The trouble with economic booms is that “crazy” is largely a matter of timing.
For anyone who was paying attention in the 1980s, the idea that Brazil, with its runaway inflation problems, would emerge as a powerhouse driver of global economic growth while developed economies struggled in the mid to late 2000s would have seemed unlikely at best. But the country’s political and currency troubles always masked a vibrant commercial tradition and the nation’s physical advantages and resource wealth are self-evident.
Brazilian companies have been major players in the revival of Latin America’s energy sector – or more accurately, the revival of its non-Venezuelan energy sector. Chavez-style politics drained Latin America’s traditional oil giant of foreign capital and expertise and renewed global interest in everything from the Colombian oil sector, once written off as an also-ran, to complex and expensive deep sea reserve development off the Brazilian coast. With Mexico’s once-vibrant energy sector hamstrung by a recently-challenged government monopoly on development and Argentina’s high-profile and damaging meddling in Repsol-YPF, the stage was largely empty for the arrival of new players in the Latin American energy sector.
Cometh the hour, cometh the man: Elke Batista, a classic showman of business who had a strong if attenuated record of building enterprises in his native Brazil, was suddenly the face of the Latin American energy business. From plans to build a giant new coal export complex in Colombia to shipyards, oil platforms and gas fields, one of Batista’s branded “X” companies was involved. He rode his notoriety and the general enthusiasm for the Brazilian energy sector to the top of the country’s list of billionaires, and has been regularly photographed with the country’s president Dilma Rousseff.
At conference cocktail hours, or behind the scenes of business meetings, it was common to hear that Batista and any one of his projects was “crazy.” Crazy large, crazy financing, crazy attention-getting. But it is hard to argue with results, and those billions didn’t come from thin air. Brazil had been defying expectations for so long, it seemed possible that even Batista’s crazy projects could make somebody a lot of money.
Now, as Brazil’s broader economy stumbles, the man who was the emblem for much of its go-go era is facing problems of his own. The complex and unclear relationships between his firms OSX, OGX, LLX Logistica and the parent firm EBX Group, once seen as synergistic, have begun to overshadow the future of individual projects in the energy sector, some of which have failed to meet production goals. Projects like a high-profile shipyard in Rio de Janeiro state have been cancelled, and shares in one of Batista’s firms OSX have plummeted more than 90% in the past nine months.
As Batista goes, so goes the Latin American energy sector? Now that greater realism about the promise of both the sector and the region is settling in, and a mix of North American production growth and slowing Chinese manufacturing offsets the promise of market demand growth from the obvious destination of much of that planned production, it is reasonable to wonder what happens to the region’s energy economy next.
Batista’s meteoric rise and fall shouldn’t be seen as a proxy for the Latin American energy sector as a whole. In many ways, it has been his company’s failure to contend with the specific operational, legal, financing and development challenges of each mega-project that has resulted in many of its problems, and it would be a mistake to repeat that error by painting every project in the region with the same brush.
After more than decade of contending with the fallout of first the rise of Chavez and his imitators, then the global financial crisis and now the wobbling of Brazil’s growth story, energy sector fundamentals in Latin America are actually looking surprisingly promising. Mexico has signaled it would like to follow Colombia’s low-profile route of welcoming foreign partnerships in developing its oil, and even in Brazil the greater realism about the promise of deep sea oil development is probably beneficial in the long term to getting the projects done (and not spending the oil wealth before it arrives). It is always possible for things to get worse in the Venezuelan industry, but it has been sufficiently marginalized in global markets to limit the fallout of further production declines.
As always in energy markets, fundamentals and detail-oriented operational excellence matter more over the long term than flash. That is as true in Latin America today as it ever was, and energy investors in the region would do well to treat the Batista Affair for the distraction it is.
