ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America

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

January 20 - February 3, 2010

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Chile's Codelco may receive new capital.

Investments are expected in the lithium industries in Bolivia, Chile and Argentina.

New oil projects in the Orinoco Belt in Venezuela.

Chile's Codelco may receive new capital.

On February 19th the president-elect of Chile, Sebastián Piñera, announced that state mining company Codelco needs a new infusion of capital to make it more competitive with the private mining sector. This concern comes even though between 2006 and 2009 Codelco contributed about US $25 billion to the treasury, with an annual production of 1.5 million tons of copper.

Piñera, an ally of the business sector who was nominated as a presidential candidate by the conservative "Coalición por el Cambio," blamed Codelco's current administration for decreased productivity.

Piñera has indicated his incoming government will supply new, long-term capital resources for Codelco, based on retained earnings and the modification of a policy that withholds 10% of gross income for  the Chilean military. However, citing the limitations of the Codelco administration, Piñera also suggested incorporating private capital into the mining company by opening 20% of Coldeco's ownership to the private sector.

This would not be the first time that Codelco has received an injection of fresh public capital. In 2009 the company received US$ 1 billion—a figure similar to current proposed amounts—to finance reforms in  its corporate governance. This time the goals include improving the company's technological performance and productivity; exploring more fields and intensifying the outputs of those under production now; increasing strategic partnerships; and improving environmental policies.

As is to be expected, several sectors are opposed to these proposals. Mining union leaders expressed their opposition to the possibility of partial-privatization, and are considering mobilizing action if they deem it necessary. Mining Minister Santiago Gonzalez, an appointee of former President Michelle Bachelet, likewise said that Chile’s public mining difficulties will not be solved by incorporating private capital, noting that, "Codelco is and should always be 100% stated-owned." And Codelco's Chief Executive, Jose Pablo Arellano, says that to increase its production levels, Codelco has developed an investment plan of US $2 billion in modernization projects.

Faced with these reactions, Piñera stressed that any change in Coldeco's ownership would require a constitutional amendment and therefore, the final decision must be agreed upon in Congress as the product of dialogue with Chile's civil society.

In this context, the newly appointed board of Codelco began operations in March, making it an opportune time to begin Piñera's project. However, according to Codelco's Law on Corporate Governance, President Bachelet, who was in office during the scheduled renewal of Codelco’s directive in February, was in charge of appointing the new directors of the company and the President of the Board. Bachelet did so, but not before establishing a consensus with Piñera, in order maintain stability in Codelco throughout the executive transition. (While other board members are elected by the executive, four independent candidates are proposed by the Council of Senior Management Service, and two others are employee representatives.)

With these considerations, the outlook for Piñera's plan appears uncertain. Piñera has announced his intentions for Codelco, but after facing thorny negotiations with the outgoing government, he must still contend with opposition from the Codelco staff.

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Investments are expected in the lithium industries in Bolivia, Chile and Argentina.

The Salar de Uyuni, a 10,000-square-kilometer area located in Bolivia’s Potosi region, contains an estimated 18 to 20 million tons of lithium—an amount that constitutes between 63.7% and 87.1% of the world reserves of this resource. The size of these reserves has predictably piqued the interest of several international companies.

The latest of approximately 50 drilling exercises made in the Salar de Uyuni doubled earlier estimates made by the U.S. Geological Survey (USGS), which projected there were nine million tons of lithium in the region. Some consultants and extractive companies argue that there could be yet more of the mineral, as the drilling exercises have been relatively shallow. More extensive exploration, they suggest, could reveal reserves of up to 100 million tons: three times the currently-known reserves of lithium worldwide.

The lithium, which is most often used to manufacture cell phone batteries and computers, is expected to become an alternative energy source for the automotive industry as well, as a key component of batteries for electric and hybrid cars. Therefore, not only mining companies but also automakers are interested in reaching agreements to exploit this resource in countries like Argentina, Chile, Mexico and Bolivia.

In Argentina, the third largest producer of lithium with exports in excess of 300 million pesos, the government and the Toyota Motor Corporation, in partnership with the Australian mining company Orocobre, have closed a public-private agreement for about $ 120 million to extract lithium from Salar Olaroz, located in Jujuy. In Mexico, 80 million tons of highly-concentrated lithium and potassium were discovered in 2009 by company Pietro Sutti S.A. in a salt region called El Zancarrón. These reserves could be exploited by Spanish, Asian or Canadian companies, all of which already have offered investments of over US$ 3 million for exploration projects alone.

After the Argentine government signed an agreement with Toyota recently, Chilean mining entrepreneurs, industry specialists and even parliamentarians have questioned the current regulatory framework around lithium as excessive for forbidding new actors from Chile's industry.

