Sweating assets

Latin America's energy companies cling to fossil fuels.

The oil and gas industry is moving through its third major downturn in the last 15 years due to the Covid-19 pandemic. However, it is expected that big oil companies will be able to cope better with the current crisis as a result of a general trend to shift capital away from fuel fossils. This tendency responds to a long-term strategy destined to being able to navigate multiple transitions at different speeds and regions throughout the globe. It also comes as a natural trend in a society which is demanding a decarbonised future. 

An Executive of a mid-size oil company in the Gulf of Mexico commented, “Large oil and gas companies are practically closing their hydrocarbon businesses and concentrating on gas and renewables. Medium and smaller companies like ours are betting on a slower transition but eventually it will be impossible to continue with hydrocarbons as the main businesses. We already have fewer clients, it is no longer profitable to bet solely on oil.”

“Medium and smaller companies like ours are betting on a slower transition […]. We already have fewer clients, it is no longer profitable to bet solely on oil.”

Executive, mid-sized oil company, Gulf of Mexico

It is also important to note that, regardless of their views of market dynamics, small and mid-sized oil companies simply do not have the resources to invest in the energy transition. Therefore, they remain reliant upon and exposed to local governments and regulatory dynamics more than ever before.

In Latin America, where the oil and gas sector is dominated by state-owned companies, governments and regulators are unsurprisingly friendly to the industry. For example, last year, Brazil granted a nine-month extension on the exploration phase of upstream licences; Colombia authorised a one-year extension on contract phases and eased conditions for requisite bank guarantees; and Peru allowed operators to defer royalty payments for 90 days.

Mexico has gone even further to support fossil fuels, as a former senior energy advisor to the Mexican government explained, “Mexico is going against the tide. The government has no interest in renewables and wants to support crude oil. The only option to bet on the energy transition in Mexico would be to look at natural gas, although even here the government has not yet defined its policy for private participation and there is a lot of transport and exploration infrastructure to be set up.”

“Mexico is going against the tide. The government has no interest in renewables and wants to support crude oil.”

Former senior energy advisor to the Mexican government

A frustrated industry executive also complained about the lack of clarity from the Mexican government, “The approval of the hydrocarbons law generated a revolution because once again they remove certainty from the business environment. This will, again, turn President López Obrador (AMLO) against the companies. Our only strategy is to sail with a low profile, AMLO could pull our operating permits at any time. We are also exposed to PEMEX’s limited payment capabilities. It’s not easy.”

“Our only strategy is to sail with a low profile, President AMLO could pull our operating permits at any time. We are also exposed to PEMEX’s limited payment capabilities. It’s not easy.”

Oil industry executive, Mexico

Beyond geopolitics and regulation, the industry is facing many other challenges as the same executive continued, “We have pressure from environmental and social organisations but our biggest concern right now is safety at sea and in ports. Pirates are going for everything and extortion is the order of the day. Corruption is also rife across the entire industry. Despite this, we are still here, there are still opportunities and we will continue while there are profits to be made.”

You’ve got to admire his commitment!

 

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