LATIN AMERICA ADVISOR a DAILY PUBLICATION of the DIALOGUE Tuesday, August 1, 2017

LATIN AMERICA ADVISOR A DAILY PUBLICATION OF THE DIALOGUE www.thedialogue.org Tuesday, August 1, 2017

BOARD OF ADVISORS FEATURED Q&A TODAY’S NEWS Diego Arria Director, Columbus Group POLITICAL Devry Boughner Vorwerk Corporate VP, Global Corporate Affairs Do Brazil’s Shaky Venezuelan Agents Cargill Seize Opposition Joyce Chang Global Head of Research, Politics Jeopardize Leaders in Raids JPMorgan Chase & Co. In overnight raids, Venezuelan W. Bowman Cutter Former Partner, the Oil Sector? intelligence agents seized opposi- E.M. Warburg Pincus tion leaders Leopoldo López and Dirk Donath Antonio Ledezma, who had been Senior Partner, under house arrest. The raids Catterton Aimara followed Sunday’s controversial Barry Featherman “constituent assembly” vote in Senior Director, Venezuela. International Government Affairs, Gilead Sciences Page 2 Marlene Fernández Corporate Vice President for Government Relations, BUSINESS Arcos Dorados Veolia Posts 24% Peter Hakim President Emeritus, Gain in Latin Inter-American Dialogue America Revenue Donna Hrinak President Michel Temer is unlikely to weather the current political upheaval surrounding his President, Boeing Latin America presidency and other Brazilian politicians, which would make it diffi cult to pass and maintain The France-based utility attributed Jon Huenemann his proposed reforms, Isabella Alcañiz says below. // File Photo: Brazilian Government. signifi cant price increases and Vice President, U.S. & Int’l Affairs, good volumes in the region for the Brazilian President Michel Temer in recent months has Philip Morris International increase. James R. Jones initiated a reopening of the oil sector to private investment Page 2 Chairman, Monarch Global Strategies Q as part of a series of economic reforms aimed at bringing Craig A. Kelly the nation’s economy out of a profound recession. However, ECONOMIC Director, Americas International political dynamics in Brazil have deteriorated dramatically following Gov’t Relations, Exxon Mobil Mexico Names John Maisto recent allegations of corruption against Temer during the course of the Smith as Top Director, U.S. Education ongoing “Lava Jato” investigations, with thousands of protesters taking Finance Group NAFTA Negotiator Nicolás Mariscal to the streets, and some turning violent and destructive. Analysts now Kenneth Smith, the current Chairman, increasingly suggest that Temer will be forced from offi ce before next Grupo Marhnos director of the Trade and North year’s scheduled presidential election. What are the consequences of Thomas F. McLarty III American Free Trade Agreement Chairman, Brazil’s heightened political drama for the country’s energy sector re- Offi ce at the Mexican embassy McLarty Associates forms? To what extent have international investors scaled back on plans in Washington, will lead Mexico’s Carlos Paz-Soldan negotiating team. Partner, to invest in Brazilian energy companies and projects? Page 3 DTB Associates, LLP Beatrice Rangel Director, Isabella Alcañiz, assistant professor in the Department of AMLA Consulting LLC Government and Politics at the University of Maryland: “The Gustavo Roosen Chairman of the Board, prospects for any signifi cant energy reform in the near future Envases Venezolanos in Brazil are slim. The political crisis is taking precedence Andrés Rozental A President, Rozental & over the country’s economic recession. Temer’s promise of a wave of eco- Asociados and Senior Policy Advisor, Chatham House nomic reforms in energy, fi nance and labor were already on shaky ground, Shelly Shetty as it seemed at least questionable than an unelected president could Head, Latin America pass a number of diffi cult reforms through Congress, albeit a sympathetic Sovereign Ratings, Fitch Inc. Roberto Sifon-Arevalo one. Brazil’s Bovespa stocks recovered slightly from the plunge they took Managing Director, Americas immediately after a recording of Temer allegedly approving hush money Sovereign & Public Finance Ratings, Standard & Poor’s to Eduardo Cunha—the other architect of President Dilma Rousseff’s impeachment—was made public. The new corruption allegation feels like Smith // File Photo: University of Kansas. Continued on page 3

