By Genaro Arriagada
E
nergy is a leading world concern. Tensions among states are increasingly linked
to the security of energy supplies, prices and transportation. In this context, analyses from
the viewpoint of politics and strategic and power considerations among states take on new importance in addressing energy issues. A fundamental factor in determining the might and weight of
nations is the quality with which they handle energy policies.
This document is an introduction to the work of the Energy Working Group (EWG) set up by the
Inter-American Dialogue to review energy policy in the hemisphere. Rather than an academic
essay, it is a guide for open, in-depth debate to identify relevant sector issues and to help build the
energy
Energy Policy in Latin America:
The Critical Issues and Choices
EWG agenda. Chapters divisions are intended to point out issues deserving special attention.
I. The Latin American Energy Mix
Due to the lack of reliable data, the preceding
table does not consider other energy sources,
the most important being firewood, waste,
and manure, often associated with hard-core
poverty. In addition, it is not possible to clearly
quantify the contribution of non-conventional
renewable energies (NCRE)—i.e., solar, wind,
geothermal or modern biomass—which, although of minor significance today, are energy
sources of the future. However, the share of
traditional biomass is high and NCRE scant.
mix is very small. Since energy policy should
be based on the use of all sources rather than
a single one, a view of the overall energy mix
is fundamental to discussing and formulating
long-term policy. For example, environmental
concern about greenhouse gas emissions takes
priority over other forms of pollution, and
that has given new momentum—also in Latin
America—to once controversial energy sources, such as large dams or nuclear plants. At
the same time, environmental considerations
should not obscure economic factors essential
to growth; the cleanest energy sources—wind
and solar—are among the most expensive. A
purely economic logic favors investment in
coal, which is the cheapest source but also the
most polluting.
Latin America is an area rich in oil, hydroelectric power, and gas, with enormous reserves
and production that exceeds consumption,
making it a net energy exporter. By contrast,
the share of coal and nuclear energy in the
In general terms, through the year 2030—assuming that energy consumption rises 60
percent, the mix remains clean, and the cost of
energy sees a relatively minor increase—Latin
America should seek goals like the following:
As compared to that of any other area of the world,
the region’s energy mix reveals special circumstances, challenges, problems and policies.
The author gratefully acknowledges comments offered by Luis Enrique Berrizbeitia, Chris Cote, Ramón
Espinasa, Peter Hakim, Paul Isbell, David Mares, Mauricio Pozo, Jaime Quijandría, Michael Shifter, Roger
Tissot, Patricia Vásquez, Duncan Wood, and Jorge Zanelli. The sole responsibility for the contents of this
article, however, lies with the author.
Genaro Arriagada is non-resident senior fellow of the Inter-American Dialogue. He served as minister of the
presidency of Chile and ambassador of Chile to the United States. Arriagada was also chairman of the Board
of Radio Cooperativa and the national director of the “NO” Campaign, which defeated General Augusto
Pinochet in the plebiscite of October 1988.
working
paper
October 2010
Energy Mix (2006, Percent)
Oil
Latin America is
an area rich in
oil, hydroelectric
power, and gas, with
enormous reserves
and production
that exceeds
consumption.
Gas
Coal
Nuclear
Hydro
North America
40.1
25.1
21.8
7.6
5.4
South/Central America
44.7
22.2
4.1
0.9
28.0
Europe & Eurasia
32.0
34.1
18.3
9.5
6.1
Middle East
50.5
47.0
1.6
0
0.9
Africa
40.3
21.0
31.7
0.7
6.2
Asia-Pacific
31.5
10.8
49.2
3.5
4.9
World total
35.8
23.7
28.4
5.8
6.3
Source: BP, Review of World Energy, 2007
(i) Hold the hydroelectric power share; (ii)
Slightly reduce the oil share; (iii) Hold the
natural gas share; (iv) Reduce the coal share; (v)
Reduce the role of traditional biomass, especially
if associated with hard-core poverty; (vi) Hold
and, ideally, increase the nuclear energy share;
(vii) Multiply the NCRE contribution so they account for 10 to 15 percent of the mix.
II. Analysis of the Various
Sources of Energy
Having set the general framework, it is important to analyze the energy grid’s components,
which are at various degrees of development,
pose distinct problems and opportunities,
and should be addressed through different
policies.
1. Oil. Excluding the Middle East, Latin
America is the region where oil makes the largest contribution to the fuel pool, even more than
in the “oil-addicted” United States. South and
Central America, the Caribbean, and Mexico
together own 15.8 percent of proven reserves
and account for 12.8 percent of world production, which compares favorably to their 8.8
percent share of consumption. The situation as
to conventional world reserves is auspicious.
2 Energy Policy in Latin America: The Critical Issues and Choices
But highly favorable conditions are giving way
to uncertainty due to stagnating, and even
declining, production in South America and
Mexico. A review of exportable surpluses for
the region’s five largest exporters (Venezuela,
Mexico, Ecuador, Colombia, and Argentina)
shows that their production fell to 4.3 million
barrels per day (mmbd) from 5.3 mmbd in the
period between 1996 and 2007. The trend has
worsened in recent years, as strong production
drops in Venezuela and Mexico have led to
cuts amounting to something more than another half million barrels a day. In other words,
from 1996 to 2009, the exportable surplus
dropped nearly 30 percent. In contrast, Brazil
has emerged as a success story when it comes
to oil exploration and production. In 1997 it
accounted for two-thirds of South America’s
crude imports, but by 2009 it was self-sufficient
in energy and ready to join the exclusive club
of oil-exporting countries.
