Brazil Fights Recession with Investments AS/COA Online 01/27/09

Brazil announced a sharp rise in Petrobras investments. (AP Photo)

Brazil began 2009 facing deteriorating economic conditions and rising unemployment. But, through recent actions, the Brazilian government seeks to steer the economy into safer waters by committing billions of dollars to create jobs and propel Petroleo Brasileiro (Petrobras) into the heavyweight category of oil production companies. Furthermore, U.S. President Barack Obama signaled his interest to work with Brazilian counterpart Luiz Inácio Lula da Silva to move forward on biofuels and the Doha round of global trade talks. Lula will visit Washington to meet with Obama in March.

With the goal of jumpstarting the ailing economy, Brazil’s Central Bank reduced its overnight lending rate by a full percentage point to 12.75 percent on January 21. The move intended to stimulate economic activity at a moment when financial markers signaled the danger of recession; private consumption has shrunk, December job losses hit their highest level since 1999, and analysts predict GDP growth may not reach the 2 percent mark in 2009. The Economist Intelligence Unit’s ViewsWire augurs that industrial growth could be close to zero and private consumption may drop to 0.9 percent in 2009—down from 6.2 percent last year. The analysis applauds the cash infusion of more than $42 billion into the Brazilian Development Bank (BNDES), designed to stimulate the creation of new employment. The fund helped create 2.8 million jobs in 2008 alone, according to BNDES data. “The businessmen who used to shop for funds on the international market and are not managing to obtain capital due to the financial crisis will be able to resort to the BNDES,” said Brazilian Finance Minister Guido Mantega last week.

In tune with the government’s actions, Petrobras unveiled a plan on January 23 that promises a 55 percent expenditure increase over the next five years. The package includes investments of more than $174.4 billion, with $28 billion alone to finance exploration of recently discovered pre-salt oil fields. The company also hopes to double its total oil and natural gas output by 2015, counting on the Tupi oil field and three other offshore camps to begin production. The day after the plan’s release, the first fully Brazilian-made natural gas platform, with capacity to generate electricity for 300,000 people, started operations. This also marks a step forward for Brazil’s naval industry, which will build another eight platforms to be deployed by 2013.

Washington’s new administration has signaled interest in working with South America’s largest economy this week in the fields of energy and trade. Following Monday’s phone conversation between the presidents of both countries, a spokesperson from Lula’s office announced that Obama “is interested in continuing discussions to advance the Doha round” of trade negotiations. In his January 26 edition of his radio show, “Café com o Presidente”urged Obama to push Doha forward.

A new report by AS/COA’s Trade Advisory Group entitled Building the Hemispheric Growth Agenda: A New Framework for Policy proposes creation of a hemispheric energy partnership that would include Brazil: “[A]s a starting point to greater regional integration, the United States and other willing partners across the hemisphere, perhaps as an E4 or E5, should join together to formulate a mutually beneficial hemispheric energy agenda roughly analogous to the original European Coal and Steel Community.” The report also suggests that the new U.S. administration should scrap the 54 cent-per-barrel tariff on Brazilian ethanol and consider a pact for a civil nuclear program similar to the one signed with India during the Bush administraion.

A December AS/COA panel analyzed the investment climate for energy in the region, with an emphasis on Brazilian energy and Latin American integration.

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Venezuela’s Oil Diplomacy May Dim AS/COA Online 01/08/09

Citgo oil delivery to a low income house in Philadelphia. (AP Images)

Crude oil prices continue to fall, forcing countries such as Venezuela that rely heavily on oil exports to rethink their 2009 spending priorities. Earlier this week, the nonprofit organization Citizens Energy headed by U.S. Congressman Joseph P. Kennedy II (D-MA) announced that Citgo—the U.S.-based subsidiary owned by Venezuela—would curtail its fuel assistance program for low-income Americans. Two days later, Citgo and the government of Venezuelan President Hugo Chávez asserted that the program, which last year provided assistance to some 200,000 households in 23 states, would remain in place.

