Peter LangshawGlobal and Latin America Sector Sales Head, Treasury and Trade Solutions, Citi

Ed MorseGlobal Head, Commodities, Citi

Treasury and Trade Solutions

Investing in Latin America: Today’s Energy Market TransformationWith announcements of major potential investments of over $300 billion in the next 10 years, Latin America is rapidly becoming one of the most attractive regions globally for investments by the world’s largest oil companies. Compelling opportunities are emerging, such as Brazil’s pre-salt, Argentina’s shale and Guyana’s frontier oil play. Therefore, many governments are taking solid market-oriented approaches.

The opportunities come from a widespread recognition that resource nationalism has brought more impediments to the fore, raising the costs of production in a more competitive global environment characterized by an abundance of resources. Brazil and Guyana are benefitting from the dramatic drop in production costs and the security of investment capital, helping to lead to continued market liberalization and investments elsewhere, including in Argentina and Colombia. The opening in Mexico under its last government continues to provide attractive opportunities there as well. But elsewhere the history of resource nationalism has dramatically undermined the production system in Venezuela and poses obstacles to continued reform in Argentina, Ecuador and Mexico.

In this feature, Peter Langshaw, Citi’s Global and Latin America Sector Sales Head for Treasury and Trade Solutions, interviews some of the key policy makers, industry leaders and specialists within the region. This feature helps bring together key insights on why oil majors and national oil companies (NOCs) are embracing these market opportunities through new technology and the digitization transformation of the energy sector, and why it will contribute to future success.

Decio OddoneGeneral Director, Brazilian National Agency of Petroleum, Natural Gas and Biofuels (ANP)

Pedro MedeirosDirector, Latin America Energy and Petrochemicals Research, Citi

Ernesto RevillaHead, Latin American Economics, Citi

Jim ReillyVice Chairman, Global Head, Energy Corporate Banking, Citi

Treasury and Trade Solutions2

BrazilBrazil offers one of the most promising oil and gas opportunities in Latin America, home to the largest offshore oil discoveries of the last decade, including most of the world’s deep-water oil discoveries and 36% of the world’s oil discoveries.1 Huge potential remains in onshore, conventional offshore and unconventional deep-water, pre-salt reserves. Currently, there is less than five percent of the sedimentary areas contracted,1 which presents a significant opportunity for expanded exploration of oil and natural gas reserves.

Consequently, the government is focusing on boosting exploration and production, as well as encouraging capital investments from private players. Brazil is relaxing bidding rules to reassure local firms and medium-size foreign explorers to participate, joining majors already established in its vast pre-salt region.2 These changes have included developments of a five-year licensing round agenda, the creation of a regime of open access for onshore, mature field investments and the restructuring of Petrobras, Brazil’s semi-public energy company.

“Latin America’s oil and gas industry is undergoing a dramatic transformation with huge potential investment opportunities for local and foreign firms, yet with a number of concerns. Even so, new huge developments in Latin America will keep the Atlantic Basin in surplus, especially in oil, and will help ward off the resource curse wherever production can grow.” — Ed Morse

“An enormous transformation is happening in our industry now: the success that we have achieved attracting large companies to operate in the pre-salt reserves, the new measure we are taking in order to attract small and mid-sized companies to the mature fields and the opening and the diversification in the natural gas downstream sector. This puts us in a circumstance that we have never been in the verge of creation of the diverse, competitive and attractive oil and gas sector in Brazil as a whole. It’s a unique opportunity not only for the large companies, but especially for the suppliers.” — Decio Oddone

3Investing in Latin America: Today’s Energy Market

Recent bidding rounds held in Brazil have attracted seventeen of the largest energy companies, resulting in $7.4 billion in upfront fees, with $112 billion in investment revenue and $425 billion1 in additional tax revenue expected over the next ten years. There are two waves of open acreage bidding rounds taking place from 2019 until 2021, with the next round in October 2019. The first wave will offer 722 blocks in nine onshore basins and 162 blocks in six offshore basins, in the second wave, 85 blocks in seven onshore basins and 969 blocks in 13 onshore basins.1 Large pre-salt and concession bidding rounds will also take place over this period.

