On January 26, the Council of the Americas and the Atlantic Council co-hosted the Caribbean Energy Security Summit. The summit, convened by Vice President Joseph Biden, brought together Caribbean leaders, multilateral banks, private sector representatives, and U.S. government officials in order to address the critical issue of energy security in the Caribbean basin.
The summit demonstrated that there is high-level attention being given to the Caribbean in the U.S. government, which is willing to work with the region in order to take on the fiscal, energy, and environmental challenges currently present.
Caribbean nations are suffering from high energy costs and a dependence on fuel oil. They are indebted to countries such as Venezuela, through the Petrocaribe program. Because countries are receiving oil from Venezuela on preferential financing terms, there is very little incentive to diversify the energy matrix towards cleaner sources of energy such as natural gas and renewables. In a sense, the Caribbean is addicted to cheap oil—but this is not sustainable, given the declining state of the Venezuelan economy.
Furthermore, energy costs are affecting the region’s economic growth. According to the IDB, electricity rates in the Caribbean are up to four times more expensive than in Florida. The Caribbean’s economy is primarily driven by tourism, and electricity represents up to 50 percent of operating costs in hotels.
Moreover, the high dependency on imported fossil fuels is exacerbated by governance systems that are outdated. The obstacles to energy reform include high upfront costs, fiscally constrained governments, weak regulations, and lack of regional coordination.
New technology and capital has boosted shale gas and tight oil production in the United States and Canada—a phenomenon dubbed the “shale revolution.” This revolution has important geopolitical implications and has shifted North America’s energy outlook from one of scarcity to one of abundance.
The rest of the Western Hemisphere is also sitting on expansive shale reserves, but these areas have not yet been fully exploited. A recently released AS/COA Energy Action Group Report, “Shale Gas Development in Latin America,” explores these issues in depth.
Within the Western Hemisphere, the primary point of comparison for Latin American countries looking to develop shale gas resources is the United States, where, in 2014, over 20,000 horizontal wells are expected to be drilled, according to RBC Capital Markets. This compares to 250 unconventional wells in Argentina and just 10 in Colombia that are expected to be drilled during the same time period. Investors spent $90 billion in the United States on developing shale gas in 2012 alone; in contrast, foreign direct investment in Latin America last year, in every sector, totaled $180 billion.
In addition to the U.S. and Canada, Argentina, Brazil and Mexico are among the 10 countries in the world with the greatest technically recoverable shale gas resources; together, they make up approximately 40 percent of the world’s total supply. Colombia also has significant potential.
In the early 2000s, Colombia’s oil industry was weakening. There had been a decrease in new discoveries, followed by a decline in production from a peak of 800,000 barrels per day (b/d) in 1999 to nearly 550,000 b/d in 2004. Exploration and production had moved to increasingly remote areas with higher security risks and risky geology, requiring more capital and technology. As such, the Colombian government remained dependent on Ecopetrol, the state oil company, which represented the entirety of the Colombian oil industry.
Today, Mexico’s oil industry stands in a similar state of decline, as described by a recently released Americas Society/Council of the Americas white paper, “Mexico: An Opening for Energy Reform.” Oil production in Mexico as a whole has fallen from 3.8 million b/d in 2004 to 2.5 million b/d in 2013. Production of the Cantarell oil field, the most lucrative of Mexico’s shallow water reserves, peaked in 2003 at 2.1 million b/d, and is now producing less than one quarter of that.
Just as in Colombia, the problem in Mexico does not lie in a lack of resources, but rather in a lack of capital and technology. Mexico in particular maintains extensive shale deposits that remain largely untapped. The roots that bind Petróleos Mexicanos, or Pemex, and the Mexican government run even deeper than those that once bound Ecopetrol and the Colombian government. Mexico’s state oil enterprise pays for approximately 40 percent of the country’s budget—and since the government acts as both a regulator and an owner, transparency and accountability suffer.
On June 10, 2014, a ministerial commission in Chile rejected the HidroAysén project, an $8 billion joint venture of the Spanish company Endesa, S.A. (51 percent), which is a subsidiary of Italy’s Enel, and the Chilean company Colbún S.A. (49 percent).
Recently-inaugurated President Michelle Bachelet had stated that she would not support the project, and her ministers of agriculture, energy, mining, economy, and health agreed. Nevertheless, the country faces a challenge of energy poverty and high costs, which President Bachelet must address going forward.