The reversal raised questions about whether Chávez’s plan to continue the program represents a costly political investment at a time when oil prices hover around the $40 per barrel mark. Venezuela’s Central Bank announced on January 8 that inflation reached 30.9 percent in 2008, the highest in more than 10 years. The Economist Intelligence Unit’s ViewsWire explains that Chávez “has his eyes more on the ballot box than on his purse strings.” The analysis argues that, as he plans to call for a national referendum that would allow him to seek unlimited reelection, he must maintain his support base among the poor through social programs.

Yet, to strengthen its balance sheet, Caracas may find that it must cut back social programs that extend beyond its border, such as fuel assistance programs. A Stratfor podcast explains that “it is practically impossible” for the Chávez government to avoid cutting social programs, with cheap oil programs facing the greater risk. The report also suggests that, before reducing popular subsidies on medicines and gasoline, Venezuela may increase sales taxes, default on government contractor’s compensation, or even halt payments on previous nationalization deals. An analysis by RGE’s EconoMonitor reports that even if average oil prices float around $50 per barrel in 2009 and spending levels mirror those of 2008, Venezuela’s fiscal budget may fall from a surplus of 0.7 percent last year to a 5.5 percent deficit in 2009. For now, they may rely on cash reserves that stand at roughly $38 billion, but risk a ratings downgrade if those reserves are depleted. “Venezuela’s government is stuck. It needs to maintain spending to ensure political support, but it may find it harder to access needed funds,” write RGE Analysts Italo Lombardi and Rachel Ziemba.

Left-leaning Upside Down World recognizes that “Venezuela has reportedly not been keeping up with current [Petrocaribe] quotas” and other initiatives like the Bolivarian Alternative of the Americas Banco del Sur, Petroamerica, and Petroandina have stalled. Through the Petrocaribe cooperation agreement, Venezuela has provided cheap oil with preferential payment terms to 16 Caribbean countries since 2005. (Although Cuba is not part of the pact, Caracas also supplies Havana with 100,000 barrels per day plus contracts to boost Cuban refining capacity.) To ease worries over Venezuela’s ability to continue supplying affordable oil, Dominican Republic President Leonel Fernández in December offered a reassurance that Petrocaribe provides elasticity on purchases and payments to the countries receiving fuel shipments and emphasized Chávez’s commitment to keep the agreement afloat. In an op-ed for the Jamaican newspaper Gleaner, University of the West Indies Lecturer Robert Buddan underlines the importance of the pact for Jamaica, saying “Petrocaribe stands out as the best example of the benefits of regional cooperation.” Former Attorney General of Grenada Lloyd Noel, writing for Caribbean Net News, recognizes how critical energy cooperation remains but concedes that “Now that the gas and oil bonanza is down to its lowest value for years, Venezuela in particular is no longer as influential in the negotiations as when it was selling crude oil at $140 per barrel as opposed to $40.”

Read a previous AS/COA analysis on how falling oil prices have taken a toll on Venezuela’s economy.

En español.

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Oil Price Drop May Affect Venezuela AS/COA Online 10/24/08

Lower oil prices threaten spending in Venezuela. (AP Images)

Falling commodity prices worldwide have sounded financial alarms in Latin America given the region’s heavy reliance on exports. In particular, oil’s spectacular price drop from $145 per barrel in July to less than $64 per barrel on October 24 raises concerns among analysts about Venezuela’s financial panorama, given that its economy revolves around oil revenue for approximately 50 percent of government earnings and 95 percent of its total export gains.

A broad range of financial experts forecast that Venezuela will see growth slow in 2009 but disagree on which oil price should be the bottom line before President Hugo Chávez’s government runs short on cash. The Economist Intelligence Unit says that Caracas’ 2009 budget is calculated based on a conservative estimate of $60 per barrel but foresees a public spending increase of 23 percent. It also notes Chávez’ determination to stimulate domestic growth using spending but warns that such a move will fuel the already volatile inflation rate, which surpassed 35 percent this year. El Universal reports Deutsche Bank analysis forecasting that Venezuela’s economy requires an average oil price at around $95 per barrel for the country to maintain a balanced budget. Others suggest the price must be even higher.

