Latin America, Heavy Crude, and Resource Nationalism
Mexico nationalized its oil industry in 1938, expropriating foreign assets and forming a decisive monopoly around exploration, production, refining, and distribution. In 1975, Venezuela did the same thing while retaining the right to form contracts with foreign companies. As usual, these state-owned enterprises, Pemex (Petroleos Mexicanos) and PDVSA (Petroleos de Venezuela) are subject to overstaffing, underinvestment, political interference, and institutionalized corruption. But despite the inherent inefficiencies of these systems, national oil companies are a bureaucratic manifestation of a surprisingly powerful force: resource nationalism. As Robin Mills writes in The National, “Myths of nationhood come in many forms: epic poets, climactic battles, age-old enemies. Possession of a slippery black liquid is also a popular foundation myth.” For Mexico, Venezuela, and various other states (particularly in Latin America and the Middle East) oil is more than a transportation fuel that packs a punch—it’s a source of national power and identity. But right now, while the world is in turmoil and oil prices are at relative lows, the shale boom may be creating incentives for various former stalwarts of resource nationalism to loosen their oily grips around their respective resources. Both Mexico and Venezuela produce some of the heaviest crude oil in the world. In the mid-2000s, before the domestic oil boom, many refiners on the U.S. gulf coast poured money into upgrades to optimize for heavy oil imports, in order to benefit from these discounts. The fact that these refineries now depend on continued supplies of heavy oil, unlike what is produced in U.S. shale formations, has been a blessing for both countries. Even though imports from both have fallen dramatically since 2005, they have fared better than other countries such as Algeria, which have seen their supplies shuttered entirely. However, despite the heavy/sour nature of their crude oil reserves, both countries have maintained a dogmatic insistence on remaining as self-reliant as possible, refusing to import crude oil from other countries. Things appear to be changing. And a lot of this change probably has to do with the fact that both countries have been forced to leave a significant amount of oil export revenue on the table for decades. Looking at spot prices of Brent and WTI compared to Venezuelan and Mexican crude oil prices, there’s always a steep price discount on the latter two. Reuters reports that early volumes are likely to be low, from 35-70,000 barrels per day. Pemex spokesman Jose Manuel Carrera said that the crude could be imported via a swap, or direct agreement with the U.S. commerce department, but that Mexico is drawn by the competitive prices of light oil in the U.S. Importantly, Mexico is not interested in importing condensate. The move is ostensibly to help the country’s ailing refining sector, which is in such poor condition that although Mexico exports over 1 million barrels of crude per day, they must import half of their gasoline. The move is eerily coincidental with a similar decision from Venezuela, which also wants to import light crude oil to blend with its extra-heavy product, so that its crude oil exports can fetch more competitive prices on the global market. Tentatively, PDVSA is exploring opportunities to import light oil from Algeria—one of many countries who served as a major supplier of light oil to the United States prior to the domestic oil boom. Presumably, blending Algeria’s ultra-light Sahara Blend into the heavy oil that comes from Venzuela’s massive Orinoco belt (the largest oil reserves in the world) will enable PDVSA to sell crude oil at normal prices. It’s just in time. Petroleos de Venezuela is in somewhat dire straits, having entered a period of almost terminal production decline and falling revenues. In the wake of the death of Hugo Chavez, the New York Times noted that Venezeula has fallen far from its halcyon days of going toe-to-toe with Saudi Arabia and throwing its weight around within OPEC, stating, “In a fundamental geopolitical turn, Venezuela now relies far more on the United States than the United States relies on Venezuela.” This underscores an important point, that in a post-shale oil world, OPEC members and other countries with national oil companies are being forced to compete. As Mills writes: Shale gives the international oil industry new options. Capital is flooding into North America, even while the oil majors are cutting expenditure elsewhere. The larger independent firms such as Apache, Occidental, Anadarko and Hess, all of which had strong positions in the Middle East and Africa, are under shareholder pressure to focus on the US. Even the most fervid resource nationalists will find themselves squeezed by shortages of capital and flat or falling oil and gas prices. It is still in the early days, but the balance of power may be shifting back towards international companies. That is good news for them, and for consumers who can hope for more diverse and secure energy supply. It is uncomfortable for governments used to having things their own way, and for populist politicians seeking appealing rhetoric. Small imports of light crude by Mexico and Venezuela might not seem like much—but it’s a critical indicator of a changing mindset, from two countries whose fervent resource nationalism drove them to expropriate assets from foreign companies and ban international investment for decades. Much ink has already been spilled writing about the revolutionary nature of Mexico’s current oil industry reform, and the poor condition of Venezuela’s PDVSA. But the decision from both countries to reverse their longstanding bans on importing oil reflects the way the global market is changing, and how the shale boom is forcing these players to reevaluate their strategies. We might even be entering a new era of petropolitics, in which common sense occasionally prevails.
Iran Deal Spurs Regional Rivalries
May 12, 2015
May 12, 2015