Outside of Brazil, and abundant reserves
notwithstanding, Latin America’s oil future
appears substandard. We must distinguish
between countries depleting their petroleum
reserves and those affected by energy policy
mismanagement. In any event, the region’s
current strength is under threat unless there
is an effort to increase sector efficiency, particularly in Mexico, Argentina, Venezuela, and
Ecuador. Depending on the country, a move
toward efficiency includes legal reforms, improved regulatory frameworks, fiscal policies
providing state-owned enterprises with sufficient investment funding, and the elimination
of price distortions.
When it comes to oil, three countries require
special attention: Mexico and Venezuela as
problematic cases and Brazil as a success
story. Concern about Mexico and Venezuela is
crucial, since in 2000 they accounted for nearly
two thirds of oil production in Latin America.
Brazil, by contrast, boasts results so favorable
that by the end of the current decade it probably will have overtaken Venezuela and Mexico
as the leading producer with 3.5 mmbd, while
Mexico and Venezuela will produce a combined 4.5 mmbd.
This raises issues of special interest:
The oil situation in Venezuela, which available data show is deteriorating rapidly—and
suggest is likely to see continuing declines in
production volume and exportable surpluses
for deep-seated reasons that are not easy to
reverse in the short term;
``
An analysis of the recent implementation
and possible effects of the oil sector reform approved by the Mexican Congress, since increasingly it is being seen as too limited and may be
incapable of reversing production losses;
``
The Brazilian case, which requires careful assessment since its unorthodox policies
eschew the national oil companies (NOC) vs.
international oil companies (IOC) dilemma.
In Brazil, an active state policy coexists with
a company, Petrobras, which combines the
features of state-owned and private enterprise
within a regulatory framework equally distant
from the overly liberal policies of the seventies
and eighties (i.e., the YPF privatization under
Menem) and from the unyielding statism of
the past (Pemex) and the present (policies currently in effect in Venezuela or Ecuador).
2. Natural Gas. The contribution of gas to
the regional energy mix matches the world
average; that is, 22.2 percent vs. a 23.7 percent
global average. When it comes to reserves
and production, however, the gas situation is
less satisfactory than that of oil. Latin America
owns 4.1 percent of proven reserves, and
production matches consumption: 6.3 percent
of the world total. However, the magnitude
of Venezuelan and Bolivian reserves notwithstanding, sector development is lagging while
Brazil, Peru, and Trinidad and Tobago appear
as success stories.
The oil situation
in Venezuela is
deteriorating
rapidly.
The South American liquefied natural gas
(LNG) market started in 2008 following the
announcement that at least seven regasification plants would be built. This strengthened
the overall regional energy situation but
weakened integration efforts, with leadership
in this field falling to Chile and Brazil in South
America and the Dominican Republic in the
Caribbean and Central America. Peru, building
South America’s initial liquefaction plant, is the
first country in the region to commit to LNG
exports.
A more optimistic way to view the relationship between LNG and integration is to say
that classic gas integration—via pipelines—is
on the way out, but the door has opened for
integration on the basis of LNG, with neighboring countries (Chile and Peru or Brazil
and Argentina) closely cooperating.
``
Several issues deserve special attention:
The prospects of gas in Bolivia, where
production increases are questionable due to
YPFB’s low investment, mismanagement, and
poor technical capacities. From the standpoint
of demand, Bolivia must be concerned that two
of its three largest clients, Brazil and Uruguay,
have announced large discoveries of gas that
may well render them self-sufficient. In addition, Argentina’s demand can now be met by
its own LNG or that of Chile.
``
Inter-American Dialogue • Energy Working Paper • Genaro Arriagada 3
The controversy over the Camisea gas
fields, beginning with reserve size and extending into charges of price policy distortions that
encourage the development of thermoelectricto-gas projects to the detriment of hydroelectric projects. However, other studies say Peru
faces no reserves problems, adding that in the
medium term there will be a gas glut as lots 56
and 58, adjacent to Camisea, come on stream.
``
Latin America
is the richest
hydroelectric region,
with 22 percent
of the global total
and four times the
world average.
3. Coal. This will continue to be the fastestgrowing fuel, and its share in the Latin
American mix —a low one-seventh of the
world average—is likely to increase, driven
by low costs and difficulties in developing
hydroelectric and nuclear energy thanks to
government indecisiveness and opposition
from environmentalists and groups defending local interests or indigenous community
rights. The role of coal is small and limited to
Brazil, Chile, and Colombia, which account for
85 percent of regional consumption of this fuel
source and which contribute about 10 percent
of the mix. Although starting from a very low
point, Central and South America represent the
world area where coal consumption is growing
the fastest. This increase will tend to muddy
a comparatively clean energy mix. Relevant
issues include:
In light of the Copenhagen Summit and
climate change concerns, analyzing the dynamics, prospects, and problems arising from
development of the coal-based thermoelectric
industry in Latin America;
``
A case study of Chile, where consumption
is undergoing explosive growth driven by low
coal prices and shortages of other forms of
energy. In this context, what are Chile’s options for energy development? Comparatively,
are these the same factors driving coal use in
Central America?
``
4. Hydroelectric Power. Latin America, and
South America in particular, is the richest hydroelectric region, with 22 percent of the global
total and four times the world average. However,
development is hampered by environmental
4 Energy Policy in Latin America: The Critical Issues and Choices
groups opposed to new dams. This has led
to conflicts in Chile over the proposed Aysén
dams; in Brazil over the Río Madeira projects; in
Guatemala over the three Río Hondo plants; in
Mexico over the large Parota dam in the State
of Guerrero and another dam on the Papagayo
River; in Honduras and El Salvador over El
Tigre dam in the Río Lempa basin; in Peru over
the Inambari and Pakitsapango in the Amazon,
and several others.