The New York Times emphasizes that some of Chávez’s signature policy initiatives—such as heavy domestic subsidies, modernization of the Venezuelan military through $3 billion in arms purchases from Russia; and selling cheap oil to Latin American allies—could face cuts. As an example, a well-trumpeted oil refinery announced by Chávez and his Nicaraguan counterpart Daniel Ortega more than a year ago remains at the drawing board. “Chávez’s days as the ultimate benefactor could be coming to a close,” the Christian Science Monitor explains.

Chávez has dismissed such omens, saying, “Venezuela has conditions to withstand any oil price fluctuations.” In a recent speech, he said that large international reserves stand at approximately $80 billion, represented half in cash and the other half in joint investment funds with China, Russia, and Iran. As a member of the Organization of Petroleum Exporting Countries (OPEC) and in sync with other members such as Libya and Algeria, Venezuela proposed to curb oil production by at least one million barrels per day. On October 24, OPEC members announced plans to cut oil production by at least 1.5 million barrels a day starting November 1 arguing that “oil prices have witnessed a dramatic collapse—unprecedented in speed and magnitude. Still, oil futures fell to $63 per barrel, the lowest price in 17 months.

Like oil, copper has suffered a steep price drop, declining 57 percent since July of this year. Such loss has prompted Chile to reduce its copper output by 2 percent over last year. Still, while U.S. demand has declined, China’s remain solid; current low prices may be a good opportunity to supply Chinese stockpiles.

The International Monetary Fund Regional Economic Outlook report underlines Latin America’s resilience facing the current financial slowdown. The analysis sees relief for commodity importer countries from Central America but advises caution for net exporters who might feel a pinch.

Read an AS/COA exclusive interview with the Global Head of Emerging Markets and Credit Research at JPMorgan Chase Joyce Chang on Latin America’s economic growth prospects.

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Reheating Russo-Cuban Relations AS/COA Online 07/08/08

Russian Prime Minister Putin greeted by Cuban leaders Fidel and Raúl Castro. (AP Images)

Recent twists and turns in U.S.-Russia relations have drawn comparisons to Cold War era tensions, sparked in particular by Washington’s plans military defense shield in Eastern Europe. During a July visit to the Czech Republic to sign a related agreement, U.S. Secretary of State Condoleezza Rice insisted that the shield’s construction was not a strategic move against Russia, but was instead intended to protect NATO allies from Iranian and North Korean threats. Still, Russian leaders seem unconvinced and, after plans to build the shield in Russia’s backyard were inked, a story arose that Moscow planned to station nuclear bombers in Cuba. The report may have been little more than a rumor, but this week Prime Minister Vladimir Putin announced intentions to restore ties with Havana.

In the days between the bomber rumors and before Putin’s call for warmer Cuba ties a Russian delegation headed by Deputy Prime Minister Igor Sechin visited Cuba. Kommersant reports that Cuban leaders were displeased by the possibility that the bomber story was a means for Moscow to use Cuba as a pawn in a chess game with Washington. Nonetheless, Cuban and Russian officials forged a number of energy and commercial agreements. Most significantly, Russian oil companies gained the right to explore and harvest oil in the Gulf of Mexico. A Stratfor podcast explores Moscow’s intentions to upstage Washington by demonstrating Russian influence in the Western hemisphere. Some Russian military experts say the door could still be open for Moscow to expand its military presence into Cuba. “It is an open secret that the West has been establishing a buffer zone around Russia during the recent years, getting European, Baltic states, Ukraine and the Caucasus involved in the process. The expansion of the Russian military presence abroad, particularly in Cuba, could become a response to US-led activities,” Leonid Ivashov, president of the Academy of Geopolitical Sciences, told RIA Novosti.

Russia may also be flexing its energy muscle in the simmering U.S.-Russia dispute; the day after Prague signed the July 8 deal with the United States, crude oil deliveries to the Czech Republic were coincidentally cut off by a Russian supplier citing technical and commercial reasons. As an Asia Times article points out, Russia’s recent deal with Turkmenistan gives it control as the sole buyer of the Central Asian’s massive natural gas reserves until 2028.

