South America

and the Energy

Merry-Go-Round

(YASUYOSHI CHIBA/AFP/GettyImages)
 This report cannot be shared or copied without express permission from Stratfor. Copyright Stratfor 2018.
South America and the Energy Merry-Go-Round
• Policy shifts in Argentina and Brazil will change
the energy situation in the Southern Cone and
beyond over the next five years.
• Elections in Argentina and Brazil in the com-
ing two years could bring further change to the
energy regulations of both countries.
• As Argentina and Brazil become less dependent
on Bolivia’s natural gas, the Bolivian government
in La Paz will try to normalize relations with Chile.
The winds of political and economic change are
blowing through Argentina and Brazil, and Bolivia
may be forced to take cover. Large natural gas shale
reserves in Argentina and oil fields in Brazil will
become more attractive to foreign and domestic
energy investors because of regulatory changes
currently underway. Both countries are moving to
increase their hydrocarbon production, and their
efforts stand to make them less dependent on
Bolivia’s natural gas in the next five years. The shift
will force Bolivia to normalize its long-strained rela-
tions with Chile, which has the Pacific ports it needs
to exports its gas beyond Brazil and Argentina.
Brazil Loosens the Rules
Over the past year Brazilian President Michel
Temer and his administration have been working
to cut restrictions on oil and gas production. One
of the first economic proposals passed after Temer
took office reduced the requirement for the use of
local products in energy development and elim-
inated the exclusive rights of Petroleo Brasileira
(Petrobras), the state-owned oil company, to
September 2018
operate Brazil’s pre-salt oil fields. (Pre-salt oil,
though of good quality, is difficult to extract because
it is found under layers of salt in the deep sea.) In
addition, the government this year extended a tax
incentive program for oil and gas production.
So far, the regulatory changes seem to be paying
off. On Sept. 27, Brazil sold 37 onshore and offshore
oil blocks for $1.1 billion in its first auction since the
reforms took effect. The country will hold a sepa-
rate auction for its pre-salt fields Oct. 27. Now that
Petrobras is no longer required to have a minimum
30 percent stake in all pre-salt operations, the fields
appear to be piquing the interest of more investors
abroad. More than 30 oil companies, including inter-
national giants ExxonMobil, Royal Dutch/Shell, BP,
Total SA and Rosneft, have signed up to participate
in the auction. The surge of interest suggests that
Brazil’s hydrocarbon sector may at last live up to the
great expectations that have surrounded it since the
pre-salt fields’ discovery in 2006. Energy production
in the country already was on the rise, despite lower
oil prices, as projects started years earlier began
coming online. Total oil and gas production in Brazil
reached 3.16 million barrels per day in 2016, repre-
senting a 3.8 percent increase from the year before.
And Temer isn’t done with the energy sector yet.
The president is expected to send a new regula-
tory framework for the natural gas industry to the
legislature by the end of the year. The measure will
include changes to privatize natural gas distribution
in nine states and to allow private companies in
Brazil to negotiate the import of Bolivian natural gas
directly instead of buying it through Petrobras. (The
state-owned firm currently holds a monopoly on
STRATFOR • 2
 negotiating the import of natural gas from Bolivia,
but the Brazilian government has no interest in
South America’s Changing Energy Scene
renewing its contract, which is set to expire in 2019.)
ArgentinaAtand
theBrazil
same will become
time, less
however, dependent
Brazil likely will curb its
on naturalimports
gas imports fromgas
of natural Bolivia.
as its domestic production
rises. For Bolivia, which depends on Brazil to buy up
more than 90 percent of its natural gas exports — a
VENEZUELA major source of revenue for the country — this is a
troublesome prospect.
COLOMBIA

ECUADOR 2016 figures

All of Bolivia’s
natural gas exports BRAZIL

PERU go to Brazil and

Argentina.* Consumed
36.6 bcm
Pacific From Bolivia
Ocean 10.4 bcm
BOLIVIA
Brazil is expected to
double its natural gas
Because of a border PARAGUAY production, leaving
dispute, Bolivia exports Bolivia looking to
no natural gas to Chile. diversify export markets.