The HidroAysén plan was to build five hydroelectric dams on the Baker and Pascua Rivers in the Patagonia region in the south of the country. The rivers–located in the Aysén region–are in an area of Patagonia that is virtually empty. The project developers viewed the plan as potentially very lucrative since the region receives steady rainfall.
HidroAysén was initially approved in 2011 during the administration of former President Sebastián Piñera, but popular protests derailed the environmental impact study. According to one estimate, more than 70 percent of Chileans opposed the project, and they took to the streets to express their disapproval.
Upcoming presidential elections and ongoing peace negotiations demonstrate Colombia’s consolidation of rule and law and democracy.
President Juan Manuel Santos is seeking re-election, and free and fair elections have been a mainstay in the country since 1957—one of the longest stretches in Latin America. Moreover, the peace process, underway since October 2012, is a notable program which has attracted the attention and support of the international community.
Yet while the exercise of democracy and the progress towards a lasting peace are clearly some of the main stories in Colombia, they have overshadowed the country’s economic performance during the past decade. According to Capital Economics, a London-based economic research group, Colombia has surpassed Argentina to become the third-largest economy in Latin America, after Brazil and Mexico.
Colombia has enjoyed stable GDP growth (estimated at between 4 and 5 percent in 2014), diversification of exports, strong fiscal position, and lower unemployment. Poverty has declined with it, and a strong middle class has emerged. Colombia’s economic growth is notable in a country that is climbing out of an internal armed conflict.
Monday marked the conclusion of “Round Zero,” a yardstick in a process initiated as part of the Mexican energy reforms. During Round Zero, Petróleos Mexicanos (Pemex), the Mexican state oil company, sent regulators a list of which fields it wants to keep for its own development.
Pemex currently owns and operates all oil and gas assets in Mexico. After the reform, private companies will theoretically be able to partner with Pemex after the fields are auctioned to private investors.
While Pemex’s exact wish list was not released publically, the company proposed to keep 83 percent of proven and probable reserves (known as “2P”), and 31 percent of proven, probable and possible reserves (known as “3P”). The 3P fields are potential hydrocarbon resources. Much of the acreage that Pemex left aside contained deepwater and shale resources, where it does not have as much expertise and experience.
In declaring that it would like to hold on to most operating fields, Pemex is showing that it will keep its most profitable onshore and shallow-water fields, as well as the few deepwater fields where it has already drilled. As it will now operate as a profit-seeking business, it makes sense that Pemex would aim to hold on to its most productive assets.
The three North American leaders—Canadian Prime Minister Stephen Harper, Mexican President Enrique Peña Nieto and U.S. President Barack Obama—will meet today in Toluca, Mexico.
Obama’s agenda is set to focus on trade, education, border security, and drug trafficking. Yet the elephant in the room is the Keystone XL pipeline, whose approval by the United States has been delayed for over five years. Last month, the State Department issued a report that declared that significant additional GHG emissions would not be released as a result of the construction of the final leg of Keystone XL.
The NALS summit has the potential to deepen hemispheric energy integration, if the three presidents can jointly take advantage of the windfall in regional energy. Increased integration leads to lower costs, higher efficiencies and greater technology transfers.
History and geography have linked the North American countries through significant energy reserves. In recent years, these reserves have been developed with timely policy choices that have increased each country’s potential. In particular, the shale gas and oil revolution in the United States, the oil sands in Canada, and energy reforms in Mexico are all new developments that have put each country on a path towards becoming an energy superpower.
Reforms to Mexico's energy sector were signed into law late last year. The legislation proceeded rapidly from President Enrique Peña Nieto's announcement of the reforms in August, to the negotiations among the major political parties during the fall, to voting in both houses of Congress, resulting in a majority of the 31 state legislatures changing the Constitution. For the first time in 75 years private participation will be permitted in Mexico's energy sector, not only in oil and gas, but also in electricity and power generation. The repercussions of this reform will be felt not only in Mexico but across the hemisphere, including Canada as increased development of Mexico's energy sector is a win-win for Mexico and the rest of North America.