Indeed, they argue that, given the aggressive plans for investment in Argentina, Mexico and now Bolivia, the Chilean industry could be left behind despite having one of the largest and best stocks of the mineral, with 6.9 million tons of lithium in the region of Atacama alone. Currently, the Chemical and Mining Society of Chile (SQM) and the Sociedad Chilena del Litio (SCL Chemetall) are the only firms that have operating permits under Mining Concessions Law 18.097 and the new Mining Code, which ratified that lithium cannot be contracted out because it is reserved for use in the development of nuclear energy.

Meanwhile, Bolivia's government is keenly aware of having one of the largest lithium reserves in the world, and of its value and future demand. The government has evaluated bids from French, Japanese and South Korean companies which are seeking licenses to extract lithium from the Salar de Uyuni. Also, the possibility exists that the Bolivian state will invest its own resources into building lithium processing plants or forming partnerships with other companies. In 2008 the Bolivian government invested US$6 million to establish a pilot plant that produces lithium carbonate in the Rio Grande province of Nor Lipez, Potosi.

Although the exploitation of lithium opens new possibilities for the use of clean energy through car batteries, the local environmental impact of large-scale lithium exploitation has yet to be assessed. A new paradox emerges from the demand for the resource: developed economies are betting on a non-fossil energy source that would generate non polluting energy, but the potentially negative environmental impact of this new extractive activity on the producing localities and countries remains an open question.

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New oil projects in the Orinoco Belt in Venezuela.

The Venezuelan state-owned oil company Petroleos de Venezuela (PDVSA) is undergoing difficult times. The company had a US$ 21.4 billion debt at the end of 2009 and was hard-hit by falling oil prices. However, during the last weeks of January, key agreements for Venezuela's oil sector were reached, raising hopes of sector recovery through the implementation of new projects in the Orinoco Belt.

One of these new projects is the Junin Block 5, which will be operated by the National Hydrocarbon Company of Italy (ENI) through an energy cooperation agreement with PDVSA for US$ 18 billion. The project will establish a joint venture refining plant, in which PDVSA will have a 60% stake and ENI 40%. Refining activities are expected to start in 2017, and according to projections, the plant will process 350 thousand barrels of oil per day.

Likewise, PDVSA and Russia's National Oil Consortium (NOC), formed by Gazprom and OAO Lukoil Holdings, established a contract in which they will invest US$ 10 billion in the Junin 6 Block, also located in the Orinoco Belt, to produce 500 thousand barrels per day. The contract similarly provides for the creation of a joint venture in which PDVSA will own 60% of the shares and NOC 40%.

Furthermore, the Venezuelan government eased the tax scheme to tender three oil projects comprising blocks 1, 2 and 3 of Carabobo—also located in the Orinoco Belt—with the intention to turn the extra heavy crude oil into light crude for export. This arrangement entails a drop in state participation rates in strategic partnerships from 2007 and a reduced royalty rate from 30% to 20%, among other measures. The project will come online in 2016.

This initiative was welcomed by the major oil companies and various consortiums that chose to participate in the process. Venezuela has received several investment offers for these projects which will cost between 10 and 20 billion dollars and will produce up to 400 thousand barrels per day. Among the consortiums which submitted proposals are Repsol (Spain), ONGC (India) and Petronas (Malaysia), and another by Chevron (US), Suelopetrol (Venezuela) and three Japanese firms: Mitsubishi, Jogmec and Inpex.

PDVSA expects more funding to continue with other projects in the Orinoco Belt, such as the Mariscal Sucre or Junin 10 Blocks, which have estimated values of US$ 8 and 25 billion, respectively. With this in mind, the Venezuelan government has not only continued to invite companies to participate in bidding processes, but is also holding a series of direct negotiations with representatives of the state-owned China National Offshore Oil Corporation (which developed the Boyaca 3 Block since last December), along with two other important Chinese state-owned companies: the China National Petroleum Corporation and the China Petrochemical Corporation.

It seems that Hugo Chávez's government is softening the terms of negotiations to partner with other state and private oil companies on new investment projects, and thereby reverse the country's financial hardships due to low oil income, debt and the energy crisis.

While some private companies are responding favorably to these new negotiating conditions, most companies that have established contracts with PDVSA or that are participating in current bids are national oil companies from Russia, India, Malaysia and China. This suggests that Asian companies interested in exploration projects in this area have developed the technology required to extract heavy oil and have the capital needed to invest.

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Sources: El Mercurio, Clarin.com, La Razón, Eldeberdigital.com, El Universal, The Wall Street Journal

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