Several regions in Latin America have been either temporary or longer-term homes for expatriates in the oil and gas industry, for example, Rio de Janeiro, Ciudad del Carmen and Maracaibo. Given the mobile lifestyle of the typical O&G Expat (let’s abbreviate to OGE), we believe they would reap the benefits of taking independent financial advice.
Whether a seasoned senior management OGE who has lived in multiple locations or a younger executive on a first overseas assignment, we discuss some of the financial considerations affecting OGEs along their careers.
1. Currency of package
Several countries in Latin America have experienced macroeconomic volatility and rapid political change which have affected their exchange rate stability. Some OGEs earn their salaries and bonuses entirely in hard currency and receive some benefits in local currency e.g. accommodation, health plans and meal allowances. In some cases, although less common, OGEs receive their salaries in two currencies, which we believe is a ‘safer’ package but it depends on the policy of their employer.
This graph below shows the British Pound against the Brazilian Real since 2005. Imagine the case of an OGE who accepted a contract weighted towards GBP at the beginning of 2008. Apart from a few months following the Great Financial Crisis (Q4, 2008), their purchasing power in Brazil would have been significantly weaker over a 3 to 5 year period given that £1 could buy 3.40 BRL in Q1, 2008 and only 2.50 BRL in Q1.2011). Such a salary contract (in GBP) would have been desirable if it were signed in 2013 until the end of 2015.
2. Switching from international to local contracts
During the oil price decline from 2014 to 2016, many OGEs were offered an opportunity to retain their employment and location if they switched to a local contract. A local contract means the employee would receive their salary and bonus in the currency of the country of assignment and may lose some benefits like an accommodation allowance and school fees for children.
In the case of a middle-aged primary breadwinner and non-working spouse with two or more children, the switch to a local contract would, in most cases, have been too much to absorb. It would depend on other opportunities in the market elsewhere, especially during a recession, but the additional costs of taking out private health insurance, renting an apartment of a similar standard and paying for school fees at an international school would be a game-changer for most families. Often, the expat benefits package (excluding salary) has a much higher monetary value than the salary itself.
An unmarried employee (with no dependents) would enjoy more flexibility and may choose to accept the switch although as mentioned in point 1, they would be facing higher currency risk if their reference currency were USD, GBP or EUR. We observed cases of single expats who chose to stay in Brazil purely for social and lifestyle reasons whilst some others were willing to accept a redundancy package and procure a higher paying job in a new country or return to their base country.
Assume the case of switching from a GBP-denominated contract to BRL from 2019 to 2021 or a USD contract to COP (Colombian Peso) in the same period, when several emerging market currencies fell sharply against hard currencies. In practical terms, the ‘switched OGE’ would still, most likely, enjoy a reasonable income and lifestyle domestically but it would reduce the potential to accumulate wealth in hard currency.
Any such offer to switch to a local contract should be critically assessed and modelled with all additional costs, the total effect on net income and at least a 20% exchange rate swing.
3. Asset consolidation
After several assignments, usually a combination of expat and domestic, we find that many senior managers and directors have been so busy working, travelling and attending to family needs, that their personal financial planning has taken a backseat.
This brings back memories of meeting financial executives at energy companies who could model an investment payback on a multi-million-dollar oilfield project yet remain distant and disorganised about their personal finances which were scattered in various accounts across countries in which they had worked. In many cases, they had entrusted their savings to unscrupulous salespeople who abandoned the promise of periodic service; a familiar and unfortunate story on the expat circuit.
We have discussed consolidation in previous articles and videos. It is important to streamline your personal finances and benefit from lower administrative costs and a more strategic approach to wealth management. Consider the hurdle rate to generate a real return when inflation and fees are aggregated. Read about the benefits of consolidation in point 9 here.
4. Too much dependence on company shares
We should all take a lesson on prioritising our personal long-term financial stability ahead of excessive loyalty to our employers. Many employees of companies have been hardwired to believe that their companies’ share prices will always follow an upward trajectory. Employee incentive schemes are usually favourable and it is generally wise to participate in profit-sharing and share option schemes.
However, with your additional savings, please focus on diversifying into other sectors and asset classes and be fully aware that your company’s stock market performance could affect a large percentage of your wealth.
If you are working in the oil and gas or mining sectors, you will be aware of commodity price volatility which inevitably leads to cyclical swings in the share price of your company.
Let’s take BP (London-listed) which was trading at 586 pence in Jan 2010, 466p in Jan 2013 and 376p in Jan 2016. On 19 Sept 2022 (date of this article), BP trades at 452p. Have a look at other companies across all categories of energy and I am sure you will conclude that it is indeed cyclical and that you cannot rely on allocating a large percentage of your wealth to just one sector to provide a retirement income for 20-30 years or to meet other lifestyle goals.
5. Becoming a contractor
Given the cull of expat jobs across the oil and gas sector in Latam, many consultants and engineers have resorted to becoming contractors. Contractors generally earn higher daily rates but face the risk of empty unremunerated periods and do not receive the long-term benefits applicable to payroll employees.
Depending on the jurisdiction and payment currency of their clients, contractors may be required to set up an offshore company and/or a local company in their country of residence which requires specific knowledge and administration time to manage company accounting and periodic filings.
When choosing an offshore jurisdiction for your invoicing company, it must satisfy several criteria such as being tax-compliant in your country of residence, cost-effective in terms of annual fees and acceptable for your principle clients because some large companies prohibit payments to certain jurisdictions.
Many company formation agents will happily offer you a cheap offshore company with low set-up and annual fees. Remember, you get what you pay for. We strongly recommend that you make this decision in conjunction with tax advice. You should know how to declare the new entity, the income tax implications and how to structure the company for succession planning.
Disclaimer: We are providing guidance and personal opinions which should not be interpreted as specific investment advice.
If you work in the oil and gas sector and would like to discuss any of the above topics, please contact us here.
Many thanks to Rawpixel.com for the image and cover photo and to Yahoo Finance for the currency charts.