INSIGHT: Brazil’s new dancing partner in the Andes

06 September 2007 16:48  [Source: ICIS news]

By John Waggoner

HOUSTON (ICIS news)--Peru is the belle of the ball for new investment in petrochemicals in South America.

Brazilian state-run Petrobras is mulling opportunities in Peru as part of its regional expansion strategy within petrochemicals through 2012.

Last year, Petrobras signed a letter of intent with Peru to study large-scale petrochemical investments – estimated in the range of $800m – in that nation’s southern section, most likely either in the Arequipa or Moquegua regions.

Peru has made steps toward infrastructure reforms but progress has been slow.

The project now hinges upon the development of the feedstock supply and promised reforms that have yet to make their way through Peru’s Congress.

Peru’s economy is strong overall despite persistent vulnerability to volatility in commodity prices and the reluctant pace of tax reform.

One sign of Peru’s strength is that even with a devastating earthquake in August, Peru’s fiscal outlook remains favourable this year at a surplus or at least near balance, according to Theresa Paiz Fredel, senior director for the Andean region at Fitch Ratings.

She said Peru’s orthodox fiscal policies and the ability of charismatic president Alan Garcia should contribute to continued economic growth.

“Investments do pretty well in Peru,” she said in an interview.

Peru’s legal framework has weak points at the local government level, which is typical of Latin America in general, she said. Investor disputes in Peru are not common, however, and when they occur, provisions for arbitration help provide additional protection that investors’ interests will be preserved, Fredel said.

Infrastructure development is still closely tied to government policy in Peru, but overall the region ranks among the most favourable for investors of any country in Latin America – a status enjoyed by Brazil, Chile and Colombia as well.

Especially for a state-run company such as Petrobras, the heavy hand of the central government in Peru is not necessarily an obstacle, and could even be a benefit, considering diplomatic support and ongoing regional cooperation.

Peru has every reason to pass the reforms. If the investments by Petrobras do go forward, the country’s incipient petrochemical industry would be set to flourish.

Local agriculture would provide demand for urea and ammonia in fertilizers, and the country could become an exporter of these chemical products which would contribute to the trade balance and the economy as a whole.

There can be no certainty that the plans will go ahead, but Peru appears to have the golden formula of abundant local feedstock, stable economy and institutions, with an export platform into the Pacific.

For its part, Petrobras has left no doubt about its goals to recover its position as a leading petrochemical producer in the region.

Brazil’s Braskem is the predominant producer in Latin America and it too has the ambition to expand regionally.

Moreover Braskem wants to shift its feedstock reliance away from imported naphtha toward the abundance of ethane available in the region.

Institutional stability however is an important part of the equation.

But both Braskem and Petrobras have stepped back from talk of investments in Bolivia - the country with the most obvious source of natural gas.

President Evo Morales strained relations with Brazil last year after rolling in military vehicles to seize facilities operated by Petrobras, causing Braskem to re-think its plans to invest in a petrochemical facility with Bolivia.

Venezuela too might seem an obvious choice for Brazilian investment, given Braskem’s intended projects there.

However, when Venezuelan President Hugo Chavez last month raised the spectre of nationalisation with the so-called “petrochemical revolution”, even Braskem with its core-competence in partnering with state-run enterprise must have been taken aback.

Similarly, a planned PDVSA-Petrobras joint venture to build a refinery in the northeast of Brazil is uncertain, with talk now that Brazil might go it alone.

According to a study on infrastructure in April by the World Economic Forum, Peru remains one of the most attractive countries for investment in Latin America, while Bolivia and Venezuela rank among the worst.

“In Bolivia and Venezuela, general investment conditions are poor…The challenge for these countries is the adoption of an extensive agenda of reforms targeted at improving the general investment climate,” the study concluded.

As Latin America becomes ever more prosperous, the region’s governments will have to balance rising social pressures to reduce inequity with the necessity to foster investments that bolster self-reliance.

Peru appears capable of doing just that.

For Brazil’s producers as well it makes perfect sense to expand in the region.

At a time when Venezuela and Bolivia are stepping on their partners’ toes, Peru is ready to dance.

By: John Waggoner
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