Consumed
Consumed 49.6 bcm
4.5 bcm
Atlantic
Imported From Bolivia Ocean
4.3 bcm 5.8 bcm
(not from Bolivia) CHILE
ARGENTINA

*Bolivia has signed agreements to export

small amounts of LNG to Peru and Paraguay.
Source: BP Statistical Review of World Energy Copyright Stratfor 2017

STRATFOR • 3
negotiating the import of natural gas from Bolivia,
but the Brazilian government has no interest in
renewing its contract, which is set to expire in 2019.)
At the same time, however, Brazil likely will curb its
imports of natural gas as its domestic production
rises. For Bolivia, which depends on Brazil to buy up
more than 90 percent of its natural gas exports — a
major source of revenue for the country — this is a
troublesome prospect.
Argentina Has a Dream
Losing business in Brazil is all the more worrisome
for the Bolivian government in La Paz considering
the recent developments in Argentina’s energy
sector. For the past decade, Argentina, once an
exporter of natural gas, has relied on Bolivia — and,
at times, Chile — to fill in the gaps in its domestic
natural gas supply, particularly during the winter.
The energy situation in Argentina seemed to change
for the better with the discovery of the Vaca Muerta
shale gas formation, announced in 2011. With
estimated reserves of over 22 billion barrels of oil
equivalent, Vaca Muerta is a boon for Argentina’s
natural gas sector. But regulatory hurdles, the drop
in oil prices and the partial nationalization of Spanish
energy firm Repsol’s assets have stalled its develop-
ment. Argentina will need substantial capital from
foreign companies to tap into the shale formation’s
abundant reserves.
Now the investments are starting to pour in,
thanks to the economic policies President Mauricio
Macri has implemented since taking office in late
2015. Macri lifted foreign currency restrictions
and allowed hydrocarbon companies to raise nat-
ural gas prices, enticing investors to the country.
Furthermore, energy firms are significantly less
concerned that the government will seize their
assets than they were under previous administra-
tions. Chevron Corp., Shell, BP and Argentine energy
company YPF already have committed $5 billion to
develop Vaca Muerta.
Their investments will help Argentina reclaim its
status as a natural gas exporter. On Sept. 9, the
country’s energy minister reported that the govern-
ment expects gas production to reach 140 million
cubic meters per day by 2021-22, up from its current
level of 105 million cubic meters per day. He also
confirmed that starting in 2019 Argentina would
resume natural gas exports to Chile, which it sus-
pended in 2004. Initially, the exports will take place
only during the summer months, when Argentina’s
domestic consumption is lower. As production picks
up over the next four years, however, Buenos Aires
will set its sights on exporting year-round.
Politics and Black Gold
Despite the progress in their energy sectors, Brazil
and Argentina could still face setbacks in the years
ahead. Brazil will hold a presidential election next
year, and the next president could decide to reverse
Temer’s policy changes. Similarly, Argentina’s
upcoming legislative elections in October, and its
next presidential vote in 2019, could determine
whether the liberalization in its energy sector con-
tinues. A weaker ruling coalition after October could
hinder Macri for the rest of his term as he works
to loosen his country’s economic restrictions. The
president already has made early indications that
he will run for re-election in 2019, and he will need
stronger congressional support to defend his office
and keep developing Argentina’s energy potential.
Considering how quickly shale wells decline, more-
over — and the continuous investment they need to
keep production up — Argentina’s energy projects
will be even more sensitive to politics than Brazil’s
pre-salt oil ventures will be.
Still, the promise of rising hydrocarbon production
in Argentina and Brazil over the next four years will
put more pressure on Bolivia to find alternative mar-
kets for its main export, natural gas. The landlocked
country will also work to diversify its economy by
pursuing investment from abroad to speed up the
development of its lithium reserves. But for any of
STRATFOR • 4
this to happen, La Paz will first have to redefine its
relationship with Chile. The International Court of
Justice will probably issue a final ruling over Bolivia’s
territorial dispute with Chile by the end of next year.
If La Paz loses, it will have to accelerate negotiations
with Santiago for sovereign access to a Pacific port
so that it can reach natural gas markets outside
South America. □

STRATFOR • 5
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