ENERGY ADVISOR a WEEKLY PUBLICATION of the DIALOGUE January 27, 2017

LATIN AMERICA ADVISOR ENERGY ADVISOR A WEEKLY PUBLICATION OF THE DIALOGUE www.thedialogue.org January 27, 2017

BOARD OF ADVISORS FEATURED Q&A TOP NEWS Nigel Blackaby Global Head, OIL & GAS International Arbitration Group, Freshfi elds Bruckhaus Deringer Is Argentina’s Oil & Peru Terminating Mary Rose Brusewitz Pipeline Contract Partner, Strasburger & Price Gas Sector Ready to With Odebrecht Jeffrey Davidow The government’s move was the Senior Counselor, latest setback for the company, The Cohen Group Compete Globally? which has been at the center of a Ramón Espinasa massive corruption scandal. Consultant, Page 2 Inter-American Development Bank Luis Giusti Senior Advisor, POWER SECTOR Center for Strategic & International Studies China’s State Grid Jonathan C. Hamilton Buys Majority Partner, White & Case Stake in Raul Herrera Brazil’s CPFL Partner, Corporate & Securities Practice, Chinese electric utility company Arnold & Porter State Grid expanded its presence Since taking offi ce in 2015, Macri has pushed to make Argentina’s energy sector more interna- in Brazil, on Tuesday signing a James R. Jones tionally competitive. // File Photo: Argentine Government. Chairman, deal to buy a 54.64 percent stake ManattJones Global Strategies in Brazilian electricity giant CPFL Jorge Kamine Oil and gas companies on Jan. 10 verbally pledged to for $4.5 billion. Counsel, invest at least $5 billion in Argentina this year and to more Page 3 Skadden Arps than double that amount annually in coming years after Craig A. Kelly Q OIL & GAS Director, unions agreed to cut labor costs, President Mauricio Macri Americas Int’l Gov’t Relations, announced. Industry executives said the agreement will cut down Trump Signs Exxon Mobil on drilling costs and will make the country’s oil and gas sector more Order to Resume Jeremy Martin Vice President, Energy & Sustainability, internationally competitive. Will the move indeed make Argentina a Keystone XL Institute of the Americas more competitive energy market on a global scale? Will Argentina see Trump’s order for the pipeline Larry Pascal “invites” TransCanada, the Cal- Chairman, a marked increase in drilling as a result of the deal? Has the bargain- Americas Practice Group, ing power of Argentina’s oil and gas unions diminished, and will their gary-based owner of the project, Haynes & Boone to “re-submit its application.” concessions lead to more investments in Argentina’s oil and gas sector Charles Shapiro Trump also said the government President, in the future, as the government hopes? would have to “renegotiate some World Affairs Council of Atlanta of the terms” of the project. R. Kirk Sherr Page 2 President, Juan Cruz Díaz, managing director at Cefeidas Group: “The Clearview Strategy Group agreement struck between national and local governments, Mark Thurber energy companies and labor unions (that cover unconven- Partner, Andrews Kurth A tional oil and gas resources) will see the federal government Alexandra Valderrama subsidize natural gas production from the Vaca Muerta shale formation Manager, International Government Affairs, to 2020. The government hopes that the deal will spur investment and Chevron increase productivity by lowering labor costs and creating price and tax Lisa Viscidi stability. While there is still a lack of clarity on many of the specifi cs, Program Director, Inter-American Dialogue when fully implemented, the cost-cutting measures could be a positive Max Yzaguirre step toward increasing productivity at unconventional wells at Vaca President and CEO, Muerta. However, productivity is just one of the factors that determines The Yzaguirre Group Argentina’s competitiveness vis-à-vis other energy markets. Domestical- ly, improving infrastructure, especially around shale fi elds, will also be Trump // File Photo: www.donald- jtrump.com. Continued on page 3

