July 2017, Vol. 244, No. 7

Features

U.S. Policy Toward Hydrocarbons in Latin America

Recommendations for the New Administration

Latin America holds the largest concentration of hydrocarbon reserves outside of the Middle East. The region’s official proved oil reserve figure was 340 Bbbls (20% of the world’s total) in 2015, second only to the Middle East with 803 Bbbls (47%), and more than the U.S. and Canada, with a combined total of 227 Bbbls (13%).¹

Latin America also has one of the world’s largest estimated endowments of shale and other unconventional resources. Its natural gas endowment is not as relatively abundant, but the region has proved reserves of 280 Tcf, compared to a combined 440 Tcf in Canada and the U.S.² This very favorable natural endowment contrasts with the poor performance of the sector in the region.

While the U.S. and Canada together increased oil production by 73% in the 2005-15 period, from 9.9 MMbpd to 17.1 MMbpd, Latin America decreased production in the same period by 7%, from 11.1 MMbpd to 10.3 MMbpd. This under-performance is particularly striking since it occurred during a decade of high oil prices. Resource nationalism is largely to blame for this wasted opportunity. The region has experienced a wave of expropriations and nationalizations and some national oil companies largely mismanaged the opportunity given by the windfall.

The general under-performance of the sector hides the divergent production trajectories within the region. Venezuela, Mexico and Argentina experienced the worst declines in production due to significant policy obstacles to private investment. Brazil and Colombia did take advantage of the price boom, but even in these successful cases, some regulatory impediments increased.

The recent oil bust has hit the Latin American oil industry extremely hard; investment and production have been falling rapidly. Production declines in 2016 may reach as high as 400,000-500,000 bpd, a dramatic drop of 4-5% in just one year, with Venezuela and Mexico again having the steepest declines in output.

Looking Ahead

This critical situation has strengthened a trend that was already in the making: the re-liberalization of the oil industry throughout the region. Countries are starting to compete to offer the best conditions to foreign investors. This new opening cycle offers a significant opportunity for sector development and for foreign capital to flow into the region. If lessons from the past are learned, this could herald a new awakening in Latin America, but it could also end in failure if the institutional frameworks that support it lack strength.

Energy trade with Latin America will continue to grow. Latin America, a major importer of oil products from the U.S., represents nearly half of U.S. product exports (about 2 MMbpd). As product need peaks in the U.S., Latin America will still demand refined products from the U.S., so policy should be aimed toward supporting investment in Latin America’s oil and gas sectors.

Expanded production in the region contributes to U.S. energy security. Mexico’s imports of U.S. natural gas have tripled in the past decade, surpassing 1 Tcf per year. Latin America is also a major importer of LNG which will likely continue. After the U.S. lifted its oil export ban, Latin America became a key destination for U.S. light crude exports. In Colombia, Mexico, and Venezuela production is increasingly of heavier crudes so it is likely more exports of light oil from the U.S. will be used to blend with these types of crudes to make them marketable. In turn, some of these blends will be re-exported to the U.S., where they can be processed domestically in its complex refining infrastructure.

Recommendations

U.S. policy should focus on supporting investment in Latin America’s oil and gas sectors. From a national security perspective, the expansion of production  contributes to energy security by providing a more diversified supply portfolio in an area close to the U.S., thereby reducing the concentration of production from the Middle East.

It also serves as a tool of economic integration with Mexico and the rest of Latin America. The growth of Latin America’s hydrocarbon industry would generate economic opportunities and promote regional stability, which in turn would help support efforts to combat drug trafficking and the spread of terrorism. Therefore:

• The end of the U.S. oil export ban was a good step toward energy integration that will promote efficiency and trade.

• LNG exports to Latin America should be encouraged, given that it is one of the most geographically attractive markets for the U.S.

• Mexico’s energy reforms offer a tremendous opportunity to expand energy trade with Mexico and develop markets for the U.S. oil supply chain and to integrate them with Mexico’s. U.S. foreign and commercial policy should aim to support the reforms and the integration of the two countries’ energy sectors. The U.S. could, for instance, offer technical assistance and facilitate the deployment of investments to help achieve integration through shared pipelines and appropriate transportation infrastructure for supply chain expansion.

• The incorporation of the energy sector in the investment arbitration mechanisms of trade and investment treaties could help strengthen the property rights of U.S. investors and bring stability to the sector.³

• The U.S. should support World Bank and Inter-American Development Bank technical assistance programs to Latin American countries. These programs should be aimed at strengthening the region’s institutions and legal frameworks for energy investment, promoting long-term policy stability. Colombia, and more recently Mexico, offer some interesting policy options for the rest of the region.

• Cuba has significant oil and gas potential in the deep waters of the Gulf of Mexico. It is in the U.S. interest that these resources are developed in an environmentally sustainable manner in concert with the U.S. energy industry.

Author: Francisco J. Monaldi is a professor, researcher and consultant in economics, politics and management of the oil industry, as well as in the areas of political economy, institutions and policymaking of Latin America. He is the founding director of the International Center on Energy and the Environment at the Instituto de Estudios Superiores de Administración, a private non-profit Venezuelan business school. Monaldi holds a master’s and doctorate degree in political science/political economy from Stanford University and a master’s degree in international and development economics  from Yale University. 

Footnotes: 

¹See the “BP Statistical Review of World Energy 2016.” If we use alternative measures of reserves from more conservative unofficial sources, the region still has a resource potential exceeded only by the Middle East and rivaling the U.S. and Canada.

²Latin America has been much less explored than the northern part of the hemisphere, and there are strong reasons to believe the potential resources yet to be discovered are significant. The region has been underexplored largely due to institutional and political factors.

³The Center for Energy Studies, the Mexico Center, and the Latin America Initiative at the Baker Institute have published research on these topics.

See: www.bakerinstitute.org/center-forenergy-studies 

and www.bakerinstitute.org/energy

Note: This presentation was written by a researcher who participated in a Baker Institute project. Wherever feasible, this research is reviewed by outside experts before it is released. The views expressed herein are those of the individual author, and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.

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