Global Politician - Energy Integration and Se...

Energy Integration and Security in Latin America and the Caribbean
Ariela Ruiz Caro - 3/31/2008
The integration of energy markets in Latin America has been discussed for more than three decades. An expression of it was the creation of the regional organizations ARPEL (Association of Petroleum Enterprises of Latin America), CIER (Regional Electrical Integration Commission), and OLADE (Latin American Energy Organization), during the decades of the 60s and 70s. These initiatives took place within the framework of important participation by the State in companies tied to the energy sector.
During the 90s, initiatives for energy integration gathered momentum at the continental level. The proposals came about within the framework of the Americas Summit, which sprung from the Initiative for the Americas, proposed by the U.S. government in 1989. At the core of what was then called the "Hemispheric Energy Initiative" were the reforms outlined by the Washington Consensus. In the energy sector, it was proposed that obstacles to the operation of foreign firms in every branch of the energy industry be eliminated, from exploration and production of gas and oil, to distribution and product sales in the final market.
This was not always possible due to reigning constitutional limits in some countries. Nevertheless, foreign investment laws implemented in most of the countries of the region, through programs with multilateral institutions such as the International Monetary Fund (IMF) and the World Bank, and consolidated in the Free Trade Agreements (FTAs) that many countries have signed or are in the process of negotiating with the United States, have attempted to assure that investments, particularly in the energy sector, operate with the least possible number of restrictions, so as to foster capital investment in this activity.
To a greater or lesser extent, since the beginning of the 90s the countries of the region liberalized their regimes in the treatment of investments, as well as their service sectors. In some cases such as Chile and Bolivia, the reforms were enacted earlier. In the energy sector, these reforms meant the elimination of obstacles to national and international private firms being able to operate at all levels of the energy industry, from exploration and production of gas and oil, to distribution and sales of petroleum products. Even though most of the countries in the region modified their normative frameworks in the sector, the degrees of liberalization were different. In many cases the modifications were limited by precepts established in their respective constitutions; in others it was determined that this was a strategic sector. Nevertheless, the foreign investment laws implemented by the majority of the countries in the region, and consolidated in the FTAs to which many countries have subscribed or are currently negotiating with the United States, seek to assure that investments, particularly in the energy sector, find no roadblocks in elements currently in effect in the respective national laws.
The thinking was that to the extent that the aforementioned reforms advanced, so would the integration process of the sector. Moreover it was thought that opening markets would give rise to a considerable expansion in business opportunities for private actors in infrastructure construction for energy interconnections. Said energy projects had the financial backing of the World Bank, the Inter-American Development Bank (IDB), and the Export-Import Bank of the United States (Ex-Im Bank).
However, the desired results were not achieved. Liberalizing energy policies are being reviewed, especially in South America. A certain tendency is discernible to restore a more active role for the State in energy activities and to make state planning for energy markets an indispensable guiding instrument in channeling and coordinating the investments made by private and public agents. Similarly, the preservation of non-renewable resources and the autonomy of the State to regulate tapping them, have now been reclaimed as part of energy policies.
It is in this context that the Petroamerica Initiative has been launched by the Venezuelan government. Although the details of its implementation are still being developed, it is based on the premise that regional integration is a matter for States and governments, which does not imply the exclusion of private enterprise sectors. The agreements contained in Petroamerica propose that state energy enterprises in Latin America and the Caribbean be integrated, leading to agreements and joint investments in exploration, exploitation, and commercialization of oil and natural gas. It also seeks joint economic activities and a reduction in the negative effects of energy costs—originating in the increase in the global demand for oil, as well as in speculative and geopolitical factors—for the countries in the region. The process is meant to be implemented in stages and, according to what is indicated in the proposal, will begin to be realized through bilateral or sub-regional actions and agreements. The proposal also includes preferential financing mechanisms in the supply of oil for the nations of the Caribbean and Central America.