POLITICAL NEWS Venezuela’s political and economic crises, but NEWS BRIEFS also to overrule other government institutions, Venezuelan Agents including the courts and the elected, opposi- U.N. Begins Removing tion-controlled National Assembly. Maduro’s FARC Weapons From Seize Opposition critics see the move as a thinly veiled attempt to increase his own power and say the country Demobilization Zones Leaders From Homes is becoming a dictatorship. On Monday, the The United Nations on Monday began removing U.S. government imposed sanctions against more than 7,000 weapons from demobilization Venezuelan security agents arrested two prom- Maduro, saying his government has trampled zones where Revolutionary Armed Forces of inent opposition leaders in overnight raids, human rights and staged an illegitimate vote. Colombia, or FARC, rebels relinquished them, seizing them from their homes less than a day The sanctions freeze any assets Maduro may the Associated Press reported. Rebels fi nished after President Nicolás Maduro threatened to have in the United States and bars U.S. entities handing over their weapons at the end of jail opponents who accused him of electoral from doing business with him. The sanctions June, seven months after the FARC and the fraud following Sunday’s widely denounced also ban Maduro from traveling to the United government signed peace accords to end their vote to select a “constituent assembly” to States. half-century confl ict. rewrite the country’s Constitution. “Some will end up in a jail cell,” Maduro said of such Brazilian Lawmakers Veolia Posts 24 Percent to Vote on Whether to Improvement in Latin Put Temer on Trial America Revenue France-based utility Veolia announced Monday Brazil’s lower house of Congress is scheduled that its Latin America revenue grew 23.7 Wednesday to vote on whether to put President percent in the second quarter due to signif- Michel Temer on trial for alleged graft, The Wall icant price increases and good volumes in In a video posted to Twitter, security agents are seen Street Journal reported today. If two-thirds of the region. Tariff increases in Argentina were putting opposition leader Leopoldo López into a patrol car the chamber approves the charges and the and driving away. // Image: @liliantintori. especially positive for results, the company Supreme Court agrees, Temer will be suspend- said, and as well as the consolidation of the opponents on Monday morning. In the raids, ed from the presidency for 180 days and will be Pedreira landfi ll in Brazil and the start-up of agents seized the two opposition leaders, who put on trial, The Guardian reported. However, if the Santa Marta water contract in Colombia. had been on house arrest—Leopoldo López, more than one-third of the lower house votes In May, Veolia signed a deal with Mexico City who less than a month ago was released from against the charges, which political insiders are worth $1 billion for a waste incinerator whose prison, where he was behind bars for more than saying is becoming increasingly likely as Temer heat will be used to power the city’s subway, three years, and Antonio Ledezma, the elected works to secure lawmakers’ support, then he Reuters reported. mayor of Caracas. “12:27 in the morning: the may successfully complete his term. Many of moment when the dictatorship kidnaps Leop- the lawmakers set to vote on whether to put Te- oldo at my house,” López’s wife, Lilian Tintori mer on trial are themselves under investigation wrote in a posting on Twitter, Reuters reported. as part of the “Operation Car Wash” corruption Brazil’s Pre-Salt Oil Tintori also posted a video that appeared to probe, The Wall Street Journal reported. “The Production Surpasses Rest show her husband being led into a vehicle real truth is that Car Wash doesn’t have the of Combined Output bearing the word “Sebin,” the name of Venezu- strength to defend itself against attacks from ela’s intelligence agency. Ledezma’s daughter, the most powerful institution of Brazil, which is Oil output at Brazil’s pre-salt offshore oil wells Vanessa, posted a video of intelligence agents Congress,” said lead Operation Car Wash pros- surpassed the combined output from all other taking away her father, who was dressed in ecutor Deltan Dallagnol. While Temer has been fi elds in Brazil for the fi rst time in June, raising pajamas. “The Sebin just took him,” she wrote. very unpopular among voters, with an approval the country’s oil output by 0.8 percent from Both opposition leaders had called for protests rating in the single digits, he has been more the month before to an average of 2.7 million following Sunday’s vote in Venezuela to elect successful as a negotiator. In recent weeks, he barrels per day, Reuters reported Monday. the constituent assembly, which may be seated has brought $1.3 billion in fi nancing for proj- Production at pre-salt oil wells increased to as early as Thursday. The powerful body will ects in lawmakers’ home states, according to 1.353 million bpd in June, up 6.4 percent from have the authority not only to rewrite the Con- Open Accounts, a public-accounts watchdog, the month before, according to Brazilian oil stitution, which Maduro says is needed to end with the goal of securing their support. watchdog ANP.

