- The Washington Times - Tuesday, December 11, 2001

Although the collapse of Enron Corp. will create buying opportunities for its competitors in South America, it will further depress foreign investment in the continent's energy sector.
Among other effects, this will worsen Brazil's stubborn energy shortage and hinder the development of Bolivian gas fields.
Energy behemoth Enron Corp. filed for Chapter 11 protection in New York bankruptcy court Dec. 3. The same day, Brazilian business daily Gazeta Mercantil reported that Enron may sell assets in Brazil worth $610 million in order to meet short-term cash needs.
Enron has sunk billions of dollars into Latin American energy markets since 1993. The company's collapse will help to reshape those markets: Competitors will maneuver to take advantage of Enron's departure as national governments seek to limit its damage to their economies.
Other energy companies will gobble up Enron assets at fire-sale prices but likely will forgo major new investments until the market stabilizes and the regional economy improves. This will cause problems including energy shortages and higher energy costs for governments across the continent, but especially for Brazil and Argentina.
If governments respond to lower energy supplies and rising costs by interfering in the markets and controlling prices in effect, slowing the pace of liberalization the investment situation could decline further. Enron's fall also could temporarily delay the development of Bolivia's rich natural gas fields, where found reserves have increased eightfold since 1997.
One of a handful of major players in South America, Enron has 16 ventures spanning Argentina, Bolivia, Brazil, Colombia and Venezuela, according to the Energy Intelligence Group (EIG), a private company based in New York that tracks the energy industry.
Although the company was moving away from an asset-based business in the United States, its portfolio of energy assets including electric utilities, power plants and natural gas pipelines was growing in South America.
Many of those assets now will go up for sale as Enron looks to raise cash to meet immediate debt obligations. It may have trouble finding buyers, however.
The region's energy market is not nearly as attractive as it once looked. The global slowdown has dampened economic growth across the continent. Argentina is mired in a prolonged recession and is on the brink of financial collapse. Neighboring Brazil suffers from Argentina's fragility as well as from a serious energy shortage that led to mandatory electricity rationing this year. The shortage also caused economists to cut Brazil's 2001 growth forecast in half.
An inefficient regulatory regime, state price intervention and problems with the energy spot market in Brazil have been blamed in part for a lack of foreign investment in new generating capacity.
Farther north, Colombia's domestic security situation has continued to worsen, with guerrilla groups targeting energy assets daily. In Venezuela, President Hugo Chavez has reversed decades of energy market liberalization with a new hydrocarbons law requiring majority state ownership in new petroleum joint ventures; the law also nearly doubles the state royalty tax on foreign oil sales. These and other decrees are leading to domestic turmoil.
The one bright spot in the region might be Bolivia, where large natural gas reserves offer the promise of significant profit.
Enron's collapse adds to the region's list of woes, further increasing market uncertainty and making this a bad time for the company to sell its assets. Because its cash needs are immediate, however, it likely will have to part with South American assets at far below market value.
Major regional competitors Royal Dutch/Shell, the United Kingdom's BG, Spanish Repsol-YPF and Brazilian state-controlled Petrobras will be happy to step in and buy Enron's best assets, but only at a steep discount. One analyst cited by EIG believes that Enron may get only 50 cents on the dollar in the sale of its foreign assets.
Even then, some buyers will balk at riskier investments where Enron itself was having difficulty turning a profit. Enron executives cited by the Wall Street Journal note that the company had invested more than $3 billion in Brazil since the mid-1990s but was operating at a loss.
Several power plant investments ran severely over-budget and over-schedule, while others failed to generate revenue immediately. The company already was backing away from the market and pulling out of some project commitments before its financial collapse.
Already cautious foreign investors will be even more risk-averse in the coming year as the impact of Enron's collapse works through the market.
Considering the regional uncertainty, competitors may decide to limit further investment to the purchase of Enron's most valuable assets while holding off on new projects until the regional economy turns around and Argentina stabilizes.
This would cause problems for power-strapped Brazil, which needs to develop 25,000 megawatts of new capacity over the next five years to meet growing demand, the Wall Street Journal reports. Brazil has 75,000 megawatts of installed capacity and has worked hard to attract foreign investment to its energy sector. Without significant new foreign investment, it will be hard-pressed to meet demand, and further power shortages could ensue.
Other important projects could also be put on hold, such as new generating plants and pipeline extensions in Brazil and Argentina.

Michael Oakes is an analyst at Stratfor in Austin, Texas, a provider of global intelligence to private companies and subscribers. Its Web site is Stratfor.com.

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