Venezuela’s nationalization trend will not sweep Latin America

As Venezuela’s May 1 deadline for nationalization of several major oil operations nears, studies by Standard & Poor’s and Rice University suggest nationalization may not always have dire consequences.

RENO, NV - 

As President Hugo Chavez battles American and European oil companies for control of several major oil projects in Venezuela, a Standard & Poor's report issued Tuesday claimed that Venezuela-style nationalization will not sweep Latin America.

In their report, S&P credit analysts admitted that the highly publicized nationalization of significant industries in Venezuela raises concerns that it may the beginning of a trend that could lead to foreign corporations to re-examine their Latin American strategies.

S&P noted, however, that "all nations in the region aren't marching in lockstep. The climate for foreign investment in Latin America will continue to vary widely, largely dependent on the national administration in each country."

In February a government decree imposed majority state control of several major heavy oil projects in Venezuela's Orinoco Belt by May 1. The U.S. Geological Survey describes the belt as the "largest single hydrocarbon accumulation in the world." Nationalization of oil companies, however, is more common historically and today than news media headlines might lead investors to believe.

For instance, a March 2007 study by Rice University found that state-owned companies represent the top 10 oil and gas reserve holders internationally. By comparison, western international oil companies now control less than 10% of the world's oil and gas resources, according to the study published by Rice's James A. Baker III Institute for Public Policy. In fact, Rice's research determined that 13 of the top 20 international holders of oil and gas reserves are traditional national oil companies or newly privatized national oil companies.

Nevertheless, the Rice study warned that the growing importance of national oil companies to the global energy supply-demand balance "raises questions about the emerging politics, objectives and priorities of these organizations." The International Energy Agency projects that more than 90% of new hydrocarbon supplies will come mainly from the developing world over the next 20 years.

The study found that many governments normally use national oil companies "as a tool to achieve wider socio-economic policy objectives, including income redistribution and industrial development."

Even though Venezuela's actions haven't been as hostile to foreign business as had been feared, Jose Coballasi, director in S&P's Mexico City office, said "nationalization will provoke second thoughts by foreign corporations that want to invest in Venezuela."

While U.S. utility company AES Corp. will probably not invest in Venezuela again--after Chavez seized control of assets, but will eventually pay Electricidad de Caracas for them --S&P utilities sector director Aneesh Prabhu stressed that AES "still has a lot of interest in Latin American because it is focused on emerging markets." Verizon Communication, which will receive $572 million after Chavez's nationalization of Compania Anonima Nacional Telefonas de Venezuela, was already leaving Latin America, according to Catherine Cosentino, director of the telecommunications sector of S&P.

Meanwhile, Lisa Schineller, the S&P director who covers Ecuador and Bolivia at Standard & Poor's, said changes to Ecuador's hydrocarbons law and the termination of an agreement with a major oil company will probably limit Ecuador's foreign investment. She noted that President Rafael Correa "supports even more adverse terms for private-company participation in the oil sector, and he continues to discuss the possibility of default on government debt."

While nationalization of the oil and gas industry in Bolivia has impaired that country's investment prospects, Schineller claimed that President Evo Morales seems to have moderated his stance while negotiating contracts with foreign oil companies.

Noting that last year, Morales announced his plans to nationalize the mining sector, Schineller suggests that Bolivia "may just tighten the terms of the contracts, such as by boosting taxes." Nonetheless she added, "This year the government nationalized one tin smelter, highlighting the persistence of an uncertain environment for foreign investment."

"Headlines about Venezuela, Bolivia, and Ecuador have obviously raised concerns about the business environment in Latin America, and these countries will likely find it more difficult to attract foreign investment in the future," S&P's analysts admitted. "But the cyclical nature of government intervention and the region's need for technical and financial resources that foreign investors provide favor continued investment, despite the current nationalistic rhetoric."

"While foreign companies might limit or suspend investment in Venezuela, Bolivia, and Ecuador until they see a moderation in tone and actions, this contrasts with other parts of the region where policies are more conducive to foreign investment," S&P analysts concluded.

PUTTING OUT THE WELCOME MAT

Standard & Poor's suggested that Mexico, Columbia, and Trinidad and Tobago are "more receptive to private and foreign participation in the oil and gas sectors" than their aforementioned Latin American counterparts. As proof, Coballasi cited a recent technical coloration agreement with Petrobas and the continued evolution of service contracts to maintain and develop natural gas fields in northern Mexico.

While Brazil's state-owned Petrobas remains the nation's largest player in Brazilian oil exploration and production, foreign shareholders hold 39% of the company's total capital through NYSE ADRs or shares purchased directly on the Brazilian Stock Exchange.

Schineller stressed that the rules of the game of the framework for foreign investment have remained stable under Brazil's President Luiz Inacio Lula da Silver. "However, other factors that limit the attractiveness of investing in Brazil in general include an extremely complex and heavy tax burden and the so-called ‘custo Brasil'-the bureaucratic, high cost of doing business," she added.

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