The reform has led to large expectations and deservedly so. It goes further than what was originally envisioned when Peña Nieto announced the reforms in August 2013. The two conservative political parties, Peña Nieto’s Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI) and the National Action Party (Partido Acción Nacional, PAN), molded the legislation to make it deeper and more robust. The opposing liberal party, the Party of the Democratic Revolution (Partido Revolucionario Democrático, PRD), demonstrated rampant opposition to the reforms as they viewed them as a “privatization” of Pemex, the state oil company. The PRD is still hoping to halt the reform through a popular referendum, but the success of this initiative is unlikely.
They say the devil is in the details, and proponents of turning around Mexico's declining oil and gas production appear pleased with the components of this legislation. The vehicles that allow foreign investment vary in the amount of risk involved. These include service contracts, profit-sharing agreements, production-sharing agreements, and licenses. The latter functions in the same way as a concession, and faces a potential legal hurdle as Mexican law prohibits concessions. Nevertheless, these contracts allow foreign companies to have more skin in the game, and catapult Mexico into the top 10 in the world in terms of investment regime offered.
With the exception of gas-rich Trinidad and Tobago, the 14 other countries of the Caribbean Community (CARICOM) are energy importers. In fact, 93 percent of the region’s energy needs are met by oil imports, which average 13 percent of GDP. Venezuela is the main supplier of oil to the Caribbean through the PetroCaribe agreement, formed in 2005, which provides oil on attractive financing terms. However, declining oil production, deficient investment, and faltering leadership in Venezuela’s state-run oil company PDVSA cast doubt on the future of the arrangement. The termination of PetroCaribe would further wreak havoc on their tenuous fiscal situations. In many countries, Venezuela’s largesse has been a double-edged sword—affordable energy but increased reliance on imported oil.
Energy dependence and vulnerability are serious issues in the Caribbean, where residents suffer from high and fluctuating electricity costs, frequent blackouts and poor service. Electricity prices are some of the highest in the world, averaging US$0.33 per kilowatt hour compared to $0.09 per kilowatt hour in the United States. Oil reliance is stifling the Caribbean’s economy and the region must work towards diversifying its matrix if it wants to be competitive.
Natural gas might just be the solution. The Inter-American Development Bank recently held a Caribbean Energy Conference where panelists called for a transition to natural gas as a cheaper alternative. While natural gas would not be able to compete with subsidized fossil fuels from Venezuela, the termination of the PetroCaribe program would open the door for expanding the natural gas market. Jamaica, for example, pays 60 percent of crude upfront at market prices ($103 per barrel), and finances the rest with 1 percent interest over forty years—essentially receiving a 40 percent discount on their oil imports. The price of natural gas in the region ($10 per million BTUs) is not competitive with this discounted price. But an energy market where buyers had to pay market prices would drastically change the game for natural gas.
The natural gas situation in Mexico is frustrating when considering the country’s ample supply. While Mexico has significant unexplored potential that would benefit power generation, investment is deficient. The country must currently import liquefied natural gas (LNG) from the Middle East and Africa, paying four times the going rate in North America, in order to keep up with domestic demand. Despite the surplus of natural gas in the United States, all of the pipelines coming to Mexico are full, and thus Mexico must import from other parts of the world at a high premium. In order to meet its domestic demand—and potentially export—private investment could engage in exploration and production of the country’s ample natural gas reserves.
Petróleos Mexicanos (Mexican Petroleum—PEMEX) , the Mexican state oil company, holds a monopoly over the energy sector and has not yet been able to fully extract deep water oil and natural gas reserves due to a lack of technical expertise and limited spending on new investments for equipment and research. PEMEX is estimated to be sitting on approximately 500 trillion cubic feet of natural gas reserves. In addition to conventional natural gas, Mexico has significant shale gas capabilities, estimated to be the sixth largest amount in the world. The famed Eagle Ford Shale in South Texas has been a boon to the United States, yet the formation does not end at the border. Rather, it extends south into Northern Mexico and represents a tremendous economic opportunity.
The shale gas boom in the United States demonstrates how unconventional drilling techniques–such as hydraulic fracturing, or “fracking”–are leading to a significant reduction in natural gas imports. If Mexico brings in foreign expertise and investments to develop similar techniques, it would no longer need to import LNG from places like Nigeria or Yemen, and instead be able to enjoy a boom in natural gas production at home.
