Energy in Latin America 2010-2020: Headed For A Lost Decade?

Genaro Arriagada

Inter-American Dialogue

Latin American politics is known for mirages that help obscure the severity of a problem and defer a solution. This is what seems to be happening with energy issues. In the past six or seven years, the energy sector was cited time and again among the most problematic in the 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 in the pre-salt fields, confirmation of Venezuela’s ultra-heavy crude oil reserves, and some hopes, albeit still vague, about shale gas, Latin America is beginning to emerge as a successful region whose energy role, in this decade and beyond, will be crucial to the world and whose exportable surplus could help relieve China’s shortages, according to some, or help 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 concrete results. The region’s contribution to relieving the global energy plight, at least in this decade, seems an idealistic promise derailed by tough realities. Reasons for optimism seem weak, barring a sea change whose nature will have to be eminently political.

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The Vulnerabilities

When it comes to energy, Latin America exhibits a range of weak points. These are discussed below in no particular order. 1. The Vulnerabilities of Central America and the Caribbean In terms of energy, there is not one Latin America, but several. One is energy-rich South America, flush with a range of diverse resources, including abundant oil, hydroelectricity, gas, coal and non-traditional renewable energy reserves. Another is energy-poor Central America and the Caribbean, which encompass twenty-three nations with a deficit —i.e., where domestic consumption exceeds the national output— and only one, Trinidad and Tobago, without a deficit. Individually, in many of these nations oil accounts for upwards of 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 hydroelectric resources 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 and social progress. In the past, these difficulties were mitigated by a joint Venezuela-Mexico

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initiative (the San José Accord), which is no longer in force. At present, albeit within limits and ways that are important to spell out, this aid is being provided by PetroCaribe, an initiative of President Chávez. In addition, in the case of Cuba, Venezuela provides oil subsidies similar in form and magnitude to those the Soviet Union used to provide. These initiatives, however, are threatened by factors such as a decline in Venezuela’s exportable surplus, an eventual change of government in Caracas, and the massive debt owed to PetroCaribe by recipient countries. Should any of these factors or a combination of them cause the flow of oil assistance to stop or be significantly reduced, the blow to Central America and the Caribbean would be harsh. In the case of Cuba, disruption of Venezuelan supplies and subsidies could trigger a crisis analogous to the “special period” of the nineties after Soviet aid ceased. 2. Stagnation of Oil Production and Decline of Exportable Surplus A review of South American oil industry performance in the past decade gives more reason for concern than enthusiasm.

As a share of the world total, South America’s proven reserves went from 8.9 percent in 2000 to 17.3 percent in 2010. Yet, disaggregation of these figures provides a less encouraging outlook. Outside of Venezuela, the region’s low reserves have grown minimally in the period, from 1.9 to 2.0 percent of the world total. Brazil accounts for over half of the growth, a share set to increase significantly as new pre-salt field reserves are proven. Mexico faces a tougher situation, as reserves have dropped from 1.2 to 0.8 percent of 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 2011 A look into production yields a disturbing balance, as it appears stagnant: 6.8 million barrels per day in 2000, 6.9 a decade later. In 2000, Latin America’s share of world oil production 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 of production. 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 500 mbd from 2000 and 2010. The good news comes from Brazil, whose share of world

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production rose from 1.7 to 2.7 percent. The rest of Latin America accounts for less. A recent success story is Colombia, although prospects are uncertain due to small reserve size. 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 to triple production without overtaxing resources. Stagnant production and domestic demand increases have made a significant dent in Latin America’s exportable surplus. Such is the result of comparing production and consumption in five countries that were oil exporters during the decade. Also considered are net importers.

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 2011 The balance is disappointing. The exportable surplus fell 33 percent in a decade and, had it not been for Brazil’s production surge, surpluses capable of meeting increases in other parts of the world would be irrelevant despite having the world’s largest proven reserves outside the Middle East. While it is true that the situation can change, so is the fact that declining production in Venezuela, Mexico and Argentina and stagnant production in Ecuador are not occasional events but the consequence of structural factors whose transformation will not be easy, will only be possible after comprehensive political accords, and will take time. 3. The Hydroelectricity Blockade Over the past fifty years, hydroelectricity has been the most distinctive—and possibly the most positive— trait of Latin American energy production. The enormous influence of this source of energy sets Latin America apart from all other regions. Hydroelectricity stands for slightly over 6 percent of the world mix and 26 percent of the Latin American mix. It accounts for over 50 percent of all electricity produced in eleven countries, including Peru and Costa Rica, and represents as much as 80 percent in Brazil and 75 and 67 percent in Colombia and Venezuela respectively. In Paraguay and Uruguay, the figure is 99 percent.