On the upstream side, the Transfer of Rights (TOR), a zone off the coast of southeastern Brazil and part of the larger pre-salt, oil-producing zone, has emerged this year as one of the world’s most promising conventional oil plays. While the government granted Petrobras the rights to extract five billion barrels of oil, the volumes are estimated to be much larger (six billion to 15 billion barrels per day). The surplus is being tendered in November this year, for the rights to extract the excess oil in the TOR. Besides the bonus payment to the government (total of $27.5 billion), plus compensation of $9 billion to compensate Petrobras for exploratory work already invested, further investments of $105 billion are expected to follow.3

6.000.000

5.000.000

4.000.000

3.000.000

2.000.000

1.000.000

0

2016

2017

2026

2025

2024

2023

202220

2120

202019

2018

The pre-salt region has the potential to contribute with the largest non-OPEC production growthin the decade to come. According to IEA, Brazil will be one of the four countries responsible for covering

the world’s demand growth up to 2020.Source: ANP

Brazilian Oil Production Forecast (bpd)

+

39 R$845New

platformsBillion of potential

investments in development

1% addition inthe Brazilian

recovery factor: $18bnNew Investments

2,2bnbarrels of provided

oil equivalentReserves

Treasury and Trade Solutions4

ArgentinaArgentina has emerged as the world’s most successful source of shale oil production outside the U.S. With several leading oil companies from around the world already positioned through direct equity ownership or through joint ventures with the Argentine national oil company, YPF (Yacimientos Petrolíferos Fiscales S. A), Argentina is poised to move to full commercial development in the next few years. The Vaca Muerta formation attracted $4 billion of investments in 2018 and is expected to attract $7.49 billion of investments in 2019.4

The first open bid round for offshore acreage in more than 20 years took place in April 2019, with 18 blocks licensed of the 38 on offer. Thirteen major companies bid, with bids totaling $718.28 million with momentum picking up, we project to see another $20 billion of investments into Argentina over the next decade.5

GuyanaThere are also substantial opportunities emerging in Guyana. Deep-water oil production is due to come on stream in 2020, with the potential to multiply GDP and increase tax revenues. In particular, Exxon Mobil announced new oil discoveries in Guyana in April 2019 soon after the government announced that an oil-bidding round would take place in the first quarter of 2020.6

Exxon’s Guyana’s operations has the potential to generate nearly $20 billion in oil revenue annually by the end of the next decade, roughly equivalent to the revenues of the much-larger Colombia.6

Colombia and EcuadorIn Colombia, on- and offshore opportunities are attracting a diverse and wide ecosystem of small and midsize companies who are successfully reducing costs throughout the entire supply chain. As a result, these fields have become highly competitive.

“We believe the interest in Colombia acreage is only going to increase over time, but it is predominantly going to be more of an M&A focused market.” — Pedro Medeiros

In June 2019, during the first bidding auction for five years, seven companies bid for 11 contracts, with anticipated revenues of $1.5 billion from this round of bidding in addition to a permanent bidding process that was recently launched.7

Latin America also has substantial untapped proven gas reserves, amounting to 4.1 percent of the total and technically recoverable resources,8 which further increases its attractiveness. However, with more than 70 percent of these resources located in Venezuela,9 investors are poised to take advantage of new opportunities as they occur in the future.

Ecuador is also very attractive to investors due to an offering of shared-profit agreements that are potentially more lucrative for oil firms than fee-for-service contracts that prevented companies from benefiting from oil price gains.2

5Investing in Latin America: Today’s Energy Market

“With substantial undeveloped reserves of oil and gas, significant further investment by the energy industry in Latin America is a near certainty. Sustainable expansion across the region is already underway, from the pre-salt in Brazil, to offshore Guyana, to unconventional in Argentina and the new licensing rounds in Colombia and Ecuador. Though stalled for the present, significant capital is committed to Mexico for concessions granted in the early years of reform. Longer term, under the right circumstances, investment in oil and gas in Venezuela could be immense. Almost every oil major and many other international energy companies, as well as ambitious local names, have a stake in the region,” — Jim Reilly

VenezuelaVenezuela has the largest oil reserves in the world, but oil production has been in sharp decline since the mid-2000s, due to a drop in investments. High oil prices through 2010-14 supported activity and production, but the oil price crash in 2014 and subsequent underinvestment in the oil sector led to declines in production, falling to 1.5 million barrels per day in 2018.