On September 18, only 11 companies signed up to participate in the auction of Brazil’s pre-salt Libra oil field, one of the largest offshore oil discoveries since 2007. This outcome fell sharply below the Brazilian government’s expectations. In fact, Magda Chambriard, head of the Agência Nacional do Petróleo (National Petroleum Agency—ANP), said the following day that she expected about 40 companies to sign up for the auction.
Because of its size and recoverable potential, the Libra field is known as one of the “elephants of pre-salt.” The field is estimated to contain between 8 to 12 billion barrels of oil, making it one of the largest in the world. Therefore, the Brazilian authorities placed a hefty price tag on registering for the auction—$2.05 million reais, or just over $900,000.
The companies that registered to participate included several Asian firms, such as Petroliam Nasional and Petronas from Malaysia; Oil and Natural Gas Corporation Limited (ONGC) from India; and China’s National Offshore Oil Corporation (CNOOC) and China National Petroleum Corporation. There were also joint ventures—such as the Chinese company Sinopec’s alliance with Spain’s Repsol—in addition to individual international oil companies that will bid, such as Total S.A., Royal Dutch Shell and Mitsui. The only Latin American company to register was Ecopetrol of Colombia.
Analysts have pointed to the absence of large international companies such as ExxonMobil, Chevron, and BP as representing the “failure” of the registration process. As stated in a recent AS/COA report, “Brazil’s Energy Agenda: The Way Forward,” government intervention in the bidding process may have deterred some companies from participating. One such deterrent, for example, is that Petrobras must be the sole operator in the pre-salt fields, and they must take at least a 30 percent stake in the project.
The relative lack of interest may spur Petrobras to change the terms of its participation, but it is unlikely to do so. Petrobras CEO Maria das Graças Foster recently stated that the company has the technical capacity to explore and produce all the oil from Libra, but needs financial backing to invest. Thus, Petrobras will need the winning bidder to put up a large share of the oil to sell from its own account in order to maximize its financial gain.
While renewable energy investment globally fell by 11 percent in 2012, renewable energy financing increased by 127 percent in Latin American countries, excluding Brazil. According to Bloomberg New Energy Finance, this included gains of 595 percent in Mexico, 313 percent in Chile, 285 percent in Uruguay, and 176 percent in Peru. In total, renewable energy investments in Latin America reached $9.7 billion in 2012.
When adding the important renewable energy portfolio of Brazil ($5.2 billion in 2012), the renewable energy sector in Latin America is growing and will continue to attract significant capital in the coming years. A combination of favorable government policies, receptiveness to foreign investment, and attractive regulatory regimes has drawn investors to renewable energy projects in the region. These issues were debated in Washington on July 30 during a roundtable discussion on financing renewable energy in Latin America at the Council of the Americas, held under the auspices of the Council’s Energy Action Group.
The conditions for renewable energy in Latin America are favorable. From the photovoltaic potential of the Atacama Desert in Chile to the many rivers that feed into hydroelectric dams in Brazil to the fields of African palm oil in Colombia, developers have been drawn to the region due to a unique geography that offers great potential for renewable feedstocks.
Countries are also beginning to adopt renewable energy standards. Chile is leading the way with its 20/20 renewable plan—20 percent of the country’s electrical grid powered by renewable energy by 2020. While the target may be a long shot, the initiative demonstrates that countries in the region are serious about developing their renewable energy potential.
Paraguay has just 6.5 million inhabitants who consume 27,000 barrels per day of refined petroleum products. To put that into perspective, Argentina consumes 698,000 barrels per day, Chile 347,000 and Bolivia 62,000. This makes Paraguay’s needs for hydrocarbons very small when compared to its neighbors.
Yet Paraguay is currently importing all of its oil, as it does not have any domestic production. In recent years, the country depended on Venezuela for a good portion of its energy needs, importing close to 8,500 barrels per day in 2011, through a preferential payment program called the Acuerdo de Cooperación Energética de Caracas (Caracas Energy Agreement—ACEC). The program was interrupted by Venezuelan President Hugo Chávez in 2012 after Paraguayan President Fernando Lugo was deposed, leaving Paraguay reeling and awash in $260 million in debt.
