Five Things We Learned in South America

December 2017

MID-CAPS ARE KEY

It shouldn’t be a surprise anymore, but energy development is only truly meaningful for local economy and communities when small -and mid-caps are present and striving. Argentina is known for its mature and diverse market, however, before Macri’s administration, little development occurred, and regulatory and financing issues stalled multiple projects. In 2017 a dozen of companies established strong production in the south with big ambitions going forward. A brilliant sign for investors and other E&Ps!

BIGGEST FINANCING OPPORTUNITY

Project financing in Argentina and its neighbors is in its infancy and needs a lot of work. So are alternative financing mechanisms – all creating opportunities for international investment banks and boutique advisors. Sooner rather than later, eager power developers, E&Ps and OFS will be looking everywhere for capital as Argentina aims to attract $8.5 billion between 2018-2022 and drill 1,600 new wells.

COMPETITION WILL BRING SPEED

Oil price isn’t an excuse for the lack of activity anymore. Competition across the region is fierce for all energy projects. Between Brazil heading for success in pre-salt, Mexico swiftly moving through 11 energy bid rounds already, Bolivia making an aggressive plan to revamp production, Colombia significantly improving its permitting system, Argentina doesn’t have much time to lose. Everyone competes for limited capital at the time when most companies with $$$ become more and more risk-averse. This pushes government bodies towards a steep learning curve to remain competitive. Watch out for a lot of activity in the next 12 months.

ALL RISKS CONSIDERED BUT SOCIAL & POLITICAL WORRY THE MOST

A deal with the Labor Union in Argentina was a good sign but social risks don’t go away overnight. There is a feeling of cautious curiosityamongst investors when it comes to trusting in South America. Can it go back to 0 overnight? Practice showed that when it comes to “license to operate” human approach works best i.e. the operator directly approaching communities and educating on effects/benefits of their operations. The dialogue has certainly started!

RENEWABLES & O&G ARE COMPLIMENTARY

Most E&Ps have spent the last 12 months actively investing in renewables to complement their balance sheets. Renewables could still be more than a fifth of E&Ps capital allocation beyond 2030. Most, especially the “giants” are slowly beginning to transform in the face of climate change policies and slowing demand. South America leads the renewables revolution with ambitious actions and targets, creating demand.

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