ECONOMIC NEWS FEATURED Q&A / Continued from page 1

Mexico’s Economic a chronicle of a scandal foretold, as Temer pate in large-potential plays in a country that Growth Slows Less has been under investigation for quite some offers a favorable operating environment. time. To maintain a legislative majority for Many of these plays have demonstrated Than Expected his reforms and avoid being removed from offi ce on corruption charges, Temer must Mexican economic growth slowed less than hold together an electoral coalition between Most analysts rec- had been expected in the second quarter, his own PMDB party and the PSDB. For now, ognize that there is due to strong output in the services sector as the coalition is holding, but there is little likely to be no major industrial production fl agged, The Wall Street expectation among political analysts and impact to oil regula- market actors that Temer will survive this. Journal reported Monday. GDP in the second tions and operating quarter grew by 0.6 percent as compared to Temer himself does not seem too confi dent the fi rst quarter and was up 1.8 percent year- in his political future, as he unceremoniously conditions in Brazil.” over-year, according to the National Statistics just replaced the minister of justice without — Cleveland M. Jones Institute. The second quarter was Mexico’s offering any explanation.” 16th consecutive quarter of growth, beating analysts’ expectations that growth would slow Cleveland M. Jones, research- the exceptional quality of the discoveries signifi cantly amid concerns that the election er at the National Institute of possible, especially in the pre-salt areas. Our of U.S. President Donald Trump in November Oil and Gas, member of the research has indicated potentially recov- would lead to worsening trade and investment A geosciences advisory board erable resources in the pre-salt alone, of relations between the two countries. “Today’s at NXT Energy Solutions and professor of between 176 billion and 273 billion barrels data should further allay the fears of a collapse geology at the State University of Rio de of good-quality oil, and even under a ‘lower in the Mexican economy that emerged in the Janeiro: “There are relatively few major for longer’ scenario, these estimates are aftermath of the U.S. election. In particular, the plays available for investors worldwide only slightly reduced. Obviously, there is strength of the domestically focused services that are easily accessible, in relatively safe much oil to be discovered. The exceptional sectors suggests consumer spending remains countries and which can be economically productivity of pre-salt fi elds is also an at- resilient,” Capital Economics’ Latin America produced with current technology. Despite tractive factor for potential investors, since economist Adam Collins said following the the momentary political upheaval in Brazil, many fi elds have individual well production publication of the preliminary reading from most analysts recognize that there is likely of 30,000 to 40,000 barrels of oil per day the National Statistics Institute. He added that to be no major impact to oil regulations and and more, thus reducing up-front costs for while higher local interest rates and infl ation operating conditions in Brazil. In fact, there installing fl oating production storage and could still slow down economic growth, the are ongoing initiatives that can even improve offl oading vessels (FPSOs) and production upcoming talks to renegotiate the North Ameri- the operating environment in Brazil. Brazil’s facilities. There are FPSOs operating with can Free Trade Agreement are unlikely to affect announced upcoming rounds, 10 in all, merely fi ve wells, when up to 18 wells would business and consumer confi dence. fi nally offer a measure of predictability, and otherwise be required. Companies will not allow longer-term planning. Thus, both the ignore these realities when deciding where concession rounds for post-salt areas, and to allocate their budgets for new exploratory Mexico Names the production-sharing rounds for pre-salt plays. Even Mexico’s Gulf of Mexico areas Smith as Top areas, represent exceptional opportunities do not match such attractiveness, despite for major world oil and gas players to partici- important modernization efforts there.” NAFTA Negotiator Continued on page 4 American Free Trade Agreement Offi ce at the great part of his life dealing with NAFTA,” a Mexico has named veteran trade policy expert Mexican embassy in Washington. He also senior Mexican government offi cial said. The Kenneth Smith as the country’s chief negotiator worked on Mexico’s original NAFTA nego- administration of U.S. President Donald Trump for the North American Free Trade Agreement, tiating team in the early 1990s. In addition, has said that reducing U.S. trade defi cits with or NAFTA, renegotiation talks scheduled to Smith coordinated the implementation of the Mexico and Canada has been its top trade pri- begin this month, Economy Minister Ildefonso agreement at Mexico’s economy ministry from ority. [Editor’s note: See Q&A on the upcoming Guajardo said Monday, Reuters reported. Smith 2002 to 2007, The Wall Street Journal reported. NAFTA negotiations in the July 28 issue of the is the current director of the Trade and North “He is a very talented man who has spent a Advisor.]