The Turkmen deal came just after Russia and Venezuela signed energy agreements during a President Hugo Chávez’s stop in Moscow. During his meeting with Russian President Dimitri Medvedev, the leaders signed a pact that would allow Russia’s Gazprom the right to explore for oil in Venezuela’s Orinoco oil belt. Furthermore, Venezuela has increased its military expenditure fivefold in the last decade, making Russia its principal arms supplier with more than three billion dollars in hardware purchases.

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Deepwater Troubles AS/COA Online 02/21/08

The Calderón administration hopes to reform laws guiding investments in Pemex.

Last week, Pemex declined an invitation to join Petrobras as a minority partner in a deepwater exploration in the U.S. side of the Gulf of Mexico. This despite Pemex’s twin problems of declining production and limited exploration capacity to tap large oil reserves in deeper waters. The conundrum rests now in how to get to those reserves without the technical ability and with constitutional hurdles barring privatization of the government’s energy monopoly.

Pemex’s production woes are not new and, according to the Energy Information Administration, Mexico’s proven oil reserves continue to fall. Cantarell, once the world’s biggest offshore oil field, reached its peak production capacity in 2004, but has seen production rates shrink by 500,000 barrels of oil a day.

In early February, Mexican Energy Secretary Georgina Kessel predicted that Mexican oil production would drop by another 200,000 barrels in 2008. She also stressed that Mexico holds roughly 100 billion barrels of equivalent crude oil, saying the country has “plenty of oil, but we need to find ways of turning these reserves into production and into resources for the Mexican people.” In a report setting out a five-year strategy, the energy ministry reports that total oil production could declice by 2.5 million barrels a day.

Mexico’s President Felipe Calderón—who served as energy minister in the Fox administration—echoes Kessel’s concerns. During his recent tour of the United States, he said, “The problem is that this treasure is buried beneath the ocean. To reach that oil we need to strengthen Pemex.” To meet that goal, Calderón has worked to push through reforms of constitutional law (PDF), which keeps Mexico’s hydrocarbons in the hands of the state. Mexico was the first developing country to nationalize its oil industry, expropriating U.S. and British holdings in 1938. As the Economist notes, Pemex’s failings are related to “two wasted decades in which governments have milked Pemex of cash which it might otherwise have invested.”

But Calderón’s efforts to open up Pemex to private investment have hit a roadblock in Mexico’s opposition-controlled Congress. As a Houston Chronicle analysis reports, opponents to the reform say the Calderón administration paints a dark future for Pemex to rally support for privatization. Among the critics stands Calderón’s political adversary Andrés Manuel López Obrador, who lost the presidential election by a hair in 2006. The former Mexico City mayor argues that rooting out corruption would serve to fix Pemex’s troubles. López Obrador may be able to strike a chord among Mexicans who remember a former privatization by President Salinas de Gortari’s, which gave Mexican billionaire Carlos Slim a monopoly over the telecommunications industry. As Newsweek’s “Why It Matters” blog reports, Calderón must ensure that reforms occur “under circumstances that primarily benefit the Mexican people.”

Enter energy giant Petrobras, which could serve as a role model—and potential partner—for Pemex. The Brazilian firm’s aggressive energy exploration policy led to two major offshore oil discoveries in 2007 plus more ventures in the U.S. Gulf Coast, West Africa, Turkey, Colombia, and, recently, Cuba. While Mexico began deepwater exploration in 2006, Petrobras drilled its first deepwater well in 1992, at a depth of more than 3,250 feet deep. The company has hit some hurdles along the way, such as a failed $135 million exploration venture with ExxonMobil and Colombian state-owned Ecopetrol in the Caribbean coast. Still, Petrobras, which the government maintains a 55 percent stake in and which began accepting private investment in the early 1970s, has been recognized as a model for other national oil companies to follow. For now, Pemex has turned down Petrobras’ partnership offer; energy reform could open the door to similar agreements in the future.

View a report by COA’s Energy Action Group on building lasting energy partnerships to improve security and prosperity in the Americas.

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