ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America

By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and George Bedoya

November 25 - December 20, 2009

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Negotiating collective agreements: Chile and Venezuela.

Colombia positions itself as a major player in the hydrocarbon sector, as Ecuador and Venezuela face an energy crisis.

Brazilian states and municipalities are negotiating the distribution of future revenue generated by Pre-sal oil fields.

Colombia: Ecopetrol could sell its shares to cover large-scale infrastructure investments.

Negotiating collective agreements: Chile and Venezuela.

In the last weeks of November different collective bargaining negotiations began between workers and companies in Chile and Venezuela's extractive sectors.

In Chile, the Escondida Mine, owned by the Anglo-Australian company BHP Billiton, gave its workers a bonus in October, after several months of negotiations, which raised the expectations of other workers in the mining sector. Indeed, the Spence Mine (also owned by BHP Billiton) and Codelco Norte (main division of the state-owned mining company Codelco) will also begin negotiating its workers' collective contracts later this year.

As a result of the negotiations, BHP Billiton awarded workers a bonus of 14 million pesos, a zero-interest loan of 3.5 million pesos and a 5% wage adjustment, in addition to other benefits which, in total, will add up to approximately US $100 million. Based on this experience, workers from the Spence Mine are also demanding a bonus of 15 million pesos, though the company has only offered 8.5 million pesos. Mine representatives argued that the Escondida Mine increase cannot be used as a benchmark for the Spence Mine request, because the production realities of the companies are different. Escondida produced 1.255 million tones of fine copper in 2008, for instance, while Codelco Norte and Spence produced 755 thousand and 164 thousand tons respectively.

As a result of this impasse, workers of the Spence mine went on strike beginning October 14, generating losses valued at US $110 million so far and further complicating the negotiation process.

Finally, BHP Billiton decided to offer the workers a bonus of 7 million pesos, a 2 million pesos loan and a 4% wage adjustment for 41 months, as well as other benefits. This offer was accepted by 75% of workers, but the negotiations ultimately failed since the union demanded that the workers who broke the strike be excluded from the benefits. Codelco Norte, on the other hand, presented a proposal for a new collective contract that will be in force for the next 36 months, which established a wage increase close to 11.5 million pesos per worker, including a 7.5% adjustment.

Like their Chilean counterparts, the Venezuelan Oil Workers Union will begin a process of collective contract negotiations with the state-owned oil company PDVSA. However, the context is different, not only because it is an oil company, but because of the current financial state of PDVSA, which is highly indebted and reported cash flow problems for the first half of 2009, when PDVSA's profits fell by 67% due to both the volume of oil sales—output was affected by the cuts established by OPEC to respond to the contraction of demand—and to the 51% drop in international oil prices. Furthermore, the company cut its investment in strategic areas, such as exploration and production, by 29%; has accumulated debts with its suppliers which amount to 8.1 billion pesos; and has also increased its payroll by 17% after nationalizing companies that provided services in the oil sector. Faced with this situation, PDVSA has been forced to turn to public institutions for financing.

It is in this adverse context that the representatives of the union have begun negotiations. Their main demand was a 159% wage adjustment, which was based on the medium term contract proposal the union produced last year. The Ministry of Labor and Social Security will call a meeting between the oil union and PDVSA representatives to begin discussions about the contract for upcoming years.

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Colombia positions itself as a major player in the hydrocarbon sector, as Ecuador and Venezuela face an energy crisis.

The energy crisis that Ecuador and Venezuela faced in the final weeks of 2009 revealed the important role of Colombian energy in that part of the region. Indeed, since 2007 Colombia has sold natural gas to Venezuela (at a rate of 150 million cubic feet a day) and, more recently, electricity to Ecuador, which also imports about 700 thousand barrels of diesel from Colombia and Venezuela to ensure its energy supply.

It appears that at a time of energy shortages—caused by drought that affected the main Ecuadorian and Venezuelan hydroelectric plants—Colombia has been better prepared than other countries. In this context, investors from the Colombian oil sector have increased their activities in oil exploration as well as infrastructure, both for the medium and the long term, seemingly confident that national and regional energy consumption will increase in coming months and years. Indeed, the director of the Colombian National Hydrocarbons Agency not only declared that oil findings in 2010 will extend energy self-sufficiency for over nine years, but also stressed that 2009 foreign investment reached US $3.5 billion and is expected to be even higher in 2010.

Additional evidence of a robust Colombian energy sector is in the rising value of the shares of Ecopetrol, the Colombian state-owned oil company, and the successful entry of the company Pacific Rubiales Energy onto the Colombian stock exchange. It is also important to note that mining companies show a similarly optimistic outlook.

Meanwhile, in Ecuador, the volume of oil exports fell from 10 to eight million barrels between August and September—generating a deficit in the country's balance of trade and resulting in a loss of US$ 511 million. On the other hand, in Venezuela, PDVSA confirmed a decline in profits in the first half of 2009 as a consequence of the fall in oil prices and the production cuts agreed to by OPEC.

The increasing participation of the Ecuadorian state in oil production has not led to higher production levels. To the contrary, production has decreased by 11% in the last three years. Therefore, some analysts argue that the state-owned oil company Petroecuador should be declared in a state of emergency since it is currently producing at only 2006 levels. Moreover, the current hydrocarbon policy has failed to give the necessary incentives for private investment to increase its production, which has fallen by 22% during the current administration. The Ecuadorian government hopes that this will change once it signs new contracts with private oil companies and joint ventures with other state-owned companies.