MexicoFollowing energy reforms in 2014, Mexico’s energy play became more attractive. These reforms opened the country’s energy sector to private investments and ended a seven-decade monopoly of its state oil firm Pemex. Since then, Mexico has seen billions of dollars pour into the country in pledged investments as private companies returned to the country to take part in the expansion of Mexican oil production. Under the AMLO (Andres Manuel Lopez Obrador) administration there is a reconfiguration of how much private participation will be allowed in some segments of the energy space. As in all periods of reform, some areas might offer significant opportunities. As a result of Mexico’s past successes in attracting private capital for the retail sector, competition has increased, as well as the availability of natural gas coupled with a decrease in the price of electricity.

Venezuela

1965

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.020

19

2016

2013

2010

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

mill

ion

barr

els/

day

Source: Citi Research

Treasury and Trade Solutions6

Mexico’s energy play involves downstream, midstream and upstream exploration environments. Opportunities have been strongest in the downstream sector where over 30 private companies have settled in the past five years. On upstream and midstream, some of the largest oil and gas companies in the world participated in three successful bidding rounds that involved $9.5 billion in investment commitments. Now, these opportunities are on hold as the new administration decides how to go forward.

“For the first time in decades, Mexicans can choose between different retail gasoline and diesel providers at gas stations. The market has definitely opened up for players to stimulate investment and competition.” — Ernesto Revilla

The current administration has presented a strategy to strengthen Mexico`s national oil company, Pemex, through tax breaks and capital injection. It has also decided to attract private investments with service contracts, another option to invest in the energy sector. Pemex’s business plan calls for a large turnaround of the company in the following years, and even if farm-outs and joint ventures have been cancelled for the moment, there will be inherent opportunities as the outlook improves.10

Along your journey with us: Embracing the digital transformationWith a presence in 23 countries, Citi has the largest banking coverage in Latin America. Having been in several countries for over 100 years has enabled Citi to develop deep knowledge and insights to be the best for our clients by supporting them locally, regionally and globally, underpinned by a single, global technology platform.

SharePrice Acquisition of

License/Block

Seismic Exploration,Surveys & Appraisal

EAs, FEED, EPCM

FID

Development

Acquisitions

Takeover/Defense

1

2

3

8

7

65

4

Production

Due Diligence &Prequalification

Exploration Construction Development

Capital Intensive Capex Funding Cash Generation

√ Account Services√ Payment Services√ CitiDirect BE

√ Commercial Cards√ Investment Options for Cash√ Bid Bonds√ Performance Bonds√ FX Exposure Management

√ Debt Capital Markets√ Equity Capital Markets√ Export Credit Agencies√ Project Finance√ Escrow Agency Services√ Trustee & Paying Agent√ RBL

√ Liquidity Management√ In House Bank√ Trade Services√ Export LCs & Bills√ Receivable Financing√ Supplier Finance√ Treasury Vision

3-5 years 4-10 years 1-7 years 10-30 years

It is possible that not all the products listed in the above exhibit are available in all Latin America’s countries.

7Investing in Latin America: Today’s Energy Market

In the energy industry, Citi draws on its deep experience working with oil and gas companies and supporting them through their life cycle approach — from investment to production.

Some examples of Citi’s support are:

• Citi issued 17 Performance Bonds for R$656 mm — Brazil

• Citi supported ANP with R$5.0 bn in Payments — Brazil

• Citi supported companies with R$2.8 bn of FX for bid rounds — Brazil

• Citi issued 11 performance bonds for $550 mm — Mexico

• Citi supported companies with USD$7.7 mm for bid bonds rounds — Mexico

• Citi secured 54% of the blocks auctioned for two bid rounds — Mexico

Moreover, as energy companies and the local countries in Latin America continue to accelerate and embrace digitization, they are looking for banks to support and help with their digital transformation, evolving industry ecosystem and business models. Indeed, Citi is already working with many national and international energy companies and has developed digital solutions to support our clients’ journey with us.