FEATURED Q&A / Continued from page 3 LATIN AMERICA ADVISOR is published every business day by the Inter-American Dialogue, Copyright © 2017 John Albuquerque Forman, di- decision-making agency for energy matters, rector of J Forman Consultoria further reducing the regulatory agencies’ Erik Brand and former ANP director: “On role. The Temer government fi rst proposed Publisher [email protected] your questions, starting from and Congress later approved changes that A Gene Kuleta the end, on the extension of international now allow Petrobras to decide if it will Editor investors scaling back possible investments: participate on pre-salt blocks and no longer [email protected] it varies, depending on the investor. As is required to be the operator. The roles of Nicole Wasson conditions deteriorate, prices for assets Reporter, Assistant Editor decrease, and that is considered a favor- [email protected] able condition by some seasoned investors The uncertainties and who recognize that Brazil will overcome its risk will remain, and problems in the future, as has happened investors will have Michael Shifter, President before. Others, more conservative, prefer to to bear with them.” wait and see what will happen in the future. Genaro Arriagada, Nonresident Senior Fellow — John Albuquerque Forman The main issues that are being considered Sergio Bitar, Nonresident Senior Fellow Joan Caivano, Director, Special Projects are the economic reforms being voted upon Michael Camilleri, Director, Peter D. Bell Rule of Law in Congress, if the process goes on, as it Program seems it will by the current developments, CNPE and the ministries were enforced and Kevin Casas-Zamora, Nonresident Senior Fellow and are approved, then the conditions for a made clear, and the agencies became even Ariel Fiszbein, Director, Education Program turnaround are given. As for the energy sec- more restricted to studies and fi scalization. Alejandro Ganimian, Nonresident Fellow tor, although the regulatory agencies were Any new government, if Temer leaves offi ce Peter Hakim, President Emeritus created from 1998 on, namely ANP, ANEEL, or if elections to take place in 2018, will Claudio Loser, Senior Fellow ANA, etc., with the role of regulating their probably bring its own views and will try to Nora Lustig, Nonresident Senior Fellow sectors, they eventually became subordinat- impose them, something that is impossible Margaret Myers, Director, China and ed to the ministries, starting with the fi rst PT to foresee now. The uncertainties and risk Latin America Program government in 2006. The Lula government will remain, and investors will have to bear Manuel Orozco, Director, Migration, Remittances & Development changed the laws to create profi t-sharing with them. Again, decisions will depend on Jeffrey Puryear, Senior Fellow contracts, to be applied to the pre-salt areas. the investors’ experience and willingness to Tamar Solnik, Director, Finance & Administration Also, Petrobras was given the rights to at face risks.” Lisa Viscidi, Director, Energy Program least a 30 percent stake in any block and to Denisse Yanovich, Director of Development and be the operator of the pre-salt areas. The The Advisor welcomes comments on its Q&A External Relations Dilma government put more emphasis on the section. Readers can write editor Gene Kuleta ministries and the CNPE, which became the at [email protected]. Latin America Advisor is published every business day, except for major U.S. holidays, by the Inter-American Dialogue at 1155 15th Street NW, Suite 800 Washington, DC 20005 www.thedialogue.org ISSN 2163-7962 Subscription inquiries are welcomed at What’s Keeping [email protected]

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