The first South American Presidential Energy Summit took place in April 2007. This was an opportunity for the South American heads of state to gather for the first time to draw up plans for a joint strategy regarding the matter of energy. An agreement was reached to institutionalize energy meetings at the ministerial level through the formation of a Council within the framework of regional integration that, among its main tasks, will develop an Energy Treaty for the region.
This takes place at a time when concerns about energy supplies and the impact that their consumption has on CO2 emissions have become topics at the top of the international relations agenda. Specialized agencies agree in pointing out that in the next decades, fossil fuels (oil, gas, and coal) will continue to be the main source of energy in the world. This will take place in a context where the production and supply of hydrocarbons is characterized by a new paradigm of high prices and a large degree of volatility, geopolitical tensions, an intensifying environmental debate at the international level; competition for access to new regions with reserves; demands for greater participation in hydrocarbon financial gains—especially in several Latin American countries—and an increment in the number mergers and acquisitions and profits without precedent.
In the area of renewable energy production, on the other hand, in March of 2007 presidents George W. Bush and Luiz Inácio Lula da Silva signed a memorandum of agreement in which they expressed their intention to cooperate in research and to promote the production and export of ethanol to the world with the aim of creating a global biofuels market. Implementing these measures could mean new investments in Latin America, less dependence on oil, and a new dawn for development in the auto industry.
Brazil has made significant advances in fuel production technology, and in using it in modes of transportation. The United States has a deficit in that sector, thus requiring an increase in imports for which joint ventures are projected in biofuels production in other countries of the region, both for internal consumption and for exports. Currently there are lines of credit from international organizations to promote the development of biofuels in the entire region, which have been received well in the sugarcane producing regions of Central America, the Caribbean, Peru, and Colombia.
Within certain parameters, the development of biofuels could bring environmental benefits through a reduction in greenhouse gas emissions, and it could contribute to rural development and job creation. However, its development also has a negative environmental impact, since it would increase the monocrop model as the process perfects itself and, if necessary precautions aren't taken, it could affect sustainable development and the production of food as well as local and regional ecosystems, with impacts on flora and fauna. So, it is not merely a matter of replacing non-renewable energy, but of trying to promote sustainable demand and efficient use. That is why it is very important to strike an energy balance in the production of biofuels with each raw material, establish what energy is required to produce it, what is the price for a barrel of oil that makes its development viable, design a conceptual framework to evaluate its environmental impact, and outline some criteria for establishing public policies for its development.
It is important to underscore that global energy trade continues to reflect disparities in global development levels but also as to responsibilities in facing climate change. Per capita energy consumption in the industrialized countries, for example, is five times higher than in Latin American countries. However, if there were no significant reduction in energy intensity nor progress made in making the energy consumed more renewable and clean, the disparities in implementing technical progress could have as a result that developing countries would be responsible for more than three-quarters of global CO2 emissions by 2030. That would lead to their participation in global emissions going from the current 39% to 52% in 2030.
Latin America and the Caribbean together represent a considerable surplus in the production of crude and gas. However, the energy resources of the region are concentrated in very few countries. For that reason there should be value placed on regional cooperation proposals geared toward guaranteeing and facilitating energy supplies and promoting the development of renewable energy, as well as more efficient energy use.
The energy integration of the region could be a decisive mechanism for a better geopolitical position in the international arena. To achieve that goal, it is fundamental to construct an adequate infrastructure, and to have an institutional scheme to regulate the way in which said infrastructure will operate. To be precise, the design of the technical as well as institutional mechanisms for the development of a common energy market is still a challenge to fulfilling the region's prevailing political will.
Translated by Annette Ramos.
Ariela Ruiz Caro is a Peruvian economist and international consultant. The original version of this paper was presented at the seminar “Integration and Sustainable Development: The New Geography of Resources, Economics, and Power,” organized by the Latin American Center for Social Equality (CLAES by its Spanish initials) and Development, Economy, Ecology, and Equity (D3E), Montevideo, July 14-15, 2005.