Among issues of great interest in this area one
stands out—even if its scope goes beyond hydroelectricity. It is the confrontation, certain to
grow increasingly bitter, between environmentalists and native communities, on one hand,
and, on the other hand, large international
NGOs opposed to dams (and nuclear energy
or even oil development) and large corporations, governments, and multilateral lenders
who support development due to security or
low costs, or because the energy generation is
cleaner and friendlier to nature. The ITT case
in Ecuador is an example of NGO opposition.
Large “environmental battles” over hydroelectric power are already underway. Proponents
of nuclear energy should be expected to
intervene with arguments that nuclear power
is a sustainable option for a continent that has
decided to bring hydroelectric development to
a halt but which should not rely on expanded
coal use.
5. Nuclear Energy. Development is incipient. While nuclear energy’s contribution to
the world mix stands at 6 percent, in Latin
America it is less than 1 percent. Since 2006,
however, development has been espoused
as necessary, given factors such as climate
change, high oil prices, and dwindling reserves and production. Brazil and Argentina
have announced new nuclear plants, the debate in Mexico is growing more strident, and
Uruguay has set up a bipartisan commission
to review the issue. Chile may soon become
the fourth Latin American country to integrate
nuclear energy into the mix. In Venezuela, the
Chávez administration has been flirting with
nuclear energy that uses Russian and Iranian
technology while leveraging Venezuela’s vast
uranium reserves. Venezuela’s claims may
have to be taken more seriously now that the
country is straining under a hydroelectric
power crisis and falling oil production. Playing
against such plans, however, is the high cost
of investment and strong demands for state
capitalization of the oil industry. Should Chile,
Uruguay, and Venezuela take action, more
than 400 million Latin Americans would have
nuclear energy.
Given the factors above, compounded by slow
hydroelectric growth, nuclear development
seems a likely part of Latin America’s future.
Relevant issues are:
A reassessment of Latin America’s regulatory framework (nuclear non-proliferation, security, radioactive supplies, waste), considering
that regional institutions (Treaty of Tlatelolco,
Opanal) are noteworthy but operationally
weak. How many more regulations are necessary and in which areas? Would full application
of existing regulations suffice?
needs can be met only by traditional biomass.
Firewood, the most characteristic use of biomass, is hard to quantify, but it accounts for a
very high share of the mix in the poor nations
of Central America and the Caribbean (e.g., 56
percent in Haiti and 42 percent in Nicaragua).
Yet, firewood could be rationally used in
countries with vast forests, the technology
to process farm waste, and thoughtful forest
management plans.
Chief among the issues of concern is a followup to Millennium Goals to give the poor, who
otherwise have only traditional biomass, access to modern energy sources. What policies
are being pursued to reach this objective? How
effective are the various policy instruments?
Worldwide use of
non-conventional
renewable energy
has been rising
rapidly, but its
overall contribution
remains scant.
``
A possible regional accord committing
countries to endorse the Additional Protocol to
the Nuclear Non-Proliferation Treaty.
``
The contention by some that proliferation
is not a Latin American concern since building
the bomb is neither a goal nor option for any
nation in the area. What is really important is
nuclear cooperation among countries of the
region in order to move forward on issues of
mineral and fuel production, nuclear electricity generation, waste disposal, and nuclear
research and development. Agreements much
like those already in effect between Argentina
and Brazil would help eliminate secrecy,
rivalry, and competition among nations and
could help avoid proliferation.
``
6. Traditional Biomass. The oldest form of
energy is traditional biomass for heating, lighting, and cooking. Its use is often associated
with hard-core poverty, and there are some 100
million Latin Americans whose basic energy
7. Non-Conventional Renewable Energy.
This includes run-of-river hydroelectric plants,
wind, solar, geothermal, and non-traditional biomass such as sugar cane, corn-based, and cellulosic ethanol. Although currently contributing
only 2 percent of the Latin American mix, these
sources are key in addressing climate change
and will be a focal point of future debate. While
clean to varying degrees, some of these sources
have non-trivial negative effects. Worldwide use
of non-conventional renewable energy has been
rising rapidly, but its overall contribution remains scant. In general, its development hinges
on subsidy policies that poor and even middleincome economies, such as those of Latin
America, cannot afford to any significant extent.
Still, there are success stories with some forms
of renewable energy in individual countries, and
that is encouraging for the region.
Relevant issues include:
What is the balance three years after the
launch of a major ethanol development initiative by Brazil, the United States, and some
multilateral organizations? Have expectations
actually materialized?
``
A minor case, the geothermal experiences
of Costa Rica and El Salvador are worth noting.
Would the current stage of “second-generation
``
Inter-American Dialogue • Energy Working Paper • Genaro Arriagada 5
Energy is
a bottleneck
to growth in
Central America
and the Caribbean.
ethanols” justify in countries with vast forest
resources, such as Brazil, Chile, and Uruguay,
a joint government-private sector-multilateral
organizations effort to develop cellulosic ethanol based on forests and forest waste?
8. Non-Conventional Hydrocarbons. The
hemisphere holds remarkable possibilities for
development of “non-conventional” or “tough”
hydrocarbons, including Canada’s tar sands
or the ultra heavy oils of Venezuela’s Orinoco
Basin, which could equal double the reserves
of Saudi Arabia. However, the technical and
financial issues in developing these resources
are enormous and require analysis of the current status of both sectors and the production
experiences now underway. (The environmental impact is also being questioned, particularly
as regards tar sands.)
Interestingly, high-profile observers have
noted that the distinction between conventional and non-conventional oil is irrelevant since,
at the end of the day, any oil that markets
can integrate, by reasons of cost and price, is
conventional. In this context, the ultra heavy
oils of the Orinoco have better prospects than
Canada’s tar sands.
