Latin America is a region ripe with investment opportunities, but also one bedeviled with perils. The future of Latin America’s largest economies; Argentina, Mexico and Brazil, is looking uncertain. Yet foreign investors continue to turn up in the most unlikely of places.
Venezuela is one of Latin America’s riskiest countries. While Hugo Chavez, Venezuela’s mercurial president, has frightened off all but the hardiest investors with his economic nationalism, anti-American tirades and overtures to unsavory leaders of other oil-rich states such as Libya and Iraq, an active program of legislation is underway to restructure foreign investment laws. And some investors have been willing to place their bets that Venezuela is a country where they can do business.
AES was one such investor. It took a long-term view on Venezuela when it bought Electricidad de Caracas last year in a $1.66 billion hostile takeover. It has also recently launched another $1.4 billion unsolicited takeover bid for Venezuela’s national telephone company Compania Anonima Nacional de Telefonos de Venezuela (CANTV). But is this below-book value offer a confirmation of AES’s continued interest in Venezuela? Or is it an attempt to force a counter offer from existing investors, Telefonica and Verizon, and cash out of its stake in the Venworld Consortium? It could well be the latter given Chavez’s latest legislative efforts.
Just as multinational energy companies were getting comfortable with investing in oil exploration and development projects, President Chavez decided to raise royalty taxes from 16% to 30% in a new Hydrocarbons law, expected to be passed by the national executive in mid-November (see Promulgations page 8). Chavez awarded himself
special enabling powers to speed up legislation. The law would require Venezuela’s national petroleum company Petroleos de Venezuela (PDVSA) to take a 51% stake in all future oil exploration projects, something PDVSA would find practically impossible to do given the enormous up-front investment and high risk involved in offshore oil exploration.
The hydrocarbon law may successfully raise cash in the short-term but threatens to damage Venezuela’s already fragile relationship with multinational investors in the long-term. Venezuela will need these multinationals if it wants to start developing another highly lucrative industry; natural gas. Venezuela has vast natural gas reserves off its coast and Chavez is already indicating that natural gas will fall under the new hydrocarbons law and not the Organic Gaseous Hydrocarbon law as it has done in the past. The country is already losing investment to another oil producing neighbor: Trinidad & Tobago. President Chavez needs to realize that foreign investors will come to Venezuela only when they trust there is a democratic process for establishing the rule of law. Changing the law arbitrarily to serve short-term fiscal objectives, without any indication that the long-term concerns of foreign investors have been considered, is a recipe for disaster. If in any doubt, look over the border into neighboring Brazil to see how restrictive legislation can drive investors away and, at least in Brazil’s case, sink a country into an energy crisis.
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