her first term. Brazil,

Nearly 63 percent of those polled favored Rousseff’s impeachment.

Latin America’s largest economy, is beset by its worst economic downturn in 25 years. Gross domestic product is expected to contract by 1.7 percent this year. In the survey, 84.6 percent of respondents said Rousseff is not able to handle the country’s economic problems. The survey was commissioned by the CNT transportation lobby group. It included 2,002 people, was conducted from July 12-16 and has a margin of error of 2.2 percentage points.

Immigration From Mexico to U.S. Drops Sharply: Study The number of Mexicans migrating to the United States has fallen by more than half since peaking in 2003, according to a study released Wednesday by demographers at the University of Texas at San Antonio and the University of New Hampshire, Reuters reported. Among the reasons for the fall are a drop in available construction jobs in the United States due to the country’s 2007-2009 recession as well as a falling birth rate and growing economy in Mexico, according to the study’s lead author, Rogelio Saenz, the dean of UTSA’s College of Public Policy. “Back in the 1960s and 1970s, the average Mexican woman was having about seven births. That created a very youthful population in Mexico, with 35 percent of the population a few decades ago less than 15 years of age,” said Saenz. However, Mexico’s birth rate has PAGE 4


LATIN AMERICA ENERGY ADVISOR NEWS BRIEFS

Guatemalan Mayoral Candidate, Three Guards Fatally Shot Guatemalan mayoral candidate Horacio Quinones and his three body guards were gunned down Wednesday in the town of San Miguel Dueñas, in Sacatepéquez department, his party said, Agence France-Presse reported. Quinones, a member of the Todos political party, was the second member of the group killed in less than a week, leaving only an opposition party candidate in the mayoral race. A deputy mayoral candidate was killed in another municipality last Thursday. Guatemalans will vote Sept. 6 for president, vice president, deputies and mayors.

Colombia Considering Cuts to Local Bond Taxes Colombia may cut taxes on foreign investors’ earnings on local bonds from the current rate of 14 percent before the end of the year as the country looks to further its capital market integration with the Pacific Alliance, Deputy Finance Minister Andrés Escobar said, Bloomberg News reported. Colombia cut the tax rate in 2013, which helped boost foreign holdings of peso bonds, and may do so again to remain competitive with Mexico, Peru and Chile, Escobar said. The change may be included in a tax bill sent to Congress in August.

Venezuela Orders Producers to Divert Food to State Stores Venezuela’s government has ordered food producers to divert between 30 percent and 100 percent of their supplies to state-run supermarkets, a food industry group said Monday, the Associated Press reported. The demand from the government could lead to significant problems in supply, according to the Food Industry Chamber’s president, Pablo Baraybar.

declined and is now about equal to that of the United States, he added. “There is no longer the excess labor force that Mexico had just a few decades ago,” Saenz said. Between 2008 and 2012, a total of 819,000 people migrated from Mexico to the United States, according to U.S. Census figures. That number compares to 1.9 million between 2003 to 2007. The figures include both legal and illegal immigration.

U.S., Cuba Express Hopes for Better Relations as Embassies Open U.S. Secretary of State John Kerry and Cuban Foreign Minister Bruno Rodríguez expressed hopes for better relations between the two nations on Monday as the Cold War foes formally re-established diplomatic relations after 54 years of estrangement, The Guardian reported. The top U.S. and Cuban diplomats stood side by side during a news conference at the State Department while acknowledging that hurdles still remain. “This milestone does not signify an end to the many differences that still separate our governments,” said Kerry, The Guardian reported. “But it does reflect the reality that the Cold War ended long ago and that the interests of both countries are better served by engagement than by estrangement.” Rodríguez said that future progress will depend on the United States ending its trade embargo of Cuba and also returning to Cuban control the U.S. naval facility at Guantánamo Bay. “I emphasized that the total lifting of the blockade, the return of the illegally occupied territory of Guantánamo, as well as full respect for Cuban sovereignty and compensation to our people for human and economic damages, are crucial to be able to move toward the normalization of relations,” Rodríguez said after his meeting with Kerry. U.S. President Barack Obama has called on Congress to lift the embargo, but his administration has not agreed to hand over the naval station. Earlier in the day, diplomats, legislators and journalists gathered at the 98-year-old mansion in Washington that for decades served as the Cuban Interests Section


and on Monday became Cuba’s embassy in the U.S. capital. Three Cuban soldiers in white dress uniforms hoisted the country’s flag in front of the building. Both pro- and anti-Cuba protesters gathered in front of the building, USA Today reported. Monday also marked the conversion of the U.S. Interests Section in Havana to a full embassy, but no similar ceremony was held. The State Department said Kerry will be in Havana for a flag-raising ceremony at the embassy on Aug. 14.

