Are Latin American resource stocks safe?Take a look at an article on political change in Latin America. This will have impact on BCM, PCR, NOC, and many others.
"Turmoil in Latin America: Implications for the Natural Resources Industries
By Alexander Turkeltaub and Alex Gorbansky
05 Jan 2006 at 12:29 PM EST
BOSTON (NGO Research Group) -- For mining and energy companies, Latin America is a continent where above-ground risks matter as much as the below-ground fundamentals. The election of Evo Morales to the Bolivian Presidency suggests that the above-ground operating environment for natural resources companies in Latin America could be deteriorating.
The election of Mr. Morales, the son of a miner and a firebrand activist whose platform promises to nationalize much of Bolivia’s gas industry could spell the beginning of a leftward wave in Latin America. In 2006, at least 12 countries in the region will go to the polls (Chile has already voted and is awaiting a run-off election between the favored left wing candidate and her conservative opponent). In many, including Peru, Brazil, Mexico and Ecuador, the winner could very well be a left-wing populist eager to make it more difficult for companies to operate in their country.
What does this mean for the natural resources industries?
Simply put, 2006 could bring increased above-ground risks – political, regulatory, social and environmental – for companies that are looking to explore, invest and operate in Latin America. Several specific challenges facing stand-out:
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Host government agreements could be renegotiated to the disadvantage of foreign companies. Given the current commodity price environment, governments may demand a greater share of company profits in order to appease communities and align themselves with populist tendencies among electorates. This process has already begun for the oil companies, which have recently signed new and far less favorable, agreements with the Venezuelan government of Hugo Chavez.
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Permitting projects will become more challenging. Both Greenfield developments and expansions of existing projects could come under increasing scrutiny and be more difficult to get through local and national bureaucracies. The “political price” of supporting companies in their requests for new permits could become too great for many governments. Moreover, as countries under rulers such as Chavez, Morales and others rapidly expand national bureaucracies, competing jurisdictions and ever-changing regulations may create regulatory confusion and delays.
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Managing the “social license to operate” will become increasingly difficult. Local communities, inspired by past grievances, local leaders and international NGOs, may challenge companies in their daily operations. Companies will not be able to rely on central government support to overcome this increased local hostility. A key trend could be the involvement of international NGOs, which not only bring media expertise, but also provide cover for the violation of contracts by populist governments. Whenever the NGOs become involved, the issue becomes less about “nationalization” and “renegotiation of host government agreements” and more about the environmental and social impacts of extractives activity on local communities.
Trends Driving the New Hostility toward Natural Resources Industries in Latin America
There are three key trends driving the new environment faced by energy and mining companies in Latin America:
Venezuela’s Anti-Capitalist “Oil Diplomacy”
When Venezuela’s President Hugo Chavez bombastically declares that his country will “help destroy capitalism” and build “socialism for the 21st century,” it is easy to dismiss him as a blowhard with a gift for public speaking. What makes Chavez different from other populists, including his good friend Fidel Castro, is that Chavez has a potent weapon – oil.
By providing Venezuela’s oil to other Latin and Central American countries on extremely favorable terms, Chavez reduces the need for these countries to rely on sound economic policies and pro-business reputations to maintain economic growth. This could make these countries far more willing to attack companies investing in their markets.
Chavez also makes it far more difficult for other Latin American leaders to support pro-business policies because of his financial and political support for left-wig movements in neighboring countries. For example, Chavez was a key early supporter of Evo Morales in Bolivia. Left-wing parties across the continent, now flush with Chavez’s petrodollars, are far more capable of attacking mainstream governments for “selling-out” to globalization and multinational corporations.
Perhaps most importantly, whenever left-wing populists do come to power, Chavez could serve as a policy-making mentor. Almost all of the populists who have or might become Presidents of their countries, including Morales in Bolivia, Ollanta Humala in Peru and even Andres Manuel Lopez Obrador in Mexico have little or no governing experience, particularly at the national level (Lopez Obrador was at least mayor of Mexico City). The result is that these new leaders will be highly dependent on the Chavez “policy-factory,” either through direct tutelage or by learning from Chavez’s example. This increased policy influence for the Venezuelan leader can only mean more challenges for companies operating and investing in Latin America.
The Availability of the “China Card”
Latin American countries and governments also feel freer to attack western companies because they have a new card to play – the interest of Chinese companies in making substantial investments in the region (Russian and Indian firms are increasingly investing in the continent as well). If western firms take their investment dollars elsewhere, Latin American leaders believe they have an easy replacement in Chinese companies. The Chinese have skillfully exploited this opening to increase their influence in the region through diplomatic moves and investments.
Chinese companies offer not only an alternative source of investment, but are also far less restricted in managing local and national political interests through financial inducements. The involvement of Chinese companies also appeals to the widespread belief in Latin America that a multipolar world – i.e. one in which the dominance of the United States is tempered by the rise of new powers such as China – will bring both greater stability and greater leverage for Latin America in defending its interests.
One recent example of this trend is the sale of the Ecuadorian assets of the Canadian pipeline company EnCana to a consortium of Chinese firms. EnCana, in many ways forced out due to protests against the oil industry in Ecuador over the past summer, could not obtain the level of government support it needed to stay because the Ecuadorian government felt that it had alternatives.
High Commodity-Price Environment
The final reason why Latin American governments may be willing and able to make the operating environment more challenging for natural resources companies is the commodity price environment. With prices at or near record highs for gold, copper, oil, natural gas and other commodities, two important temptations could prove irresistible to Latin American politicians.
First, there is a desire to extract greater economic resources from foreign companies operating in the region. Given the large profits made by these firms and their high-flying stocks, Latin American governments as well as local communities believe they are entitled to a larger share of the pie. And in a year when elections are taking place across the continent, using the foreign companies as a bogey-man to explain social ills and pointing to them as the explanation of how election-year promises will be funded is a path hard to resist for any politician.
Second, high commodity prices have given Latin American populists the sense that “economic gravity” can be defied and there is little need to maintain a business-friendly climate. With enormous windfalls awaiting national treasuries, particularly in countries rich in oil and gas, social programs can be funded without concern about budget deficits and the international financial markets can be tapped for debt despite the poor fundaments or anti-business reputations that leftwing populism will create. Chavez’s “Bolivarian Revolution” would not get very far if oil prices were at $20 a barrel; Ecuador would not have been able to raise $750 million through a bond issue, at a time when two men claim to be the country’s president, if natural gas and oil prices were at their historical averages.
So long as the region feels unconstrained by the normal rules of supply and demand, populism, socialism and nationalism are “cost-free” experiments for the continent in the eyes of its politicians. Such “cost-free” experiments, of course, are what made Latin America poor in the first place. But repeating historical mistakes is the prerogative of every country.
Conclusion
Latin America remains an area of extraordinary opportunity for natural resources companies. Countries such as Brazil, Peru, Columbia, Venezuela, Ecuador, Bolivia and others are rich with natural resources and require foreign investment and know-how to develop these in the best interests of their people.
However, the above-ground risk environment on the continent could deteriorate over the coming 12-36 months. Chavez’s oil diplomacy, the availability of the “Chinese alternative,” and the commodity price environment are combining to create obstacles for western firms. Senior executives evaluating Latin American opportunities must be careful to properly calculate these above-ground risks prior to making investments in the region.
© NGO Research Group 2006
The authors are Managing Directors at the NGO Research Group, a research and advisory firm headquartered in Boston, Massachusetts that specializes in analyzing above-ground risk in the natural resources industries. Questions or comments may be sent to aturkeltaub@ngorg.com or agorbansky@ngorg.com.
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