III. Energy Regions
in the Hemisphere
Specific local circumstances and issues call for
different policies, making it most expedient to
view the hemisphere as not one zone but three:
Central America and the Caribbean; South
America (a more detailed study may require
distinguishing between the Andean area and
a wider Southern Cone including Brazil and
Bolivia); and North America. North America
should not be limited to Mexico (i.e., include
the United States and Canada).
Central America and the Caribbean encompasses twenty-three nations with a deficit. They
are Haiti, the Dominican Republic, and Cuba,
plus the seven Central American nations—
Belize, Guatemala, Nicaragua, El Salvador,
6 Energy Policy in Latin America: The Critical Issues and Choices
Honduras, Costa Rica, and Panama—and
thirteen of fourteen CARICOM members. In
this region, only Guatemala and Cuba produce
some oil, although not enough to meet domestic
demand. Oil accounts for upwards of 70 percent
of the energy mix in many of these nations.
They possess limited refining capacities, which
compounds dependence. Cuba may eventually
become self-sufficient if agreements signed with
Russia, Brazil, Norway, and Spain to explore
the northern coast come to fruition. In addition,
the Central America and Caribbean zone has no
gas except for Trinidad and Tobago, home to a
significant exportable surplus. Countries in this
area possess modest hydroelectric resources
and will have no access to nuclear energy in the
foreseeable future.
Energy is one of the bottlenecks to growth in
Central America and the Caribbean. The use
of oil as an instrument of policy is rife whenever there is a strong imbalance of power between a country with a surfeit of the resource
and another that needs the resource urgently.
A state may prevail over another in such a situation, reinforced by subsidized prices or soft
financing terms. Within the hemisphere, this
zone is the most likely for such relationships.
It is where the importance of oil as an instrument of foreign policy can be greatest.
South America, in contrast, is rich in energy
resources. Exportable oil surpluses are
significant and proven reserves very high.
Venezuela, Bolivia, and Peru have vast gas
reserves and Brazil has recently reported major discoveries. The hydroelectric potential is
enormous, with Brazil standing as the world’s
largest producer after China. Venezuela
is eighth in the world and Colombia and
Argentina are among the top twelve. Chile
and Peru alone produce 5.4 percent and
4.4 percent of the world’s hydroelectric
power, respectively.
Yet, major differences underlie this scenario.
Chile and Uruguay are weakest, with strong
energy shortfalls. Paraguay compensates
its shortcomings with the enormous flow of
electricity from the large dams on its borders
with Brazil and Argentina. All other countries
show positive balances, but their prospects are
dissimilar. Brazil exemplifies successful policy
management, but Venezuela, Argentina, and
Ecuador are the opposite.
North America: Latin America is the leading
oil exporter to the United States, and analysis
of this zone must look at Mexico along with
the United States and Canada. The most likely
scenario for energy partnerships in the hemisphere involves the United States, with a strong
deficit, and Mexico and Canada, both with excess production. However, a closer look reveals
that the United States is not alone in having
an oil industry with fast-declining production
(1.5 million barrels per day less than a decade
ago), as Mexican prospects are even bleaker.
North America is the region of the world where
the reserves-to-production ratio is lowest; at
current pumping rates they will be depleted in
twelve years.
The disparities among these three zones
create both challenges and opportunities
for energy partnerships. Several issues
deserve attention:
Energy shortcomings in Central America
and the Caribbean will tend to worsen as three
initiatives designed to mitigate those shortcomings face difficulties. The oldest of these is
the San José Accord, a joint effort by Mexico
and Venezuela. The second, PetroCaribe, is
weakened by issues facing the Venezuelan oil
industry and economy. And progress has been
frustratingly slow in the energy dimension of
the Puebla-Panama Plan.
``
Venezuelan difficulties may affect current
assistance to Cuba and cause major problems
to this island state.
``
Analyzing the complementary prospects
of the United States with South America and
Mexico should be an interesting exercise given
the falling production in both Mexico and
Venezuela (Venezuelan exports to the United
``
States are their lowest since 1992). By the end
of the decade, Mexico may well cease to be an
oil exporting country. Other major U.S. suppliers include Brazil, Colombia, and Ecuador.
IV. Security, Integration,
and Geopolitics
Energy security is not a synonym for autarchy.
Rather, it is an elusive concept that is difficult
to unequivocally establish. At its most simple,
it can be defined as the security—or reasonable guarantee—that the flow of energy toward
a consumer will not be interrupted. Yet, the
first issue with that definition is the dichotomy
between the security of consumers, which is the
security of supply, and the security of producers, which is the security of demand. In other
words, the refusal to buy, especially in the case
of a monopsony, although less frequent, can be
as serious as a decision to curtail the supply.
By the end
of the decade,
Mexico may well
cease to be an oil
exporting country.
While cuts in the supply are the most frontal
threat to security, responsibility for them varies.
Many cuts are not the fault of states or companies (i.e., accidents in refineries, landslides or
earthquakes that sever pipelines, catastrophic
weather conditions). Some cuts may result
from political or social turmoil beyond the control of companies or governments (i.e., strikes,
riots, terrorist attacks, war, other geopolitical
instability). Cutting or threatening to cut the energy supply may also be used as an instrument
of political pressure, such as happened with the
oil embargo applied by Arab countries against
the United States and the Netherlands in 1973
or Russia’s interruption of the gas supply to
Ukraine in 2006 or Belarus in 2007.