ECONOMIC NEWS

Brazil Cuts Fiscal Savings Goal Amid Drop in Revenue Brazil on Wednesday sharply revised downward its fiscal savings goal for this year and next amid a drop in tax revenue, Reuters reported. At the same time, the government also announced new cuts to spending in an effort to demonstrate its commitment to austerity and maintain investor confidence. The government cut its primary surplus target for this year to 8.7 billion reais ($2.70 billion), or 0.15 percent of GDP, from 66.3 billion reais, or 1.1 percent of GDP. It also cut its 2016 primary surplus target to 0.7 percent of GDP from 2 percent. The primary surplus, a measure of revenue available to make interest payments on debt, is watched by markets and credit rating agencies as an indicator of a country’s ability to repay its debt. The move may make it more difficult for the government of President Dilma Rousseff to regain the confidence of investors and ratings agencies, which have warned that they may lower the South American nation’s credit rating. “The target revision should not be taken as a sign that we are abandoning the fiscal adjustment,” Finance Minister Joaquim Levy told reporters. “We are committed to fiscal discipline.” Levy added that the government’s decision to cut an additional 9 billion reais in spending shows it commitment to fiscal discipline. The government in May said it would cut 70 billion reais in a bid to restore investor confidence. PAGE 5


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LATIN AMERICA ENERGY ADVISOR

F E A T U R E D Q & A / Continued from page 3

involvement and fiscal terms (particularly regarding the minimum offer) that left a bad taste in the mouths of some companies. In the legal environment, the enduring disagreement between the government and oil companies over contractual and administrative rescission needs to be resolved, with executives demanding greater clarity from the government over the process and the larger question of whether existing investor protections apply to the hydrocarbons sector. The good news for both Mexico and the industry is that both of these problems can be resolved. In later tenders, more attractive blocks can be put on offer, and the government has shown itself willing and able to adjust contract terms. Its open attitude to dialogue with the industry is encouraging, and there is reason to be optimistic about future bidding processes.”

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Eduardo Canales, global energy transactions associate at Akin Gump Strauss Hauer & Feld in Houston: “With the opening and presentation of bid proposals of the first tender of Round One, Mexico officially reopened its energy industry to private oil companies after more than 70 years. Even though 14 contract areas were up for tender, only two were awarded to a consortium bidder formed by Sierra Oil & Gas (Mexico), Talos Energy (U.S.) and Premier Oil (U.K.). Government officials involved in the first tender and numerous analysts have been crystal clear about the results: the first tender was unable to attract the expected number of participants and bid offers. A 14 percent contract areas placement efficiency fell clearly short of the Mexican government’s revised expectations (30 to 50 percent placement). Despite the results, Round One should not be considered a failure. It is of utmost importance to understand the underlying process that was required to reach this point. His-

toric constitutional, regulatory and administrative changes, necessary to accomplish the reopening of the Mexican energy sector and implemented at an unprecedented pace, cannot be overlooked. It is certain that Mexico has developed a strong legal foundation for the development of a competitive energy industry. However, government officials must

Government officials must reassess and realign their approach with the current market conditions...” — Eduardo Canales

is published weekly by the Inter-American Dialogue Copyright © 2015 Erik Brand Publisher [email protected] Gene Kuleta Editor [email protected] Megan Cook Reporter, Assistant Editor [email protected]

Michael Shifter, President Peter Hakim, President Emeritus Genaro Arriagada, Nonresident Senior Fellow Sergio Bitar, Nonresident Senior Fellow Joan Caivano, Director, Special Projects Maria Darie, Director, Finance & Administration Ariel Fiszbein, Director, Education Program Claudio Loser, Senior Fellow Nora Lustig, Nonresident Senior Fellow Margaret Myers, Director, China and Latin America Program

reassess and realign their approach with the current market conditions in three different areas: contract area selection with attractive geological characteristics, competitive fiscal and financial terms, and contract and legal restructuring to incorporate industry best practices. Round One has two more tenders coming up soon, one for extraction in Gulf of Mexico shallow waters and another one for onshore exploration. Mexico must look within and make the necessary changes during these upcoming tenders to create a globally competitive bidding system in time for the crown jewel tender: Gulf of Mexico deepwater fields. Otherwise, Mexico will miss an unprecedented opportunity to evolve into a leading energy player.” Editor’s note: The Advisor welcomes comments on its Q&A section. Readers can write editor Gene Kuleta at [email protected].


Manuel Orozco, Senior Fellow Jeffrey Puryear, Senior Fellow Lisa Viscidi, Director, Energy Program Latin America Energy Advisor is published weekly, with the exception of some major U.S. holidays, by the Inter-American Dialogue 1211 Connecticut Avenue NW, Suite 510 Washington, DC 20036 Phone: 202-822-9002 Fax: 202-822-9553 www.thedialogue.org ISSN 2163-7962 Subscription Inquiries are welcomed at [email protected] The opinions expressed by the members of the Board of Advisors and by guest commentators do not necessarily represent those of the publisher. The analysis is the sole view of each commentator and does not necessarily represent the views of their respective employers or firms. The information in this report has been obtained from reliable sources, but neither its accuracy and completeness, nor the opinions based thereon, are guaranteed. If you have any questions relating to the contents of this publication, contact the editorial offices of the Inter-American Dialogue. Contents of this report may not be reproduced, stored in a retrieval system, or transmitted without prior written permission from the publisher.

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