Cambridge Energy Conference Notebook: Latin America and the Middle East Are Still Kicking

But every silver lining has a cloud.
Author:
Publish date:

HOUSTON -- Despite Brazil's economic trouble, Latin America remains a bright spot in the global energy arena.

Throughout the region, energy demand has remained healthy, with approximately 3% growth in demand for oil products expected this year, compared with flat demand worldwide. The increase in demand will put more pressure on the energy infrastructure throughout the continent and will bring more opportunity for government privatization, said William Durbin, director of Latin American energy at

Cambridge Energy Research Associates

.

Nearly all the 1,400 attendees at Cambridge's annual conference packed into a room here Wednesday to hear a panel of the firm's experts offer their views on the global energy markets.

Some highlights:

  • There's a caveat to everything in the energy business these days, and that extends even to the bright spots. Companies that want to invest in Latin American markets need to be comfortable with risk and need to be hedged against currency risks in the region, Durbin said.
  • Opportunities with the four main Middle East producers -- Saudi Arabia, Kuwait, Iran and Iraq -- are real, said James Placke, director of Cambridge's Middle East research.
  • In Kuwait, Placke sees the government signing a "super-service" contract with a major international oil company this year. The lucky oil company would not actually own reserves there, but it would supply cash, expertise and technology and receive a portion of the proceeds. The key is approval by Kuwait's parliament for such an arrangement as well as winning over the populace. Iran is overwhelmed by a fiscal crisis, Placke said, and the best way out is by receiving international investment in its energy sector. A concern to U.S.-based companies is that Iran has already turned toward Europe for these investments. International relations with Iraq will remain tense, but that will not stop investment in its energy sector.
  • Cambridge sees a recovery, but not a rebound, in Asia's economies. Economic growth in the region will be less than 1% this year, said Dennis Eklof, senior director of Asia Pacific Energy, though that could rise to 3% by 2003.
  • Right now, there is a lack of economic consistency throughout the region, a major factor needed for a full rebound, Eklof said. For example, there are signs of recovery in Thailand and Korea, but not in Japan or China. That lack of consistency has led to risk. Again, the focus is on Japan. "You do not see the commitment to change by Japan's government," he said. There are no real signs of increases in consumer confidence, and the government is on a massive spending spree to try and stimulate the economy. In addition, massive additions to the governments bond debt is "an ingredient for a hard landing in Japan over the next 12 months," he said. This year Japan's economy will contract 0.7%, the second year of decline.
  • Shifting from one difficult area to another, Thane Gustafson, Cambridge's director of Eurasia energy sees opportunity in Russia because its credit rating is at rock bottom and the bulk of Western countries have fled after the devaluation debacle last August. Changes in Russian policy, especially in the niggling area of production-sharing legislation set up between Russian companies and Western partners, will make the country more attractive, Gustafson said.
  • There is also the highly sensitive political machinations taking place in the area of succession to President Boris Yeltsin. Russia will continue its export efforts -- Gustafson sees Russian exports rising from last year's record at the same time as its overall production is dropping. But great uncertainty lingers, to the tune of 3 million barrels per day. Depending on the country's access to capital, by 2010 Russia could produce 7 million barrels per day. If that capital does not come through, production will be closer to 4 million barrels, Gustafson said.
  • Last year was the year of the megamerger. But remember, making a merger work is more important than the merger itself, said Julian West, Cambridge's senior director of oil strategy. As the prospect of continued merger mania pervades the industry, it's important to remember that the advantages seen today in terms of building a larger, more attractive asset portfolio may turn into tomorrow's disadvantages, West said. A few years from now, today's attractive portfolio may seem huge and unwieldy, and managing it may be akin steering a supertanker.
  • Quote of the day: "Experience is what helps you recognize a mistake -- when you make it again," said West.