August 20, 2021: Energy Advisor

LATIN AMERICA ADVISOR ENERGY ADVISOR A WEEKLY PUBLICATION OF THE DIALOGUE www.thedialogue.org August 20, 2021

BOARD OF ADVISORS FEATURED Q&A TOP NEWS Nigel Blackaby Global Head, OIL & GAS International Arbitration Group, Freshfields Bruckhaus Deringer To What Extent Is Brazil to Lead Jeffrey Davidow Senior Counselor, Global Supply of The Cohen Group Pemex Weighing on Offshore Crude Jonathan C. Hamilton by 2025: Study Partner, White & Case Mexico’s Finances? A new report by data and analytics Raul Herrera company GlobalData suggests Partner, Brazil will supply around 23 Corporate & Securities Practice, percent of global offshore crude Arnold & Porter oil and condensate production James R. Jones by 2025. Chairman, Page 2 Monarch Global Strategies Jorge Kamine Partner, RENEWABLES Corporate & Financial Services, Willkie Farr & Gallagher Colombia to Craig A. Kelly Double Renewable Senior Director, Americas Int’l Gov’t Relations, Energy Capacity Mexican state oil company Pemex posted net profit of $721 million in the second quarter, but Exxon Mobil the company’s debt surpassed $115 billion. // File Photo: Mexican Government. Energy Minister Diego Mesa Jorge León said the government expects to Energy Economist, close 2021 with nearly twice the BP Mexican state oil company Pemex last month posted a sec- installed capacity for renewables. Jeremy Martin ond-quarter net profit of $721 million, with crude production Page 3 Vice President, Energy & Sustainability, Institute of the Americas up 3.8 percent as compared to the same period a year ago. Q However, the firm’s financial debt surpassed $115 billion OIL & GAS Larry Pascal Chairman, at the end of the quarter, raising concerns among investors over the Americas Practice Group, Guyana to Create Haynes & Boone sustainability of its debt burden. What were the main factors driving Oil Commission R. Kirk Sherr Pemex’s profits, as well as the company’s production increase, in the by Year-End: Ali President, second quarter, and will these positive trends continue? What is the Clearview Strategy Group Guyana will create a new authority Mexican government doing to address concerns over Pemex’s debt sus- Mark Thurber by year-end to regulate oil reve- Partner, tainability? How much is the firm’s financial situation weighing on Mexi- nues and promote the orderly and Hunton Andrews Kurth co’s account balances and the country’s broader economic recovery? transparent management of the Alexandra Valderrama country’s blooming hydrocar- Director, bons sector, President Irfaan Ali International Government Affairs, announced. Chevron Larry B. Pascal, member of the Energy Advisor board, and Page 2 Jose L. Valera Natalia Cosio, both members of the International Prac- Partner, tice Group at Haynes and Boone LLP: “Pemex’s reported Mayer Brown LLP Lisa Viscidi increased profits and production during the second quarter of Program Director, A the year may be attributed to several factors. Pemex benefited from a rise Inter-American Dialogue in international oil prices and reported an average price during this period Vanessa Wottrich Principal Analyst for Latin America, of $60.30 per barrel, an 87 percent increase over the prior 2020 period. Equinor It produced an average of 1.736 million barrels per day (bpd) during the second quarter, which represents an increase of 3.8 percent over same the period a year ago. Pemex attributes the increase to the inclusion of productive wells in the southwest marine, northern and southern regions of Mexico. Also, a couple of recently announced discoveries could improve Pemex’s production once those projects go online. In March, Pemex Ali // File Photo: Guyanese Gov- Continued on page 3 ernment.

