From The Wall Street Journal

The world’s largest energy companies are placing enormous bets on Latin America, a region rich with oil that many avoided in the past due to restrictive economic policies and the threat of resource nationalism.

Exxon Mobil Corp. , Royal Dutch Shell PLC and others have flocked to offshore auctions in Mexico and Brazil, fracking prospects in Argentina and big discoveries in the small nation of Guyana.

The wave of interest comes as several countries, including the region’s two largest economies, Brazil and Mexico, have liberalized their energy markets in a bid to offset declining oil production or fiscal constraints. The changes have lured most major Western oil companies.

The companies have little choice. Latin America has become one of the few areas in the world outside the U.S. where they can find profitable drilling opportunities. Many countries with significant oil and gas reserves, such as Saudi Arabia and Iraq, generally offer their best prospects to their own state oil companies, while U.S. sanctions have put Russia and Iran mostly out of reach.

“All the supply boom in the world is coming from the Americas,” said Amy Myers Jaffe, an energy expert at the Council on Foreign Relations in Washington. “The center of the universe in oil is moving that way.”

The timing of these early investments in newly opened Latin America is critical, as concerns about supply shortages are emerging.

Brent crude topped $80 a barrel this month for the first time in four years, and daily world oil demand is expected this year to exceed 100 million barrels for the first time ever, according to the U.S. Energy Information Administration.

Not everything is rosy in the region. For many companies, Venezuela is a cautionary tale. Under former President Hugo Chávez, the country seized assets from Exxon andConocoPhillips about a decade ago. Despite holding the biggest oil reserves in the world, Venezuela’s production has plunged nearly 40% in the last five years due to corruption, a debt crisis and underinvestment.

Some see similar political risk brewing in Mexico as it heads into a presidential election in July. Leftist nationalist Andrés Manuel López Obrador leads the polls by a wide margin and is an opponent of the 2013 constitutional amendment that opened Mexico’s energy sector to foreign and private investors after 75 years of state monopoly.

Mexico has awarded 110 contracts to companies from 20 countries in the last three years, raising more than $2 billion in income, bonus payments and co-investments from joint ventures with state oil company Petróleos Mexicanos, or Pemex.

Mr. López Obrador has said he won’t reverse the energy overhaul if he wins but would freeze new exploration and production auctions until existing contracts can be reviewed for their benefits.

At a Mexico City rally in March, a group representing Pemex refinery workers who support Mr. López Obrador hung banners in a crowded park demanding “a second oil expropriation.” The signs showed boots kicking the corporate logos of Russia’s Lukoil, Exxon and other oil companies beneath the words “Russians Out, Americans Out, Other Foreigners Out.”

Global oil companies are set to spend tens of billions of dollars in Latin America in the coming years, and the developments make up a significant portion of their growth plans. Exxon executives have said prospects in Brazil and Guyana are among the best assets the company has had in decades.

The region also offers cheaper opportunities than booming U.S. shale regions such as West Texas, according to James Park, chief executive of GeoPark Ltd., a small producer based in Chile that also operates in Colombia, Peru, Argentina and Brazil. The company’s share price has nearly doubled in the last year.

“The cost of entry is low, and the economics beat just about any play in North America today,” Mr. Park said.

To insulate themselves against political risk, Exxon, Chevron Corp. and others have sought partnerships with state oil companies, executives say.

Exxon and Shell joined Brazil’s state-run Petróleo Brasileiro SA to win access to several offshore prospects, and Australia’s BHP Billiton Ltd. in 2016 became the first-ever foreign company to enter a partnership with Pemex, teaming up to develop the Trion oil field in the Gulf of Mexico. The field’s reserves are estimated at about 500 million barrels of crude.

“By 2025, (the world will) require a new supply of 25 to 28 million additional barrels per day,” said Steve Pastor, BHP’s president of petroleum operations. “The question is, where are we going to find that supply? And that’s where Mexico and Brazil come into play.”

Shell has been particularly aggressive in Latin America, winning nine offshore leases in Mexico and three in a highly coveted area in Brazil.

“Places like Mexico and Brazil have created a fair, open fiscal regime where you can bid on certain terms,” said Wael Sawan, Shell’s executive vice president for deep water. “It’s a balance of institutional strength that gives us confidence to invest.”

Despite that, he acknowledged the risks. “There is definitely political-economic risk. Both countries have upcoming elections,” he added. “We’ll be watching very closely because that influences how much we’ll decide to invest in the future. But elections on their own are not what swings things one way or another.”

Brazil’s President Michel Temer, who took office in 2016, has loosened regulations blamed for keeping foreign players at bay. Since last fall, Brazil has raised some $2.7 billion in signing bonuses and drilling auctions. Another bidding round is scheduled for next month.

“Latin America has always had excellent exploration and production opportunities, but sometimes it’s a question of whether protectionism is winning, or market-oriented policies are winning,” said Tim Samples, a professor at the University of Georgia who researches global energy laws. “Right now, outside of Venezuela of course, some really solid market-oriented approaches have taken hold.”

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