Oil in Paraguay has a complex history. The Chaco region is believed to have massive oil reserves, with estimates of some 4 billion barrels—just less than half of the estimated reserves of Brazil’s famed Libra pre-salt field. Because of these resources, Paraguay and Bolivia went to war in 1928 over claims to part of the region, where oil had been discovered by Standard Oil of New Jersey. The Chaco War, which raged until 1935, resulted in 100,000 casualties and, despite winning the war, Paraguay was never able to develop the region’s potential, while Bolivia went on to become a major producer.
Subsequent to the end of the war, numerous exploration and production companies came to Paraguay, but there were never any significant finds. Between 1947 and 2005, 49 wells were drilled without major production. A hydrocarbons law attractive to foreign investors was passed after the end of the Alfred Stroessner dictatorship (1954-1989), which provided favorable terms for companies wishing to develop projects in the country. Yet nothing to date has yielded tangible results.
Mexican President Enrique Peña Nieto’s plan to reform state-owned Petroléos Mexicanos (PEMEX) has attracted the attention of many analysts. Since President Lázaro Cárdenas nationalized the oil sector in 1938, no president has been able to push for reform to allow for foreign ownership of petroleum assets.
Peña Nieto sees allowing foreign investment to be critical to turning around PEMEX, which has suffered from declining production in recent years. PEMEX was producing 3.4 million barrels per day in 2003 and production slipped to 2.5 million barrels per day in 2012.
While the debate for energy reform continues, an oil auction for six blocks in the Chicontepec basin is set to take place on July 11, with multinational oil companies such as Repsol, Schlumberger and Halliburton set to make bids.
This is possible due to a 2008 reform that allows for limited private investment in the sector through incentive-based contracts. When it passed, then-President Felipé Calderón was quick to accompany the reform with a firm disclaimer: “I want to make clear that oil is and will continue to be exclusively Mexican property. PEMEX is not being privatized. Oil is a symbol of the nation’s sovereignty.”
With urbanization and population growth trending upward, Brazil has increased its demand for energy, especially in the areas of oil, natural gas and electricity. On the supply side, oil and gas production has increased and there have been several well-publicized, large deepwater finds that have generated much excitement. These include the pre-salt reserves off the coast of Rio de Janeiro state where the potential reserves total over 50 billion barrels of oil. Brazil has only approximately 14 billion barrels of proven reserves, making these finds quite significant.
However, without foreign investment, Brazil will be unable to effectively and efficiently extract the potential oil and gas because of the size and complexity of the untapped reserves. Shale gas and shale oil present an added layer of complexity for development. Because the extraction of shale relies on horizontal drilling and hydraulic fracturing (“fracking”), only companies experienced in these sophisticated techniques are able to extract the shale gas.
To generate investment interest, the Ministéria de Minas e Energia (Ministry of Mines and Energy), in conjunction with the Agência Nacionaldo Petróleo, Gas Natural e Biocombustíveis (National Agency of Petroleum, Natural Gas and Biofuels—ANP), is publicizing the oil and gas bidding rounds that will take place this year. Interestingly, as part of its effort, the ANP has been looking to target small and medium-size oil producers with auctions either in mature basins or inactive fields where there still may be accumulations of oil and gas.
Earlier this week in Brazil, the price of ethanol rose above the price of sugar for the first time in nearly two years. What does this mean? Sugar mills, which dot Brazil’s landscape, will now opt to produce ethanol rather than sugar. This is a key development in a country that has been a leader in sugarcane ethanol for the past 40 years.
Since the 1970s, Brazil has led the way in producing alternative liquids as a part of the country’s energy matrix. Indeed, in 1975, Brazil initiated a gasoline substitution program called Pró-Álcool (The National Alcohol Program), which was developed in response to the world oil crisis at the time. Brazil could pivot its extensive sugar supply to produce ethanol, which could be used as an automotive fuel instead of relying on fossil fuels—which fluctuated in price—in large part due to the vagaries of the Organization of the Petroleum Exporting Countries (OPEC).
This approach resulted in a win-win: Brazil became the world’s second-largest producer of ethanol fuel and, until 2010, was the world’s largest exporter. The Brazilian government subsidized production of ethanol, mandated that fueling stations offer ethanol in addition to gasoline, and provided incentives to build cars that ran on ethanol alone. Later, Brazilian automakers began producing “flex-fuel” automobiles that gave drivers the option to fill up their tank with either pure ethanol, or an ethanol/gasoline blend, depending on what was cheaper on that particular day.