OIL AND GAS NEWS does not have a state oil company nor domes- NEWS BRIEFS tic refining capacity, the wire service reported. Guyana to Create Among the countries that participated in the Cuban Oil Output to Fall latest bid were Royal Dutch Shell and Chevron, for Seventh Consecutive Oil Commission as well as France’s TotalEnergies and Norway’s Equinor. Year: Government in Upcoming Months Cuba’s oil production is set to decline for the Brazil to Lead Global seventh consecutive year in 2021, worsening Guyana will create a new authority by year-end a fuel deficit that Venezuela, a close ally, has to regulate oil revenues and promote the order- Supply of Offshore not been able to offset as it deals with years of ly and transparent management and develop- mismanagement and U.S. sanctions on its oil ment of the country’s blooming hydrocarbons Crude by 2025: Study sector, Argus Media reported last week. Cuba sector, President Irfaan Ali said last week, will produce around 44,700 barrels per day, a Argus Media reported. The petroleum commis- Brazil is expected to supply around 23 percent, volume that is 6 percent lower than in 2020 and sion will help shield the sector from “undue or the equivalent of 1.3 million barrels per 23 percent lower than in 2014, according to of- political interference,” Ali said. Guyana’s energy day (bpd), of global offshore crude oil and ficial statistics and other government sources. department previously handled the country’s condensate production by 2025, according to a oil sector until it was shut down until the end new report released last week by GlobalData, a of last year, when the portfolio shifted to the data and analytics company, WorldOil reported. Peru’s Energy Minister natural resources ministry and the office of The company’s “Global Offshore Upstream De- Vice President Bharrat Jagdeo. Among the new velopment Outlook, 2021-2025” estimates that Wants to Strengthen State commission’s early responsibilities will be the planned and announced projects that are set to Firm, Expand Renewables management of auctions involving internation- start operations between 2021 and 2025 in the Peru’s new energy minister, Iván Merino, wants al oil companies for offshore and onshore acre- South American nation will produce approxi- to strengthen state oil company Petroperú, age, government officials told Argus Media. mately 1.16 million bpd of crude, in addition especially in the oil and natural gas sectors, as The commission will also handle the sale of to 169,000 bpd expected from announced well as expand the use of renewable sourc- Guyana’s share of crude produced by the Exx- early-stage projects that should get approval es, Merino said in an Argus Media interview onMobil-led consortium off the country’s coast, for development soon. A total of 29 crude oil published Monday. “We are going to strengthen the officials added. Exxon is currently produc- projects are expected to come online in Brazil Petroperú,” Merino said. “This means restruc- ing 120,000 barrels per day (bpd) and expects in the 2021-2025 period. Of the announced turing it, because it has many limitations. We output to surpass 800,000 bpd by 2025. An projects, the Bacalhau, Búzios V and Lula Oeste have to fix it first if we are going to improve it,” unnamed source told local newspaper Stabroek together are expected to contribute about 44 he added. News that Guyana received some $80 million percent of the country’s crude and condensate for its last one-million-barrel share of oil, the production in 2025, according to the study. highest sum to date. The country’s account at “Brazil leads crude and condensate production the New York Federal Reserve Bank “has seen from upcoming/new projects,” Effuah Alleyne, Brazil’s Cemig Registers a deposit of $79.6 million for the last oil sales senior oil and gas analyst at GlobalData, says 4.8 GW of Wind, Solar and $12 million in royalties,” the source added. in the report. “Brazil’s prolific pre-salt layer Power for Aug. 24 Tender Using Brent crude oil prices as estimates, that in the Santos basin has produced a strong would mean Guyana cashed slightly more than portfolio of offshore projects operated mainly Brazilian utility Cemic said it had registered $79 per barrel for the country’s portion of the by [state oil company] Petróleo Brasileiro.” nearly 4.8 gigawatts (GW) of wind and solar en- oil, the newspaper reported. Meanwhile, the Petrobras, as the company is known, earlier ergy projects for the upcoming auction planned country received bids from 15 different compa- this month posted higher-than-expected for Aug. 24, Renewables Now reported Monday. nies hoping to market the government’s share quarterly growth, swinging to a profit due in The company said it will award long-term pow- of the crude, according to Guyana’s National part to strong natural gas sales and higher in- er purchase agreements to start power supply Procurement and Tender Board Administration ternational crude prices, Reuters reported. The from January 2024 through December 2038, for website, Reuters reported. The government had company registered a quarterly net income of both sources. Cemig did not detail the amount discarded a previous tender and relaunched 42.855 billion reais ($8.29 billion), compared to of electricity it is hoping to contract but said the process in July. While Guyana is entitled to a loss in the same period of last year and much in the tender notice that the new capacity will a share of the oil produced by Exxon, it needs higher than the Refinitiv consensus estimate of help its unit Cemig GT to cover demand in a partner to market that portion as the country 30.7 billion reais, the wire service reported. the southeast, midwest, south and northeast markets in Brazil.

