Energy genaroarriagadafinal 1


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Energy genaroarriagadafinal 1

  1. 1. Energy in Latin America 2010-2020: Headed For A Lost Decade? Genaro Arriagada Inter-American DialogueLatin American politics is known for mirages that help obscure the severity of a problemand defer a solution. This is what seems to be happening with energy issues. In the past sixor seven years, the energy sector was cited time and again among the most problematic inthe region, sparking numerous statements, speeches by heads of state, and a few summits.However, in recent times this mindset has changed. On the strength of Brazilian success inthe pre-salt fields, confirmation of Venezuela’s ultra-heavy crude oil reserves, and somehopes, albeit still vague, about shale gas, Latin America is beginning to emerge as asuccessful region whose energy role, in this decade and beyond, will be crucial to the worldand whose exportable surplus could help relieve China’s shortages, according to some, orhelp offset the United States’ dwindling resources, according to others.This optimistic, self-satisfied view is wrong. Overall, energy problems in the region —without detracting from individual country or industry successes— have, if anything,worsened. The future is bright in terms of potential, but mediocre in terms of concreteresults. The region’s contribution to relieving the global energy plight, at least in thisdecade, seems an idealistic promise derailed by tough realities. Reasons for optimism seemweak, barring a sea change whose nature will have to be eminently political. (1) The VulnerabilitiesWhen it comes to energy, Latin America exhibits a range of weak points. These arediscussed below in no particular order.1. The Vulnerabilities of Central America and the CaribbeanIn terms of energy, there is not one Latin America, but several. One is energy-rich SouthAmerica, flush with a range of diverse resources, including abundant oil, hydroelectricity,gas, coal and non-traditional renewable energy reserves. Another is energy-poor CentralAmerica and the Caribbean, which encompass twenty-three nations with a deficit —i.e.,where domestic consumption exceeds the national output— and only one, Trinidad andTobago, without a deficit. Individually, in many of these nations oil accounts for upwardsof 60 percent of the energy mix. They also have no gas except for Trinidad and Tobago,alone in having a significant exportable surplus. These countries’ modest hydroelectricresources are among the few sources of primary energy available. In the poorest countries,such as Nicaragua and Haiti, traditional biomass, often associated with severe poverty,contributes over 40 percent of the energy mix. The energy deficit constitutes a severe bottleneck for regional development andsocial progress. In the past, these difficulties were mitigated by a joint Venezuela-Mexico
  2. 2. initiative (the San José Accord), which is no longer in force. At present, albeit within limitsand ways that are important to spell out, this aid is being provided by PetroCaribe, aninitiative of President Chávez. In addition, in the case of Cuba, Venezuela provides oilsubsidies similar in form and magnitude to those the Soviet Union used to provide. Theseinitiatives, however, are threatened by factors such as a decline in Venezuela’s exportablesurplus, an eventual change of government in Caracas, and the massive debt owed toPetroCaribe by recipient countries. Should any of these factors or a combination of themcause the flow of oil assistance to stop or be significantly reduced, the blow to CentralAmerica and the Caribbean would be harsh. In the case of Cuba, disruption of Venezuelansupplies and subsidies could trigger a crisis analogous to the “special period” of thenineties after Soviet aid ceased.2. Stagnation of Oil Production and Decline of Exportable SurplusA review of South American oil industry performance in the past decade gives more reasonfor concern than enthusiasm.As a share of the world total, South America’s proven reserves went from 8.9 percent in2000 to 17.3 percent in 2010. Yet, disaggregation of these figures provides a lessencouraging outlook. Outside of Venezuela, the region’s low reserves have grownminimally in the period, from 1.9 to 2.0 percent of the world total. Brazil accounts for overhalf of the growth, a share set to increase significantly as new pre-salt field reserves areproven. Mexico faces a tougher situation, as reserves have dropped from 1.2 to 0.8 percentof the world total. Proven Reserves and Oil Production, By Region (2000 and 2010) (Share of World Total) Region 2000 2010 Reserv. Prod. Reserv. Prod. Middle East 63.1 31.5 54.4 30.3 South & Cent. Amer. 8.9 9.1 17.3 8.9 Europe & Eurasia 9.8 20.0 10.1 21.8 Africa 8.5 10.4 9.5 12.2 North America 6.2 18.5 5.4 16.6 Asia-Pacific 3.6 10.5 3.3 4.9 Total 100.0 100.0 100.0 100.0 Mexico 1.2 4.6 0.8 3.7 Source: BP Statistical Review of World Energy. June 2011A look into production yields a disturbing balance, as it appears stagnant: 6.8 millionbarrels per day in 2000, 6.9 a decade later. In 2000, Latin America’s share of world oilproduction was nearly equal to its share of proven world reserves. Ten years later, in 2010,this share had dropped in half: 17 percent of reserves versus a scant 9 percent ofproduction. Disaggregation of the total shows that the country with the largest reserves —Venezuela—had the worst production performance, with an 800-mbd drop in the period.Prospects in Mexico look even worse, since reserves declined and production dropped 500mbd from 2000 and 2010. The good news comes from Brazil, whose share of world 2
