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.