In Venezuela, the crisis has become so acute that PDVSA had to cut gas delivery to industrial power plants, which has caused concern in the commercial sector. Given the irregularities in electricity supply, Venezuelan electric companies that were indebted to PDVSA, such as the Compañía Anónima de Administración y Fomento Eléctrico (CADAFE), saw an opportunity to pay them off by providing energy to those plants PDVSA could not supply with gas.

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Brazilian states and municipalities are negotiating the distribution of future revenue generated by Pre-sal oil fields.

In late August, 2009, Brazil's Executive sent four bills to Congress that could make up a new legal framework for the exploration and exploitation of oil reserves located in the Pre-sal area—the largest hydrocarbon discovery in the world since 2000. However, one issue that was postponed was the revenue distribution plan between the federal government, producing and non-producing states.

According to the law currently in force (Law Nº 9.478) the resources of the special share—established for oil fields with large volume production or high profitability such as the Pre-sal—are distributed as follows: 50% for the federal government, namely the Ministry of Energy and Mines, Environment, Water Resources and Legal Amazon, 40% for producing states and 10% for states' producing municipalities.

In the last weeks of November, as part of the ongoing discussions regarding distribution of new Pre-sal resources, producing states and non-producing states met with the central government to discuss future arrangements. The governors of the states of Rio de Janeiro and Espíritu Santo reached an agreement establishing their participation at 25%, with the federal government keeping 19% of the royalties, producing municipalities 6%, and non producing states and municipalities receiving 44%. The agreement was sent to a special commission of the legislative branch to be evaluated and then debated in Congress.

Meanwhile, producing states in the continental platform negotiated an increase of their share of future revenue from royalty payments, while inland producing states ended with a decrease in their share, from 52.5% to 20%. After these agreements were reached, inland state representatives claimed they had not been informed of the coastal states' agreements.  The inland states are now seeking to go back to the original distribution, a decision that will finally be made by Congress.

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Colombia: Ecopetrol could sell its shares to cover large-scale infrastructure investments.

Colombian state-owned oil company Ecopetrol reported positive production figures for 2009, although lower levels of oil prices and an unfavorable exchange rate did affect its income. Ecopetrol, the nation's leading oil company and the fourth largest in Latin America, increased production by 9.3% in the first nine months of 2009 as compared to the same period in 2008, while income over the same period fell from 9.97 billion pesos in 2008 to 7.37 billion pesos for 2009.

In this context, the Colombian government sent to Congress a bill that proposes the sale of 15% of Ecopetrol’s shares to finance large-scale infrastructure projects such as the Las Américas route, the Montaña highway and a two-way highway from Bogotá to Villavicencio, all of which are part of the strategic Highway Program, Proesa.

To date, the initiative has been approved by the Minister of Mines and Energy and the President of the Republic, with only the approval of the Minister of Finance pending. Once the project has the authorization of Congress, the government may finally be able to sell 15% of its shares, worth US $7,500 million at 2009 prices. But it is important to note that Ecopetrol has already put 10% of its shares up for sale and another 10% is about to be released. After selling this third stake, the government will maintain 65% ownership of Ecopetrol.

The sale is seen as positive for the sector, since production volumes have reached 700 thousand barrels of oil per day, and are estimated to reach 800 thousand barrels per day during 2010. In addition, the company plans to invest US $3.8 billion for the expansion of the Cartagena refinery, which could produce 165 thousand barrels oil per day, along with US $3.5 billion dollars for treatment plants and other infrastructure projects.

Furthermore, Ecopetrol has decided to participate in the Lima Stock Exchange, becoming the first Colombian company to be listed on a Latin American exchange. The American Depository Receipt (ADR) the company submitted is being registered according to the procedures established by the Peruvian National Stock Exchange Supervisory Entity (CONASEV).

However, the planned 15% sale would not be done through the stock exchange, because the shares would be offered exclusively to Public Territorial Pension Funds in Colombia. This means that the measure would not increase private sector participation in the state-owned company, as in the case of Petrobras in Brazil, but that the financing would come from public resources. The fact that the Territorial Pension Funds will obtain representation within Ecopetrol's Board of Directors has generated criticism from the small private owners of Ecopetrol's shares. Indeed, Marucio Cárdenas, the representative of this group of small private shareholders, said that "due to the large fiscal needs of these territorial entities, they will be more focused on the cash flow generated by the company instead of its long-term growth."

Therefore, what appears in some ways as an attempt to privatize a greater share of state-owned Ecopetrol is in reality only a way to secure financing in order to maintain Ecopetrol's high level of investment while retaining state control over the company.

The case of Mexico's national oil company, which was also discussed recently, is very different. Recent debates there have focused on the possibility of seeking private investment for oil fields in areas currently reserved for the state by law. Indeed, the head of the Energy Secretariat of Mexico, Georgina Kessel, said that the Executive is considering the constitutional changes needed to allow for private companies to operate in areas that are currently reserved because they are considered to be of strategic national interest. These changes would be part of a "new generation of reforms," following the Pemex Reform approved in November of 2008. It is noteworthy that while these changes would allow private companies to increase their presence in the Mexican oil sector, the companies would be restricted to providing services and have no ownership of the hydrocarbon resources.

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Sources: El Mercurio, El Comercio, Elcomercio.com, Eldeberdigital.com, El País, El Universal, La Republica.com.co (Columbia), La República (Peru), Portafolio.com.co, Folha Online

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