Argentina’s recent decision to expropriate and nationalize its largest energy company, YPF (NYSE:YPF) has sent shock waves throughout the energy-investment community all across South America.
Deeming the oil industry one of “national public interest,” Argentinean President Cristina Fernandez de Kirchner’s government will now own and operate 51% of YPF, with majority owner Spain’s Repsol YPF (OTCBB:REPYF) seeing its stake dwindle to just 6%. The remaining assets of YPF will be divided among federal agencies and provincial governments.
Overall, the Argentinean government accused the oil company of not investing enough back into its local fields and criticized it for not producing enough oil. Energy imports into South America’s third-largest economy rose nearly 110% last year.
The country’s actions set a dangerous precedent.
Locally, what’s at stake is Argentina’s 774 trillion cubic feet of technically recoverable shale gas and unconventional reserves, the largest in Latin America. The nation is not alone in its populist momentum. Bolivia recently moved to expropriate a local unit of a Spanish power-grid operator, and Venezuela’s nationalization ambitions are well-known. Meanwhile, populist politics continue to rule investment decisions in Nicaragua and Ecuador.
Many natural-resource hunters have practically given up on Latin America as these worries persist. Nonetheless, for every Argentina or Venezuela that has begun to unwind decades of progress, there are plenty of Latin American nations that recognize the importance of foreign capital, especially in the energy sector. For investors, the continent still offers many opportunities.
A Wealth Of Reserves
Despite heightened tensions in a few nations, new oil and natural gas discoveries are drawing investors into Latin America in spades. As maturing conventional oil fields dwindle and energy demand surges, exploration efforts across the continent continue to intensify.
There are several reasons to be bullish on the region.
According to the Latin American Energy Organization (OLADE), proven reserves across LATAM currently make up around 20% of all global oil reserves. And that number doesn’t even include all of the unconventional and offshore deepwater potential of the region. Brazil’s deepwater Tupi formation alone, located 2,000 meters below the surface of the sea, may be enough to boost current Brazilian oil and gas reserves by over 50%. The area is estimated to have five to eight billion barrels of recoverable light oil and natural gas in its pre-salt reservoirs.
The potential doesn’t stop with the BRIC leader. Colombia has emerged as Latin America’s fourth-biggest oil exporter as it has roughly doubled production since 2006. The nation is close to hitting its target of one million barrels per day after $5.08 billion worth of foreign direct investment flowed into the oil sector last year. The nation is partnering with various companies to beef up its pipeline and exporting infrastructure.