For example, Citi is leveraging a new digital payment method in Mexico, CoDi (Cobro Digital or Digital Collection), which is being rolled out during 2019. This will help provide real-time payments and collections from mobile devices, including supporting QR codes, request to pay (RTP), and contactless payments as a convenient alternative to cash. We are helping our energy clients capture more sales as they expand their retail gas stations and improve the purchasing experience provided to their own customers.

Many countries in Latin America have recognized the need to support energy companies in their digital transformation. Citi has also implemented APIs, blockchain, and working capital — using digital solutions to support the evolving digital transformation.

“With all this change that we see in the world with artificial intelligence, digitalization, big data, blockchain, there is an enormous opportunity for innovative companies that can use those technologies to help us to develop the oil and gas sector in Brazil under this new circumstance and open market.” — Decio Oddone

DISCOVER & FIND REPEATDECISION SERVICEUSAGEONBOARDING

Engagement Client Experience

Understanding Expressed and

Unexpressed Client Needs

Providing Clients with Digital

Solutions Powered by Data

We are making it Easier for You to Do

Business with Us through Digital

2-Day Onboarding

Multifaceted and Responsive to Client Needs through Digital

Channels

Client Service Experience

Transformation

Digital Marketplace, Solutions and

Modeling

Treasury and Trade Solutionsciti.com/treasuryandtradesolutions

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Across the region, energy companies are focusing on strong governance and control as they expand, looking for improved operational efficiencies, and reconciliation. Citi® Payment Outlier Detection is another example of a digital solution for the industry to help protect against fraudulent payments.

Another important aspect of transformation has been the adoption of innovative working capital solutions in Latin America by energy companies. Indeed, with Citi’s strategy and commitment of being the “World’s Working Capital Bank,” we have developed solutions on a digital platform to help our clients thrive in a competitive environment. These include Sales and Supply Chain Finance solutions, electronic Letters of Credit (LCS), and guarantees, which are able to capture end-to-end transactions through our extended global network.

To succeed in this competitive, capital-intensive and increasingly digital environment, both producers and distributors, among other players, need a long-term banking partner that can support them. Having a bank with a strong presence along with a comprehensive knowledge of the industry and a cutting-edge digital vision and strategy, is essential for any expansion to prosper.

1 Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP), “E&P Sector in Brazil”: http://www.anp.gov.br/images/Palestras/reunioes_investidores_2018/PPT_ANP_Decio_Oddone_Calgary_January_2018.pdf

2 Reuters, “Latin American nations compete for capital in surge of oil auctions”: https://ca.reuters.com/article/businessNews/idCAKCN1H90UJ-OCABS3 Reuters, https://www.reuters.com/article/us-petrobras-auction-explainer/explainer-brazils-transfer-of-rights-oil-area-whats-next-idUSKCN1RM2OK4 Agencia EFE, “Vaca Muerta shale formation could be key to Argentina’s economic development”: https://www.efe.com/efe/english/business/vaca-muerta-

shale-formation-could-be-key-to-argentina-s-economic-development/50000265-40161805 Oil and Gas Journal, “Capital investment continues to increase in Latin America”: https://www.ogj.com/home/article/17222790/capital-investment-

continues-to-increase-in-latin-america6 The New York Times, “The $20 Billion Question for Guyana”: https://www.nytimes.com/2018/07/20/business/energy-environment/the-20-billion-question-

for-guyana.html7 Reuters, “Seven companies bid for eleven contracts in Colombia oil auction”: https://www.reuters.com/article/us-colombia-oil-auction/seven-companies-

bid-for-eleven-contracts-in-colombia-oil-auction-idUSKCN1T52J48 Statista, “Distribution of proved natural gas reserves worldwide from 1992 to 2018, by region”: https://www.statista.com/statistics/273584/distribution-of-

natural-gas-reserves-by-region/9 IBRD/World Bank, 2017 (refers to 2014 figures)10 Citi Research