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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 2011

However, in Latin America, the hydroelectric sector has been rapidly losing steam for years. In the twenty-year period from 1966 to 1986, the industry more than quadrupled. In the next decade, it grew 50 percent; from 1996 to 2006 it expanded only 33 percent, and over 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, the best 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 25 percent is being effectively used. Another explanation is that low oil prices, much like in the nineties, have made dams seem less attractive. But this objection has been contradicted by oil prices four times what they were five years ago. Strictly speaking, in Latin America, the strongest foes of hydroelectricity are the increasingly influential environmentalist groups whose opposition against large dams is nearly absolute. 4. The Trend Toward a Dirtier Energy Mix The energy consumed in Latin America is the cleanest in the world due to two factors. First and foremost, hydroelectricity. Secondly, the share of fossil fuels in the energy mix is the lowest in the world: 72 percent versus an 87 percent world average. Within that total and corroborating the cleanliness of the regional mix, the role of coal —“the dirtiest fossil fuel”— 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)

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Source: BP Statistical Review of World Energy. June 2011

Keeping the mix clean requires maintaining hydroelectricity use at current levels. Failing that, the slack will be taken up by fossil fuels, notably coal, the cheapest energy source of all. Chile is case in point. Chile has rich hydroelectric potential, but has continued to source the majority of its primary energy needs from fossil fuels. As a result, imports of fossil fuels witnessed a five-fold increase from 2003 to 2011, and all of the power stations constructed since 2004 are gas- or coal-based. The notion that non-conventional renewable energy (NCRE) can fill the gap, although highly desirable, is hard to achieve, at least in this order of magnitude. In fact, the share of NCRE is minute (1.8 percent of the mix). Disaggregation reveals an even less auspicious reality, since Brazil alone accounts for 70 percent, nearly all of it ethanol. Demand for NCRE is an essential policy objective but developing it is not easy, not to mention 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 is not rational policy; it is folly. Claiming that the gap left by freezing these sources can be filled 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 nuclear energy, and the development of NCRE will be the focus of a civic debate of the utmost importance for the meaning —whether successful or lost— of this decade.

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THE NEED FOR POLITICAL DEFINITIONS This inventory of weaknesses is by no means exhaustive. Several other major factors could be mentioned, including issues of pricing and subsidies, but this catalog helps illustrate the main 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 the availability 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 successful energy sector are institutional and political in nature. Central America and the Caribbean require special attention from states and multilateral agencies. The efforts of institutions such as the IDB and the World Bank should be directed at these countries. Except for Bolivia, it makes no sense to focus on energy-rich South America. Assistance for sector development should not concentrate on any one component of the mix, but on all of them (oil, gas, coal, hydroelectricity, traditional biomass and NCRE), and most importantly, on grid integration both within these sub-regions and with Mexico and Colombia. The technical studies for grid integration within Central America have been completed and require little else. Nowadays the issue lies with the political

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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 financial centers that evaluate the technicalities of projects to the realm of politics, the place where one must try to balance the requirements imposed by energy security and tighter environmental regulations and the interests of groups that feel adversely affected by such projects. This is a strong conflict where dam opponents not only wield intellectual objections, but are a social movement in which environmental groups are joined by agrarian communities and aboriginal peoples and have international connections, so that they feel part of a single struggle spanning from Río Papagayo in Mexico to Patagonia in Chile to Río Madeira in Brazil to the Inambari and Pakitzapango dams in Peru. But governments are forced to build solutions, since a Latin America that agrees to freeze hydroelectric development would plunge into a major energy crisis and —even if some environmental groups refuse to acknowledge it— end up with a substantially less clean energy mix. Ending the current stagnation of oil production is, again, an issue where institutional and political components play a key role. In the realm of Latin American energy —especially oil and gas—national oil companies are the largest players and, underpinned by growing resource nationalism, will continue to be for decades to come. Yet, this recognition starts rather than precludes a debate on oil sector institutionality, as it is evident that there is no single type of state-owned oil company. This is illustrated by the fact that while both are state-owned, Petrobras and PDVSA interact very differently with their respective governments, differ radically in terms of their corporate government and links to society and 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, in others they do not. Petrobras and Ecopetrol are open to private investors who share in their ownership and results through shares of stock traded across world stock markets. Yet, in both cases state control of the company is guaranteed. Such openness forces these companies to submit to the control, transparency and accountability standards governing international private enterprise. As various writers hold (i.e., Espinaza, Tissot, Arriagada), often the leading factor accounting for the extremely checkered performance of national oil companies is institutional in nature.