Security can also be threatened when a relatively more powerful country sets an unfair
price—either too high (if it is a supplier) or
too low (if it is a consumer), thus affecting a
weaker nation. In addition, cartels may distort
prices, and more seriously, put conditions on
the supply. That energy security requires an
uninterrupted flow of energy at a reasonable
price is perhaps a better way to define it.
Inter-American Dialogue • Energy Working Paper • Genaro Arriagada 7
Higher levels of
energy security
require not autarchy
but diversification
of the energy mix.
The use of the energy supply as a political instrument depends on several factors.
One is the existence of strong asymmetries
between states, where one owns the resource
in abundance and the other or others do not. It
also depends on the quality of crude. Lighter,
sweeter crude has better and more varied markets; with a broad range of players involved in
demand and supply, prices are set more transparently. This is not the case with heavy or acid
crude, which is harder and costlier to produce.
It trades in restricted markets, which may lead
to a symbiotic relationship between producer
and consumer.
The use of oil for political purposes may also
be limited by its nature as a fungible product
traded in the global market. Exports to one
country that are diverted to another will simply
be replaced with other exports, which in turn
will be diverted from other nations. The issue
is whether a supply cut implies a net reduction in the oil supply to all markets or merely a
redirection of the flow. The use or threatened
use of oil as an instrument of pressure is also
limited by transportation costs since diverting
exports to other countries may represent a
significant cost increase.
This situation with natural gas is quite different, as about 70 percent of the gas supply
does not trade on the open market. Prices
and amounts are fixed in long-term contracts
between countries joined by a pipeline. That
creates strict, reciprocal dependence between
exporter and importer: a monopoly and a monopsony at the same time. Grid links between
countries share this trait. The LNG market, on
the other hand, resembles that of oil with the
restriction that it requires consumers to build
regasification plants.
Experience shows that higher levels of energy
security require not autarchy but diversification of the energy mix. That allows countries
to avail themselves of different sources—ideally from different countries—and to leverage
competitive advantages, as production costs
can vary widely from country to country.
8 Energy Policy in Latin America: The Critical Issues and Choices
Security through diversification and leverage
of economic benefits are among the factors
that drive integration. The leading forms of
energy integration are linkages through gas
pipelines and power grids. In the region,
development of either is incipient. In the case
of natural gas, progress has been hobbled by
political or geopolitical factors. In recent years,
threats to use energy as an instrument of pressure against other states has been frequent,
as demonstrated by Chávez’s warning to the
Dominican Republic over the status of Carlos
Andrés Pérez; criticism of the “Southern Gas
Pipeline;” Bolivia’s “gas for sea” policy with
Chile; the Uribe administration’s reduction
of gas in the Transguajiro pipeline and in
electricity deliveries to Venezuela; and several
others. While not economically or politically
significant, these events negatively affect the
chances for energy integration, and they have
prompted several countries to adopt policies
which, while costlier, guarantee energy security and independence. Fears such as these are
behind the willingness of Brazil, Chile, and the
Dominican Republic to invest in costly regasification plants; that will circumvent dependence
on a neighboring country, even if it means
sourcing more expensive gas supplies as far
afield as Indonesia or Africa.
Nations such as China or India, whose highest concern is to secure the energy supplies
required by their growth plans, are increasingly
active in Latin America. They are committing
to investments and partnerships (especially
China) with corporations and governments. As
a result, the geopolitical energy equation must
consider not just large producers, but also and
most especially large overseas importers and
their investments in the area.
There are several issues of special interest
when it comes to the twin concerns of energy
security and geopolitical tension:
The need for an international accord or convention, at the regional level, designed to guarantee that energy supplies (especially those
channeled through pipelines and transmission
``
lines) will not be arbitrarily cut by signatory
states. Of particular note are the EU Energy
Charter Treaty and recent developments and
talks involving Europe, Eurasia, and Russia. In
a wider sense, a regional governance system
that guarantees investments, precludes arbitrary supply cuts, and ensures market prices
would be extraordinarily important, especially
as a driver of energy integration. However, it
may not be easy to achieve.
Geopolitically, the presence of extracontinental powers in the region as well as
tensions between countries in the hemisphere
should be watched. They include:
VV
VV
Concerns created by Chávez’s proposal to set up the Organization of Gas
Exporting Countries of the South, a producers’ agreement (cartel) to regulate
production and prices;
VV
Tensions over energy issues in Central
America and the Caribbean, where
several powers and sub-powers, including
the United States, Mexico, and Venezuela
have historically attempted to exert influence through energy. Brazil is now paying
closer attention to the region;
VV
Uneasiness between Colombia and
Venezuela over deliveries of gas
and electricity;
VV
Historical strains between Brazil and
Argentina over nuclear energy as
well as tensions that could arise from
Venezuela’s interest in producing it,
especially if Chávez decides to use
Russian or Iranian technical assistance
or technology;
VV
Chinese investment in the region, especially in Venezuela and Ecuador, including gas development loans to Bolivia,
its contribution to Petrobras investment
plans, and expansion of the capacity to
refine Venezuelan crude in Guangdong
province in China;
VV
Russia’s involvement in oil exploration
in Cuba and its partnerships in the
Orinoco Oil Belt;
VV
Iranian activities, if significant, in the
energy arena in Venezuela, Bolivia,
Ecuador, Nicaragua, and Brazil. This
``
VV
Any vacuum created by the suspension
or reduction of projects or promises
(i.e., direct investment, technical assistance, refineries) made to countries and
governments by Venezuela, whose oil
slump may make fulfillment impossible;
VV
How the United States will address
eventual export declines by Mexico
and Venezuela;
VV
Tension between Brazil and Bolivia
over natural gas, including not only
as related to Brazilian investments in
Bolivia (i.e., the Petrobras nationalization in 2006) but also to those arising
from Brazil’s shift from deficit to selfsufficiency and even to exporting;
VV
Relations between Brazil and Venezuela
which, irrespective of efforts by Luiz
Inácio Lula da Silva and Chávez to
present them as friendly, are marked by
tensions. These tensions include those
arising from the nationalization of gas in
Bolivia and the PDVSA-Petrobras partnerships for development of ultra heavy
Orinoco crude and construction of a
crude refinery in Pernambuco, Brazil;
VV
Tensions between Argentina and Bolivia
over gas purchases;
Strained relations between Chile and
Argentina over the latter’s failure to
meet its gas sales commitments to
Chile, thus rendering a vast network of
pipelines useless, as well as the prospect
of shipping LNG from Chile to Argentina
through the very same network;
Are US corporations
deliberately losing
ground in the area?