Venezuela’s Citgo FEATURED Q&A / Continued from page 1 announced the discovery of the Dzimpona not allowing its partner Talos Energy from Posts First Profit in 1 onshore field in Tabasco, with between being the operator of the major Zama oilfield Seven Quarters 500 million and 600 million barrels of crude project. Ideologically, the government has oil equivalent, mainly in the form of natural made clear it will try to restore and strength- Venezuelan state oil firm PDVSA’s U.S. refiner, gas. President López Obrador campaigned en Pemex’s quasi-monopolistic status and Citgo, on Monday posted its first profit in seven on the platform of strengthening Pemex as a national priority. Hence, the Mexican quarters, registering net income of $3 million The government has in the April-June period, the company said in government has responded by financially a statement. Earnings before interest, taxes, supporting Pemex—primarily in the form made clear it will try to depreciation and amortization, or EBITDA, of a $3.5 billion reduction in taxes and an restore and strengthen reached $214 million, and adjusted EBITDA injection of an additional $6.5 billion. In July, Pemex’s quasi-monopo- was of $208 million. It was the first time since Moody’s downgraded Pemex’s rating from to listic status...” ‘Baa3’ from ‘Baa2.’ Per Moody’s, these rating the third quarter of 2019 that Citgo registered — David Shields a profit. The company posted a $5 million net actions are based on Pemex’s high liquid- loss in the second quarter of last year. Higher ity risk and increasing business risk and fuel exports in the second quarter helped the expected short-term expenses while it reduce the role of private investors in the en- offset weak margins as well as the impact of increases refining capacity and production. ergy industry. So, Pemex refuses to consider the nearly week-long shutdown of the Colonial It is difficult to assess the full impact on the a role for existing or potential joint ventures Pipeline, which was taken offline in May fol- national economy. However, a strengthening and is severely in arrears in payments to its lowing a cyberattack and affected operations U.S. economy usually helps the Mexican partners, contractors and suppliers. Such at Citgo’s Lake Charles, La., facility, Reuters re- economy.” errors could end up having dire consequenc- ported. “Given the multiple challenges we have es not only for Pemex, but for the nation’s faced during 2020 and the first half of 2021, David Shields, director general finances going forward.” this return to profitability is particularly satisfy- of Energía a Debate: “Essen- ing—especially given the slow margin recovery tially, Pemex’s finances and Víctor Rodríguez, professor we are experiencing due to the lingering effects A operations have not improved at the National Autonomous of the pandemic,” Carlos Jordá, the company’s in any significant way, even though it might University of Mexico: “Pemex’s president and CEO, said in the statement. Citgo seem so, when comparing its results in the A situation is delicate and will has been under pressure since it lost access first half of 2021 results to a very depressed continue to be so in the medium term. The to Venezuelan oil due to U.S. sanctions on the first half in 2020. Moody’s recent decision positive results in the second quarter are cir- Andean nation’s government, as well as efforts to downgrade Pemex from Ba2 to Ba3, with cumstantial and not the product of structural from international bondholders to collect a negative outlook, is a clear reflection of changes—high international oil prices, capi- unpaid PDVSA debts. this. Pemex has the unconditional support of tal contributions by the federal government President López Obrador, who seems ready and other less-relevant factors explain the to give it a blank check to invest recklessly profit of around $3 billion in the exploration in another refinery (Deer Park, Tex.) and in an and production segment and of $700 million RENEWABLES NEWS LPG distribution company (Gas Bienestar), for the entire business. However, the stars both of which are potentially troubled, un- will not always be aligned for Pemex. Price Colombia to Double profitable businesses. This, in addition to the volatility is pervasive, and government aid ongoing task of building from scratch the faces restrictions. Pemex Exploración y its Renewable Energy $12 billion Dos Bocas refinery in Tabasco, Producción has managed to halt a decline Capacity by Year-End which is set to become a white elephant, in production, but geological maturity does if it ever gets completed. Changing energy not allow for more. Pemex Transformación trends and climate-change priorities will Industrial continues to be a source of losses Colombia is set to double its renewable energy ensure it never operates anywhere near full despite big efforts to get out of the red, and capacity by the end of the year, Energy Minister capacity. In the upstream, Pemex has shown no factors indicate this will change in the Diego Mesa said last week during an interna- no desire to seek help from the private future. Although Dos Bocas and Deer Park tional congress on renewable energies, BNa- sector. This is obvious from its insistence on operate efficiently and profitably, other refin- mericas reported. He said the ministry expects Continued on page 6

