Political changes increase risk for mining, energy in Latin America

A growing demand to participate in the revenues from natural resources is increasing political risks for mining and energy companies across Latin America, including in countries once considered safe investment destinations, according to a new study by consultants Verisk Maplecroft released Aug. 19.

Data collected by the company for its Resource Nationalism Index found governments across the region adopting a range of policies, from direct expropriation to tax and royalty increases and requirements that companies use local-produced goods and services, to increase industry contributions.

One of the biggest swings has been in Mexico where President Andres Lopez Obrador has rolled back the 2015 liberalization of the energy sector in order to shore up state-owned oil giant Pemex and power utility CFE.

The country fell 85 places in the next to become the third highest risk location globally, behind Venezuela and Tanzania.

"With resource nationalism firmly back on the agenda for a host of governments in Latin America, the long-term regulatory outlook for mining and energy firms is more uncertain than at any time over recent years," said Verisk Maplecroft's senior Americas analyst Mariano Machado. "Investors and extractive companies should buckle up."

As well as the increased fiscal pressures created by the COVID-19 pandemic and the rise of left wing and populist ideologies, state intervention in the sector is increasingly driven by concerns to protect local communities and the environment.

In Argentina, having already expropriated agriculture and infrastructure businesses and reintroduced price caps and capital controls, state intervention in the economy is likely to increase during the second half of President Alberto Fernandez's term in office, the study warned.

In Brazil, where President Jair Bolsonaro has interfered in gasoline pricing by Petrobras, the risks could increase should leftist former president Luiz Inacio Lula da Silva be elected next year.

Risk has even increased in destinations once considered safe. In Chile, the world's leading producer of copper, work has begun on the drafting of a new constitution which is likely address demands for greater environmental protection and for the mining sector to pay more taxes.

In Peru, President Pedro Castillo has promised to force mining companies to deliver the development that rural communities have been demanding for decades.

The phenomenon is not restricted Latin America. The Verisk Maplecroft study found that the number of jurisdictions considered extreme risk has risen from just five in 2017 to eleven in 2021, where Venezuela and Mexico are joined by Russia, North Korea, and Zimbabwe, among others.