Inter-American Dialogue • Energy Working Paper • Genaro Arriagada 9
includes Iran’s interest in Venezuelan
uranium and nuclear cooperation with
Venezuela;
Energy efficiency
is not merely
symbolic—it
can yield a
remarkably high
economic return.
VV
VV
Brazil’s Petrobras expansion to
Colombia, Ecuador, Venezuela, and
Argentina, as well as its involvement
in the Bolivian gas industry, its large
hydroelectric projects in Peru, its world
leadership in ethanol, and its aggressive
expansion into the South America retail
market. Is it positioning itself as the
dominant Latin American energy power?
Whether U.S. corporations are losing
ground in the area—and to whom. Is it
a deliberate policy on their part?
V. Savings, Prices, and
Public Corporations
Any energy policy must consider three fundamental elements: efficiency, public corporations, and energy prices.
Energy efficiency is a priority objective of a
consistent policy. Nearly all Latin American
countries have the ability to reduce consumption at a reasonable cost using measures within
reach of institutions and individuals. These
measures include more energy-efficient housing insulation standards; fluorescent street
lighting; soft loans for replacement of inefficient machinery and motors; appliance standards, certification and labeling norms; use
of energy-saving light bulbs in homes; energy
efficiency awareness drives; energy efficiency
audits; exchange of energy efficiency technology, information, policies, and good practices;
and several others strategies.
According to a recent Inter-American
Development Bank study, a US$17 billion
investment in measures to reduce the region’s
electricity consumption by one-third would
save some 140,000 GWh. The economic significance is enormous, since it represents the
electricity produced by 328 gas-fired. 250-MW
10 Energy Policy in Latin America: The Critical Issues and Choices
thermal plants carrying US$53 billion in construction costs of. Another study estimates that
China’s implementation of appliance and labeling standards would, over the first ten years,
help save the equivalent of Latin America’s total residential electricity consumption in 2002.
Figures exhibited by the European Union are
even more impressive.
The conclusion is obvious: Energy efficiency
is not merely symbolic, and it can yield a
remarkably high economic return. Of equal or
even greater importance is the fact that energy
efficiency makes a significant contribution
toward addressing climate change.
The largest players in the Latin American
energy arena, especially as pertains to oil
and gas, are NOCs. They are much larger
than IOCs, and their preeminence is nearly
universal. NOCs control an estimated 80 percent of world oil and gas resources, whether
directly or through contracts with IOCs. In
Latin America, their control is equally strong
and will only grow, driven by factors such as
natural resource nationalism, especially oil;
the notion that oil prices will stay high and
countries will remain interested in appropriating, through state-owned corporations, a larger
portion of the returns; and attempts by governments to use NOCs not just as energy policy
tools but as instruments of foreign policy. The
preeminence of NOCs—at least within the
political climate and under the conditions in
which energy issues are debated—is not questioned by most senior IOC executives. They
assume that the most likely scenario is partnerships rather than confrontation. Therefore,
especially in South America and Mexico, it is
likely that NOCs will continue to dominate the
oil world. Their study and the quality of their
performances are a central energy policy issue
in Latin America.
Many types of NOCs exist, varying by
corporate governance systems and relations
with the state, the private sector, and society.
These models are differentiated by the ways
the NOCs address: (i) The constitutional and
legal framework of hydrocarbons in each
country; (ii) Whether oil is the NOCs’ sole
preserve or if exploration and production is
allowed through majority or minority partnerships with local or foreign private corporations; (iii) Whether ownership is solely public
or participation of local or foreign investors
is allowed; (iv) Where private participation
exists, the nature and limits of the political
rights of private parties, and the type of stock
held (common, preferred); (v) Whether the
company is entirely publicly owned, whether it
is possible to distinguish between total control
by the Executive (a government company,
or worse, a branch of the Presidency), or if
powers other than the Executive—such as
legislatures or independent agencies—have
a guidance, control, or oversight role, in
which case one could more properly speak
of a state-owned rather than a purely government company; (vi) The degree of opacity
or transparency within NOC management;
(vii) Whether and to what degree corporate
governance meets control, transparency, and
accountability standards applicable to large
private corporations (SEC compliance, stock
exchange norms, adherence to the SarbanesOxley Act, supervision by superintendents of
stocks or securities, etc.); (viii) Where some
NOC stock is privately owned, whether there
are norms preventing transfer of the natural
resource to the private sector or abroad; (ix)
The degree of union involvement in the management of the corporation; (x) Whether the
NOC plays a dual role of business and regulator of the natural resource; (xi) The degree
to which the state appropriates NOC profits
and the prevalence of such ills as clientelism;
(xii) The authority setting investment policy
and standards; (xiii) NOC relations with the
Legislative Branch; (xiv) The sector’s price
policy.