  3. 3. production rose from 1.7 to 2.7 percent. The rest of Latin America accounts for less. Arecent success story is Colombia, although prospects are uncertain due to small reservesize. Argentina, on the other hand, is an exporter turned importer due to mismanagement.Although Ecuadorian production is stagnant, sheer reserve size could easily allow it totriple production without overtaxing resources.Stagnant production and domestic demand increases have made a significant dent in LatinAmerica’s exportable surplus. Such is the result of comparing production and consumptionin five countries that were oil exporters during the decade. Also considered are netimporters. Production Minus Domestic Consumption (mbd) 2000 2010 Product. 2010/2000 1. Surplus Argentina 385 94 - 168 Colombia 476 563 + 90 Ecuador 281 269 + 86 Venezuela 2,680 1,706 - 768 Mexico 1,500 964 - 492 , Subtotal 5,322 3,596 2, Shortfall Brazil 750 467 + 869 Chile 233 305 + 0 Peru 53 27 + 57 Other South & Cent. Amer. 930 1,043 + 1 , Subtotal 1,966 1,842 3, Balance (1-2) 3,356 1,754 Source: BP Statistical Review of World Energy. June 2011The balance is disappointing. The exportable surplus fell 33 percent in a decade and, had itnot been for Brazil’s production surge, surpluses capable of meeting increases in otherparts of the world would be irrelevant despite having the world’s largest proven reservesoutside the Middle East. While it is true that the situation can change, so is the fact thatdeclining production in Venezuela, Mexico and Argentina and stagnant production inEcuador are not occasional events but the consequence of structural factors whosetransformation will not be easy, will only be possible after comprehensive political accords,and will take time.3. The Hydroelectricity BlockadeOver the past fifty years, hydroelectricity has been the most distinctive—and possibly themost positive— trait of Latin American energy production. The enormous influence of thissource of energy sets Latin America apart from all other regions. Hydroelectricity standsfor slightly over 6 percent of the world mix and 26 percent of the Latin American mix. Itaccounts for over 50 percent of all electricity produced in eleven countries, including Peruand Costa Rica, and represents as much as 80 percent in Brazil and 75 and 67 percent inColombia and Venezuela respectively. In Paraguay and Uruguay, the figure is 99 percent. 3
  4. 4. ENERGY MIX 2010 (Consumption, Percent) Oil Gas Coal Nuclear Hydro Renew. . Middle East 51.4 47.0 1.2 0.0 0.4 0.0 100.0 South/Cent. Am. 46.9 21.7 3.9 0.8 25.7 1.8 100.0 Europe/Eurasia 31.3 34.3 16.4 9.2 6.5 2.3 100.0 Africa 42.0 25.3 25.5 0.8 6.2 0.2 100.0 North America 38.5 27.6 20.0 8.0 5.9 1.6 100.0 Asia-Pacific 27.7 11.2 52.1 2.9 5.4 0.7 100.0 World Total 33.6 23.8 29.6 5.2 6.5 1.3 100.0 Source: BP Statistical Review of World Energy. June 2011However, in Latin America, the hydroelectric sector has been rapidly losing steam foryears. In the twenty-year period from 1966 to 1986, the industry more than quadrupled. Inthe next decade, it grew 50 percent; from 1996 to 2006 it expanded only 33 percent, andover the past five years growth has been a meager 1 percent a year.There are several causes for the decline. First, many of the best rivers, and within them, thebest sites, are already being used, while the remainder are less important and profitable.This is true in the United States and Western and Central Europe, but not in Latin America,whose hydroelectric potential remains enormous, so much so that less than an estimated 25percent is being effectively used. Another explanation is that low oil prices, much like inthe nineties, have made dams seem less attractive. But this objection has been contradictedby oil prices four times what they were five years ago. Strictly speaking, in Latin America,the strongest foes of hydroelectricity are the increasingly influential environmentalistgroups whose opposition against large dams is nearly absolute.4. The Trend Toward a Dirtier Energy MixThe energy consumed in Latin America is the cleanest in the world due to two factors. Firstand foremost, hydroelectricity. Secondly, the share of fossil fuels in the energy mix is thelowest in the world: 72 percent versus an 87 percent world average. Within that total andcorroborating the cleanliness of the regional mix, the role of coal —“the dirtiest fossilfuel”— is minor: 4 percent versus the 30 percent world average. ENERGY MIX 2010 (Consumption, Percent) (1) (2) (3) (4) Fossil Nuclear (Hydro+)Renew. (1-3) South/Cent. Am. 72.5 0.8 27.5 100.0 (45.0) Europe/Eurasia 82.0 9.2 8.5 100.0 (73.2) North America 86.1 8.0 7.5 100.0 (78.6) Asia-Pacific 91.0 2.9 6.1 100.0 (84.9) Africa 92.8 0.8 6.4 100.0 (86.4) Middle East 95.6 0.0 0.4 100.0 (95.2) World Total 87.0 5.2 7.8 100.0 (79.2) 4