COPYRIGHT © 2021, INTER-AMERICAN DIALOGUE PAGE 3 LATIN AMERICA ENERGY ADVISOR August 20, 2021 to close this year with nearly twice the installed s capacity for renewable energy, which currently stands at 292 megawatts. Mesa added that, by next year, the government expects nonconven- Subscriber Notice tional renewable energy projects to have a total installed capacity of 2,500 megawatts. Mesa also said the country’s energy transition has Online Event: ESG Investment Trends in Latin America and the Caribbean Colombia has great potential for hydrogen use...” Moderator: — Natalia Gutiérrez Devry Boughner Vorwerk CEO, DevryBV Sustainable Strategies been based not only on solar and wind power projects, but also on other sources including Speakers: biogas and hydrogen whose uses he said are Andrea Bonime-Blanc incentivized by the new Energy Transition Law. CEO, GEC Risk Advisory LLC Mesa announced earlier this year that the gov- María José Cortés Loreto ernment would publish a detailed road map for Head of ESG, the development of green and blue hydrogen in Atlas Renewable Energy Colombia in September. “Colombia has great Ben Ho potential for hydrogen use, which will allow for Vice President, Sustainable cleaner energy and the sustainable use of coal Investments, BlackRock and natural gas, in order to meet our climate goals,” Natalia Gutiérrez, executive president of the Colombian Association of Electric Energy Generators, or Alcogen, told the Energy Advisor in a Q&A published July 30. However, challeng- Thursday, August 26 es remain, as Jose Zapata, partner at Holland & 11:00 a.m.-12:00 p.m. EDT Knight, pointed out in the same edition. “To the Inter-American Dialogue extent that Colombia can find a way of avoiding RSPV here overregulating the industry as it develops and secure long-term stable ties with companies specialized in hydrogen development … it rubble, the country’s Office of Civil Protection which carries more than 600 personnel and would undoubtedly become a leader in this said late Wednesday in a tweet. At last count, is due to arrive in Haiti on Friday, CBS News area,” Zapata said. “This will require clarity in 2,189 people have been killed, 12,268 have reported. The U.S. Coast Guard has rescued the rule of law, stable taxes and timely permit- been injured and 332 are reported missing, dozens of injured people and has delivered ting,” he added. the office said, adding “Search and rescue thousands of pounds of supplies to victims. operations continue!!” Additionally, at least ‘We have all kinds of rescue equipment,” a 600,000 people need humanitarian assistance, Coast Guard worker told CBS News. “We have POLITICAL NEWS and 135,000 families are displaced following over 80 rescuers in this area.” However, hos- the earthquake, Jerry Chandler, the head of pitals that were already dealing with Covid-19 Death Toll Surpasses Haiti’s Civil Protection Agency, told Reuters. patients are overwhelmed, forcing doctors to “Haiti is now on its knees,” Prime Minister Ariel treat some patients outside. The poorest coun- 2,100 From Powerful Henry said in a video address on Wednesday. try in the Western Hemisphere, Haiti still has “The earthquake that devastated a large part not completely recovered from a devastating Haiti Earthquake of the south of the country proves once again 2010 earthquake that is believed to have killed our limits, and how fragile we are.” The United more than 200,000 people. Tropical Storm The death toll from last Saturday’s powerful States is providing assistance, including the Grace, which brought heavy winds and rain to earthquake that struck Haiti surpassed 2,100 dispatch of the Navy Warship USS Arlington, the country earlier this week, has complicated as search crews discovered more bodies in the