While both Petrobras and PDVSA are NOCs,
they address in divergent ways those 14 issues. This is without mentioning that these
companies fare differently when it comes to
efficiency, partly as a result of corporate gov-
ernance systems and their relationships to the
branches of government.
A key—and relatively neglected—aspect of energy development in Latin America is energy
pricing. Even in the case of energy sources
that provide a basic service with no competition and, thus, rate determination is mandatory, price mechanisms ranges from total
discretion to objective calculation criteria.
Subsidies are the first cousin of price, and in
this arena Latin America exhibits less than satisfactory conditions. To begin with, high subsidies are common. In cases such as Venezuela,
gasoline prices are among the world’s lowest
but at enormous public cost. In fact, subsidies in Venezuela and Ecuador represent 8.3
percent and 6.7 percent of GDP, respectively.
Since the dismantling of the currency board
in Argentina, price controls on natural gas—
despite recent minor amendments—have had
the twin effect of discouraging investments in
the industry, thus reducing the supply, while
encouraging consumption to the point that
Argentina boasts one of the world’s highest
per capita gas consumption rates. In some
cases, subsidies are high and also not transparent. Their cost and financing are unclear, and
because they are not subject to a means test,
sometimes they end up benefitting the affluent
sectors of society.
Subsidies in
Venezuela and
Ecuador represent
8.3 percent and
6.7 percent of GDP,
respectively.
The study of pricing and subsidy policies
is an issue of special concern since in Latin
America they can be an obstacle to consistent
energy policies. They interfere with efficiency,
discourage investment, distort demand, don’t
always favor the poorest, and are a disincentive
to integration.
A comparative analysis of energy mix costs
in different countries of the region would be
interesting, as these vary widely depending
on the contribution of the various sources, the
comparative advantages of national energy
industries, and the cost of imported components. Fuel prices differ on a wide scale and
are subject to market fluctuations and constant
Inter-American Dialogue • Energy Working Paper • Genaro Arriagada 11
A decline in the
ability of the
Amazon rainforest
to capture carbon
has worldwide
implications.
technological change, making comparison
difficult. In turn, as technology now stands,
many non-conventional renewable energy
sources are costly, or very costly, and can only
be developed if supported by subsidies. This
forces a discussion, within a broad perspective, on the advisability of investing in NCRE
without impacting global economic growth or
diverting funds from other needs, especially
social needs.
acknowledging that climate change is a universal challenge that must be addressed by all nations, even the poorest ones. Obviously, such
efforts should be equitable. Since it would be
unfair to require all countries to assume the
same degree of greenhouse gas reduction,
Latin America’s contribution should be lower
than that of developed nations. But that says
little since this contribution should be different
among the various countries that make up the
region.
VI. Latin America and
Climate Change
When it comes to regional energy policies to
address the climate change challenge, several
have been already noted. A decisive one is
hydroelectric power. If its share of the energy
mix were to stay at the current 28 percent for
the next twenty years, fossil fuel consumption would drop 12 percent regardless of an
increase in energy consumption. Another
fundamental mechanism, also noted before, is
increased energy efficiency.
Energy’s golden era of fossil fuels is coming
to an end. Over the past two hundred years,
the predominant criteria—perhaps the only
criteria—for energy use was that it be both
abundant and cheap. In this context, oil and
coal held an advantage, which led to the
creation of the so-called “Dirty Fuel System” (a
term coined by Thomas Friedman). In recent
years, however, humankind has agreed that
such a system is unsustainable and must not
continue because it emits high levels of carbon
dioxide and contributes to climate change.
Yet, the region seems to be bucking this trend:
From 2007 to 2008, while oil consumption in
North America fell 5.4 percent, in South and
Central America it grew 3.7 percent.
Latin America is not a large contributor to
greenhouse gas emissions, adding a mere 6
percent to the world total, mostly due to low
industrial output, to the still low significance
of public transportation, and to the weight
of hydroelectric power in the energy mix.
Potentially, the region’s greatest contribution
to climate change is deforestation. A decline in
the ability of the Amazon rainforest to capture
carbon has worldwide implications far greater
than those arising from changes in the regional
energy mix. It is therefore possible to say that
energy consumption is not the region’s first
but its second contributor to climate change.
Most of the historical and present responsibility for carbon dioxide emissions rests with the
industrialized world, yet this does not preclude
12 Energy Policy in Latin America: The Critical Issues and Choices
An instrument in meeting Millennium Goals
is the reduced use of traditional biomass, especially firewood, as an energy source, both
because it is highly polluting and because it
results in deforestation.
Finally, nuclear energy cannot be ignored. The
controversies affecting its development, mostly
political (nuclear weapon proliferation) and
safety-related (risk of accident) cannot obscure
the fact that it is a clean source of energy in
terms of greenhouse gas emissions.
To the above policies—whether any or all are
adopted—one must add the fundamental role
to be played by NCRE because of their contribution to reducing carbon dioxide emissions
and fossil fuel dependence. In general terms,
NCRE are expensive and hard to develop without subsidy support. That makes them unfeasible for many countries and helps explain why
their role in the global energy mix, especially
in Latin America, remains so low. Yet, recent
years have seen constant reductions in NCRE
production costs as well as active discussion
about international financing tools that could
make them accessible to countries where they
now see lower relative development.
And there are areas of NCRE expansion that
bear careful observation.