  5. 5. Source: BP Statistical Review of World Energy. June 2011Keeping the mix clean requires maintaining hydroelectricity use at current levels. Failingthat, the slack will be taken up by fossil fuels, notably coal, the cheapest energy source ofall. Chile is case in point. Chile has rich hydroelectric potential, but has continued to sourcethe majority of its primary energy needs from fossil fuels. As a result, imports of fossilfuels witnessed a five-fold increase from 2003 to 2011, and all of the power stationsconstructed since 2004 are gas- or coal-based. The notion that non-conventionalrenewable energy (NCRE) can fill the gap, although highly desirable, is hard to achieve, atleast in this order of magnitude. In fact, the share of NCRE is minute (1.8 percent of themix). Disaggregation reveals an even less auspicious reality, since Brazil alone accountsfor 70 percent, nearly all of it ethanol.Demand for NCRE is an essential policy objective but developing it is not easy, not tomention that it requires heavy subsidies without which, as the technology currently stands,NCRE cannot prosper. Many of its proponents, as commendable as their efforts may be,show little realism by opposing coal, nuclear energy and hydroelectricity all at once. This isnot rational policy; it is folly. Claiming that the gap left by freezing these sources can befilled within a decade by increases in NCRE is wishful thinking, to say the least.As far as Latin American energy is concerned, large dams, opposition to coal and nuclearenergy, and the development of NCRE will be the focus of a civic debate of the utmostimportance for the meaning —whether successful or lost— of this decade. ( 2 ) THE NEED FOR POLITICAL DEFINITIONSThis inventory of weaknesses is by no means exhaustive. Several other major factors couldbe mentioned, including issues of pricing and subsidies, but this catalog helps illustrate themain characteristics of regional energy issues and the nature of possible solutions.A look at the availability of resources shows Latin America has a promising future.Scarcity is not the factor that prevents rapid sector growth, nor is it oil prices or theavailability of technology, which has made enormous strides and is readily available.Rather, the hurdles that the region must clear if it wants a more dynamic and successfulenergy sector are institutional and political in nature.Central America and the Caribbean require special attention from states and multilateralagencies. The efforts of institutions such as the IDB and the World Bank should be directedat these countries. Except for Bolivia, it makes no sense to focus on energy-rich SouthAmerica. Assistance for sector development should not concentrate on any one componentof the mix, but on all of them (oil, gas, coal, hydroelectricity, traditional biomass andNCRE), and most importantly, on grid integration both within these sub-regions and withMexico and Colombia. The technical studies for grid integration within Central Americahave been completed and require little else. Nowadays the issue lies with the political 5
  6. 6. decisions governments must make on electrical services legislation, regulatory frameworks,pricing systems, and industry integration.If attention shifts to hydroelectricity, decision-making will clearly move from the financialcenters that evaluate the technicalities of projects to the realm of politics, the place whereone must try to balance the requirements imposed by energy security and tighterenvironmental regulations and the interests of groups that feel adversely affected by suchprojects. This is a strong conflict where dam opponents not only wield intellectualobjections, but are a social movement in which environmental groups are joined byagrarian communities and aboriginal peoples and have international connections, so thatthey feel part of a single struggle spanning from Río Papagayo in Mexico to Patagonia inChile to Río Madeira in Brazil to the Inambari and Pakitzapango dams in Peru. Butgovernments are forced to build solutions, since a Latin America that agrees to freezehydroelectric development would plunge into a major energy crisis and —even if someenvironmental groups refuse to acknowledge it— end up with a substantially less cleanenergy mix.Ending the current stagnation of oil production is, again, an issue where institutional andpolitical components play a key role. In the realm of Latin American energy —especiallyoil and gas—national oil companies are the largest players and, underpinned by growingresource nationalism, will continue to be for decades to come. Yet, this recognition startsrather than precludes a debate on oil sector institutionality, as it is evident that there is nosingle type of state-owned oil company. This is illustrated by the fact that while both arestate-owned, Petrobras and PDVSA interact very differently with their respectivegovernments, differ radically in terms of their corporate government and links to societyand the private sector, and are markedly distinct in their economic results and production.In some countries, state-owned oil companies have both a business and regulatory role, inothers they do not. Petrobras and Ecopetrol are open to private investors who share in theirownership and results through shares of stock traded across world stock markets. Yet, inboth cases state control of the company is guaranteed. Such openness forces thesecompanies to submit to the control, transparency and accountability standards governinginternational private enterprise. As various writers hold (i.e., Espinaza, Tissot, Arriagada),often the leading factor accounting for the extremely checkered performance of national oilcompanies is institutional in nature. 6