NEWS BRIEFS relief efforts after Saturday’s earthquake, and presented his resignation, but the opposition the country is dealing with political instability and some media have been blasting the former Hurricane Grace following last month’s assassination of Presi- guerrilla member for saying that the Shining dent Jovenel Moïse. Path terrorist group was a creation of the U.S. Rakes Mexico’s Central Intelligence Agency. “I’m convinced, Yucatán Peninsula Interim Bolivian although I can’t prove it, that the Shining Path Hurricane Grace moved across Mexico’s was in large part created by the CIA and [other] Yucatán Peninsula Thursday morning with 80 Gov’t Persecuted intelligence services,” Béjar said in the video, mile-per-hour winds, CBS Miami reported. As which was dated last year. [Editor’s note: See of 8 a.m. Eastern Time, Grace was 45 miles Opponents: Report Q&A on President Pedro Castillo’s cabinet in south-southeast of Valladolid. The storm is the Aug. 12 issue of the Dialogue’s daily Latin forecast to build strength in the Gulf of Mexico Bolivia’s interim government, which ruled from America Advisor.] late Thursday through Friday and is likely to late 2019 to 2020, came to power without make a second landfall on the mainland coast regard to constitutional rules for presidential of Mexico late Friday or early Saturday, accord- succession and persecuted opponents with ECONOMIC NEWS ing to the report. The storm dumped more than “systematic torture” and “summary executions,” a dozen inches of rain in some countries of the according to a new report by independent Brazil Income Tax Caribbean, leading to floods and mudslides. human rights experts, the Associated Press reported Tuesday. The study, which was commis- Reform Unlikely to sioned by the Organization of American States and presented in La Paz on Tuesday, centered Pass: Deputy Speaker Mexico’s López Obrador on the country’s October 2019 presidential Backs Central Bank’s vote. Longtime former President Evo Morales An income tax reform that would include a 20 Interest-Rate Tightening won the election but was forced to resign percent tax on company dividends is unlikely to following massive protests denouncing alleged pass because of wide opposition to it among Mexican President Andrés Manuel López fraud, claims that foreign electoral experts Brazilians, said the deputy speaker of Brazil’s Obrador on Wednesday voiced support for the later questioned, the AP reported. Morales Chamber of Deputies, Marcelo Ramos, Reuters central bank’s moves to raise interest rates, went into self-exile in November, and Senator reported Wednesday. “Everyone is against the saying inflation “must be kept under control,” Jeanine Áñez took over as interim president. bill. The airlines, agribusiness, industry, the Reuters reported. López Obrador had previous- The report, written by independent experts financial market, civil construction. There is ly pushed the Bank of Mexico to focus more on of the Inter-American Commission of Human no way it can pass the chamber,” he told the growth than inflation threats, leading some an- Rights, or IACHR, found disproportionate use wire service. The legislation would have to be alysts to worry about government interference of force by security agents and negligence on rewritten in order to win consensus, he said. with the independent central bank. However, the part of Áñez’s government to prevent such President Jair Bolsonaro has shifted his focus the leftist leader on Wednesday criticized abuses, CNN en Español reported. The report to social welfare initiatives “not to help Brazil- board member Gerardo Esquivel for his plan to said 37 people on both sides of the conflict ians, but for purely electoral reasons,” Ramos allocate International Monetary Fund resources were killed between Sept. 1, 2019 and Dec. told Reuters. “He has realized that is his last to pay off debt to save interest costs. 31, 2019. One IACHR expert, Patricia Tappatá, chance to get re-elected ... Austerity polices described some incidents as “massacres.” achieved with much sacrifice by the Brazilian people have been abandoned.” Bolsonaro’s Chile’s Economy Grows press office did not immediately respond to 18% in Second Quarter, Peru’s Foreign a request for comment by the wire service. Minister Béjar The lower chamber postponed a vote on the Beating Expectations bill that had been scheduled for Tuesday, but Chile’s economy grew 18.1 percent in the sec- Steps Down the chamber’s speaker, Arthur Lira, said it ond quarter as compared to the same period would not be shelved indefinitely because the last year, as government stimulus spending Peru’s foreign affairs minister, Héctor Béjar, country needs the reform. In May, Lira, Senate fueled retail sales, Bloomberg News reported resigned Tuesday, less than a month after President Rodrigo Pacheco and Economy Min- Wednesday. Gross domestic product grew 1 taking office amid criticism for comments ister Paulo Guedes reportedly struck a deal to percent in the second quarter as compared he made about terrorism in the country 30 attempt to pass a series of piecemeal changes to the first, beating analysts’ forecasts of 0.7 years ago, the Associated Press reported. The to the country’s tax system rather than taking percent growth. president’s press office did not detail why Béjar on a large-scale reform.