Brazil produces 44 percent of the world’s
sugar cane-based ethanol supply (as opposed
to corn-based ethanol), thereby freeing its
industry from criticism faced by the United
States over the use of farmland that otherwise
would grow food crops. In March 2007, Brazil
and the United States signed a memorandum
of understanding for biofuel promotion that,
basically, carried three components: a technology exchange agreement; a commitment to
provide technical assistance and to help third
countries with feasibility studies; and a multilateral effort to encourage worldwide biofuel
development. Tariff and non-tariff barriers the
United States imposes on ethanol imports have
hampered this partnership. In general, except
for an interesting biofuel program in Colombia,
there has been little to show for the effort. The
potential of “second-generation ethanols,” in
particular those produced from cellulose and
forest waste, should also be explored.
As to wind power, Latin America’s 133 percent
increase in wind-power generation in 2008 to
2009 is the world’s largest, with Brazil and
Mexico making the largest contribution. While
a positive trend that is positioned to continue,
it must be noted that the region started from a
very low point of production.
Some Central American countries—El
Salvador, Nicaragua, and Costa Rica—plus
Mexico are successfully developing their
geothermal energy resources. Chile has also
started an interesting program.
Latin America should redouble its efforts to
invest in NCRE and develop new technologies
that are more accessible. But they should do so
with caution, ensuring that development does
not create a heavy subsidy burden or affect the
population with strong energy price increases.
Latin America’s
133 percent
increase in windpower generation
in 2008 to 2009 is
the world’s largest,
with Brazil and
Mexico making the
largest contribution.
Finally, as regards worldwide efforts to address climate change, a growing number of
countries have committed to reducing CO2 and
greenhouse gas emissions. No Latin American
nation has made that sort of commitment,
but this should change in the near future,
especially given world pressures to embrace
agreements of this type. To this end, it is high
time to begin studies that can help formulate
proposals for emission reduction targets at
both the regional and country levels.
Inter-American Dialogue • Energy Working Paper • Genaro Arriagada 13
About the Series
We are pleased to publish this Inter-American Dialogue report,
“Energy Policy in Latin America: The Critical Issues and Choices,”
which carefully examines Latin America’s energy matrix and explores
the region’s critical and evolving energy challenges. It was written by
distinguished Chilean analyst and former minister Genaro Arriagada,
a non-resident Dialogue senior fellow, who directs our energy policy
Working Group.
The Dialogue’s Energy Policy Working Group was established in
September 2009 with the support and cooperation of the Inter-American
Development Bank. It includes some twenty people drawn from a
dozen countries—including energy specialists, policy and political
analysts, business leaders, and former officials of private and public
oil companies. The group meets regularly to discuss Latin America’s
most pressing energy policy issues and choices. Participants review
and comment on analytic papers drafted for each session, and prepare
the way for dissemination and public discussion of the papers and
recommendations of the group. These efforts are directed to informing
and shaping national and regional policy debates on the energy
challenges confronting the countries of Latin America, improving the
quality of attention to those challenges, and encouraging multilateral
cooperation to address them.
This report is the first in a series. Other reports will be published in
the coming months on the performance of Latin America’s national oil
companies; the special challenges nuclear development faces in the
region; resistance by local and indigenous groups to energy projects;
and fiscal issues in managing petroleum resources. In preparation are
studies of the emerging market for natural gas in South America; how
subsidies affect energy pricing and cooperation; and climate change
and energy initiatives as a basis for greater hemispheric integration.
The Dialogue is pleased to recognize the support and cooperation
provided by the Inter-American Development Bank. The comments and
opinions expressed in this series are those of the authors alone and not
of the supporting institutions.
14 Energy Policy in Latin America: The Critical Issues and Choices
Inter-American Dialogue
Board Of Directors
Michelle Bachelet, Co-Chair, Chile
Carla A. Hills, Co-Chair, United States
Enrique Iglesias, Co-Vice Chair, Uruguay
Thomas F. McLarty III, Co-Vice Chair, United States
Peter D. Bell, Chair Emeritus, United States

Fernando Henrique Cardoso, Brazil
David de Ferranti, United States
Alejandro Foxley, Chile
William L. Friend, United States
Francis Fukuyama, United States
L. Enrique García, Bolivia
Donna J. Hrinak, United States
Marcos Jank, Brazil
Yolanda Kakabadse, Ecuador
Jim Kolbe, United States
Ricardo Lagos, Chile
Thomas J. Mackell, Jr., United States
M. Peter McPherson, United States
Billie Miller, Barbados
Antonio Navarro Wolff, Colombia
Pierre Pettigrew, Canada
Jorge Quiroga, Bolivia
Marta Lucía Ramírez, Colombia
Eduardo Stein, Guatemala
Martín Torrijos, Panama
Elena Viyella de Paliza, Dominican Republic
Ernesto Zedillo, Mexico

Michael Shifter
President
The Inter-American Dialogue is the leading U.S. center for policy
analysis, exchange, and communication on issues in Western
Hemisphere affairs. The Dialogue brings together public and private
leaders from across the Americas to address hemispheric problems
and opportunities. Together they seek to build cooperation among
Western Hemisphere nations and advance a regional agenda of
democratic governance, social equity, and economic growth. The
Dialogue’s select membership of 100 distinguished citizens from
throughout the Americas includes political, business, academic, media,
and other nongovernmental leaders. Twelve Dialogue members served
as presidents of their countries and more than two dozen have served
at the cabinet level.
The Inter-American Development Bank (IDB) was established in 1959
to support the process of economic and social development in Latin
America and the Caribbean, and is the main source of multilateral
financing to the region with a total capital of more than $170 billion.
Current lending priorities include initiatives on Sustainable Energy
and Climate Change, Water and Sanitation, and Education. The IDB
Group, comprising IDB, the Inter-American Investment Corporation
(IIC) and the Multilateral Investment Fund (MIF), provides solutions to
development challenges by partnering with governments, companies,
and civil society organizations, thus reaching its clients ranging from
central governments to city authorities and businesses.
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