Surveyed Oil Executives Slam Latin-American Investment Climate

Venezuela has ranked last in the Fraser Institute's 2014 Global Petroleum Survey due to heavy state interference and an unstable political climate
Venezuela ranks last in the Fraser Institute’s 2014 Global Petroleum Survey due to heavy state interference and an unstable political climate (Wikimedia)

EspañolThe 2014 Global Petroleum Survey — released on Thursday by the Fraser Institute in Canada — makes grim reading for governments in Venezuela, Bolivia, and Ecuador that seek to further capitalize on their sizable oil reserves.

The eighth annual survey of 710 petroleum industry executives in 156 jurisdictions will surprise few in finding that onerous amounts of red tape, high tax rates, and unstable political climates tend to scare away investors seeking to exploit oil and natural gas.

By contrast, industry leaders continue to be attracted to those jurisdictions that offer more competitive regulatory environments, such as best-ranked Oklahoma (1), Mississippi (2), Saskatchewan (3), Arkansas (4), and Manitoba (5). The share a top 10 occupied exclusively by North American states and provinces.

According to the survey’s Policy Perception Index — which considers factors independent of the size of reserves — Venezuela ranks last out of 156 jurisdictions, immediately preceded by fellow Bolivarian Alliance members Bolivia (155) and Ecuador (154). The South American nations performed even worse than Iraq (150), the Democratic Republic of Congo (148), and Syria (138).

Investors Leery of Corrupt State Interference

Javier Paz, a Bolivian economist, draws parallels between the government of President Evo Morales and other “populist” nations in Latin America, arguing that the administration is “openly hostile to private enterprise.”

“There are no guarantees with regard to investment and private property; the government often threatens to nationalize private enterprises. The lack of clear rules for investment prevents long-term planning. [And] the judicial system is corrupt … subject to pressure from the executive,” Paz told the PanAm Post.

This unfavorable climate for oil and natural-gas investors is nothing new, Paz says. Despite record oil prices, with a 2008 high of US$145 per barrel — up from $10 in 1998 — and “record” government revenue, the Morales administration has failed to make substantive investments in the sector.

Going back further in Bolivia, a 2006 nationalization decree resulted in an increase in taxes and royalties of 32 percent on the two largest producers, Petrobras and Repsol YPF.

“If we add to this the recent fall in prices to around $80 per barrel,” Paz says, “we can conclude that investment will decrease even further.”

Anonymous comments by the surveyed petroleum industry executives, analysts, and specialists highlighted Venezuela’s foreign-currency exchange controls which “limit the influx of capital.” They also criticized government interference in mixed state-private companies, as well as the expropriation of Exxon-Mobil assets in Venezuela.

Venezuela, which has the largest oil reserves on the planet and a daily production of 3.9 million barrels, began importing light oil from Algeria in late October. Critics, such as Venezuelan journalist Mariana Párraga, have argued that the government has failed to invest sufficiently in exploration and development of new reserves, particularly those of light oil, instead focusing exclusively on profits.

Meanwhile, in September, the Dutch Supreme Court found Ecuador liable for a $106 million fine to be paid to Chevron for failing to honor concession contracts dating back to the 1990s.

A Way Out of the Morass

However, it’s not all bad news for the region. Uruguay (21), Suriname (40), and Guyana (51) have all witnessed considerable improvements since the 2013 survey, in which they placed at 63rd, 87th, and 90th respectively. Respondents noted that in Uruguay “clear rules, government support, and positive economic parameters” encouraged onshore and offshore exploration.

And respondents didn’t rule out significant increases in exploration and development in Venezuela, Bolivia, and Ecuador if the nations were to achieve a “full and complete transition” to a more favorable investment climate. Some 84 percent of those surveyed agreed that each nation could significantly boost her petroleum sector, with almost half saying that the Venezuelan petroleum industry would double in size if the necessary reforms were made.

The report surmised that investors “continue to turn away from jurisdictions with onerous fiscal regimes, political instability, and land claim disputes. Similarly, investors prefer to avoid jurisdictions with costly, time-consuming uncertain regulations. Other factors being equal, competitive tax and regulatory regimes can attract investment and thus generate substantial economic benefits.”

Ben Eisen, director of research and programs with the Atlantic Institute for Market Studies — based in Halifax, Nova Scotia — told the PanAm Post that the Fraser Institute report further confirmed how jurisdictions with high-tax regimes tend to scare away investors.

“A clear, relatively easy understood and predictable regulatory regime with consistent enforcement is another attribute that can help a jurisdiction attract investment. Regulatory obligations that are expensive or complicated to comply with, taxes that are uncompetitive, or extreme uncertainty about the future evolution of the regulatory climate are all factors that can discourage investment,” he said.

Edited by Fergus Hodgson.

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