Venezuela remains Latin America's energy hotspot   
Oil and Gas Journal 

HOUSTON, Jan. 20 -- The Latin American energy sector, with the 
exception of Venezuela, appears positioned for growth with improving 
capital market conditions, renewed investor interest, and decreased 
sovereign credit risk, the Chicago-based Fitch Ratings Ltd. reported. 
"Beyond navigating a period of turbulence that has significantly pressured 
Latin American energy, sector participants appear for the most part to be 
facing calmer conditions. Until the second part of 2003, regional sovereign 
creditworthiness was exhibiting a deteriorating trend," Jason Todd, a Fitch 
senior director, said during a conference call on Jan. 15. 

Regional access to capital was difficult and expensive last year while 
liquidity pressures and corporate defaults were widespread in Venezuela 
and Argentina, he said. 

"Investors and shareholders witnessed firsthand the volatility that comes 
with Latin America's energy industry's close link to the respective 
sovereigns. Recent positive macroeconomic trends include improved 
financial liquidity and increased capital market access," Todd said. 
Conditions now may be sufficient for most Latin American countries to 
achieve near-term to midterm energy goals, he said. 

"Despite improved market liquidity, access to capital will remain 
constrained by the energy companies' close alignment with the 
sovereigns—many of which, with the exception of Mexico and Chile 
remain firmly planted in the speculative rating category," Todd noted. 
The outlook for each major energy player differs, reflecting the volatility of 
an individual country's sovereign environment. 

Venezuela 
"Venezuela will be the energy sector's primary hotspot for at least the first 
half of 2004¿. The political environment remains highly charged," Todd 
said. 

Venezuela's state oil company Petroleos de Venezuela SA (PDVSA) 
remains subject to the political environment and continues to experience 
ramifications from last year's strike. 

The company has been hindered in efforts "to extricate itself from the 
surrounding events and effectively move forward. The recall of President 
Hugo Chávez could occur by May, but delays are still possible. Significant 
uncertainty and volatility will remain until after the recall election," Todd 
said. 

Opponents to Chávez submitted petitions in August 2003 calling for a 
nationwide referendum. 

PDVSA has increased its 2004 budget, nearly doubling its 2003 capital 
expenditure program. The company is expected to invest nearly $5 billion 
during 2004, primarily focused on improving refinery output, he said. 
The company's capital investment program also calls for significant third-
party investments in 2 to 5 years. 

"But the near-term appetite from potential sponsors and investors for 
Venezuelan risk is uncertain in the current environment. This coupled with 
increased PDVSA's cost of capital may result in a scaling down of new 
projects in the near term," Todd said. 

Brazil, Mexico 
Brazil state oil firm Petróleo Brasileiro SA (Petrobras) clearly has benefited 
from improved market conditions, and probably will be able to arrange 
financing to implement its near-term investment plans, he said. 
"We expect the company's stated 2004 capital expenditure budget to be 
$8 billion, up from roughly $7.2 billion for 2003. It is to be directed toward 
for exploration and production in gas and also for the petrochemical 
business," Todd said of Petrobras. 

Regarding Mexico's national oil company Petróleos Mexicanos, he called 
the outlook "status quo." 

"Efforts to increase Pemex's long-term competitiveness, including 
increasing its stand-alone financial flexibility, and opening opportunities for 
third-party participation in the upstream activities, have been plagued by 
political infighting between the Vicente Fox administration and the 
Institutional Revolutionary Party, the opposition party," he noted. 
Pemex has a solid, near-term oil and gas reserve position coupled with an 
attractive upstream cost structure. This creates confidence that it can 
generate enough production to fulfill growing domestic and export 
demand, Todd said. 

"For 2004, Pemex's budget should be approximately $11 billion with 
roughly 75% directly toward exploration and production," he said. 
Over the medium term, Pemex's outlook will continue to be influenced by 
three fundamental factors: exposure to political risk, vulnerability to cash 
flow redirection to the sovereign, and the company's ability to attract 
private investment in the absence of material reforms to address the 
company's tax burden. 

He expects Pemex will be able to attract third-party financing given current 
capital market conditions in Mexico. 

Meanwhile, Mexico is expected to help drive the drilling services sector in 
the Gulf of Mexico in 2004. 

Pemex has announced plans to spend more than $8 billion this year on 
exploration and production, said Patrick McGeever, Fitch director on 
drilling and services. 

"It is Pemex's goal to increase crude oil production by more than 20% and 
natural gas production by more than 50% by the end of 2006," McGeever 
said. 

To reach these goals, Pemex will need to exploit Campeche Sound fields, 
which are typically at 260 ft of water and ideal for jack ups, McGeever 
said.