FEATURED Q&A / Continued from page 3 LATIN AMERICA ENERGY ADVISOR is published weekly by the Inter-American Dialogue ISSN 2163-7962 eries will continue to hinder the company’s for hydrocarbons owned by private compa- development. Pemex Logística is profitable, nies and the cancellation of permits by the Erik Brand but its earnings are small compared to Mexican Energy Regulatory Commission, Publisher [email protected] the group’s financial challenges. The ‘right imposed a burden on private participants, to shared profit’ rate has dropped to 54 giving Pemex a competitive advantage. Gene Kuleta Editor percent, but the problem is not the rate, but Moreover, the increase in production was [email protected] rather a failed tax regime that forces Pemex driven by private companies’ discoveries of Anastasia Chacón González to borrow and pay taxes while continuing new reservoirs with collaborative agree- Reporter & Associate Editor operations. Long-term indebtedness has ments that allow them to explore oil fields. [email protected] been stopped, but short-term borrowing is According to the Mexican constitution, Leticia Chacón increasingly being used, so negative working all new discoveries are turned over to the Reporter capital continues to grow. The main source Mexican state. However, with no additional [email protected] of income is gasoline sales, yet the company or new collaborative license agreements

continues to lose markets as competition and the cancellation of oil rounds, this trend advances. Pemex still does not generate might not continue. Indeed, Pemex’s finan- Michael Shifter, President sufficient income to meet its financial cial debt will be a burden not only for the Rebecca Bill Chavez, Nonresident Senior Fellow obligations. A shock strategy is needed to sustainability of future exploration projects, Bruno Binetti, Nonresident Fellow clean up the relationship between Pemex but for the firm itself. There are signs that Sergio Bitar, Nonresident Senior Fellow and the public treasury and to reconfigure the new minister of finance wants to take a Joan Caivano, Senior Advisor the company for a rebirth that is compatible different approach that will protect taxpay- Santiago Cantón, Director, Rule of Law Program with the energy transition.” ers’ resources and increase opportunities Kevin Casas-Zamora, Nonresident Senior Fellow for collaboration with the private sector. It Julia Dias Leite, Nonresident Senior Fellow Claudio Rodriguez Galan, remains to be seen if he can convince the Ariel Fiszbein, Director, Education Program partner at Holland & Knight president, Pemex and the Minister of Energy Sandra García Jaramillo, Nonresident Senior Fellow LLP: “The pandemic caused a to follow this plan.” Selina Ho, Nonresident Senior Fellow decrease in global consump- Edison Lanza, Nonresident Senior Fellow A Nora Lustig, Nonresident Senior Fellow tion of hydrocarbons and refined products [Editor’s note: The Energy Advisor asked Pe- Margaret Myers, Director, Asia Program across the globe. Now, with the increase of mex officials for a commentary but received Manuel Orozco, Senior Fellow commercial and industrial activities, Pemex no response.] Xiaoyu Pu, Nonresident Senior Fellow is seeing its revenues increase. Additionally, Jeffrey Puryear, Senior Fellow administrative changes by the Mexican Min- The Advisor welcomes comments on its Q&A Tamar Solnik, Director, Finance & Administration istry of Energy, such as new asymmetric reg- section. Readers can write editor Gene Kuleta Lisa Viscidi, Director, Energy Program ulations, the cancellation of import permits at [email protected]. Denisse Yanovich, Director of Development

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Citigroup’s Ernesto Revilla on The opinions expressed by the members of the Board of Latin America’s Economic Outlook Advisors and by guest commentators do not necessarily represent those of the publisher. The analysis is the sole The Latin America Advisor interviewed Ernesto view of each commentator and does not necessarily Revilla, head of Latin America economics at Citigroup, represent the views of their respective employers or firms. The information in this report has been obtained from about the region’s economic outlook. reliable sources, but neither its accuracy and completeness, nor the opinions based thereon, are guaranteed. If you have any questions relating to the contents of this publication, WATCH HERE contact the editorial offices of the Inter-American Dialogue. Contents of this report may not be reproduced, stored in a retrieval system, or transmitted without prior written permission from the publisher.