OIL & GAS SECTOR NEWS back a signiﬁ cant portion of their investments NEWS BRIEFS within the next three years. Odebrecht declined Peru Terminating to comment. In related news, Peruvian Presi- Gamesa to Supply dent Pedro Pablo Kuczynski said Tuesday that 325MW of Turbines to Pipeline Contract Odebrecht will have to sell all its projects in Peru and leave the country, after the company Mexico Wind Farms With Odebrecht admitted to paying millions of dollars in bribes Mexican wind turbine manufacturing company in order to win public works contracts, The Gamesa will supply 325 megawatts of wind The Peruvian government has decided to Wall Street Journal reported. “Unfortunately, turbines to Mexico, ReNews reported Jan. terminate a contract with a consortium led they are tainted by corruption. They have to 20. Gamesa secured the order from Spanish by Brazilian construction giant Odebrecht to go,” Kuczynski said. Peru is the second country multinational electric utility Iberdola. Gamesa build a $7 billion natural gas pipeline, Mines to order Odebrecht’s departure due to its will install 84 of its G114-2.625MW turbines and Energy Minister Gonzalo Tamayo said involvement in a massive corruption scandal. for the Pier 4 wind farm in Puebla state and 50 Monday, The Wall Street Journal reported. The Last month, the company signed the largest G114-2.1MW machines for the Santiago Eólico anti-corruption settlement in history and ac- project in Guanajuato state. The turbines for knowledged to U.S. authorities that it had paid the Pier 4 facility are expected to be delivered almost $800 million in bribes in connection early next year and will begin operating in to more than 100 projects spread across 12 March 2019, the Mexican company said. Tur- countries, mostly in Latin America. Last week, bines for the Santiago Eólico wind farm will be the Colombian government said it was in the installed during the second half of 2018. process of ousting Odebrecht after it admitted to paying $11 million in bribes in order to win road and other public works projects. Argentine Province

Tamayo // File Photo: Peruvian Government. Confi rms Funding for Trump Signs Order Six Solar Projects government’s move was the latest setback for to Resume Keystone Argentina’s Mendoza province has confi rmed the company, which has been at the center of that six solar projects in there will receive a massive corruption scandal. The Southern XL Pipeline Project fi nancing from the national bank under the Peruvian Gas Pipeline consortium, of which framework developed by the Ministry of Odebrecht owns a 55 percent stake, failed to U.S. President Donald Trump on Tuesday Production, PV Magazine reported Jan. 20. meet Monday’s deadline to “obtain this fi nanc- signed an executive order to revive the The fi nancing will be provided by the Fund for ing from the international fi nancial community Keystone XL oil pipeline as part of his effort Argentine Economic Development (Fondear). as a sign of their capacity to bring this project to roll back former President Barack Obama’s forward,” Tamayo said. Spain’s Enagas owns a environmental legacy, The Washington Post 25 percent stake in the consortium, and Peru’s reported. Trump’s order for the pipeline “in- Graña y Montero owns 20 percent. Tamayo vites” TransCanada, the Calgary-based owner UAE Launches $50 Mn said the consortium would also face a $262 of the project, to “re-submit its application.” Caribbean Clean million penalty for not being able to complete Trump also said the government would have to Energy Project Fund the construction of the 700 mile-long pipeline, “renegotiate some of the terms” of the project. which was intended to transport natural gas Obama had halted the construction of the Key- The United Arab Emirates has launched a $50 from the Amazon to towns across the southern stone XL pipeline in 2015, arguing that the proj- million renewable energy fund to support the highlands and on the Pacifi c. Tamayo said the ect would signifi cantly contribute to climate development of projects in the Caribbean, government is studying options to decide who change because the it would carry tar sands Clean Technica reported on Jan. 20. The fund should fi nish the pipeline, and it may ultimate- crude oil from Canada to Texas, which would is one of the single-largest investments in the ly decide to auction off the project to new lead to the emission of a particularly large Caribbean’s clean energy sector. The funding bidders. In separate statements, Enagas and amount of greenhouse gas, due to the energy will be provided by the Abu Dhabi Fund for Graña y Montero said that according to their required to extract the crude. Trump signed the Development, and the UAE Ministry of Foreign contract, Peru must use the funds from a new measure, saying the project would create a “lot Affairs and International Cooperation will auction to compensate them for their invest- of jobs, 28,000 jobs, great construction jobs,” manage the initiative. Abu Dhabi’s renewable ments, adding that they expected to receive BBC News reported. Canadian Natural Resourc- energy company, Madsar, will lead project implementation.

COPYRIGHT © 2017, INTER-AMERICAN DIALOGUE PAGE 2 LATIN AMERICA ENERGY ADVISOR January 27, 2017 es Minister Jim Carr said Trump’s decision “will eight months and will require about $50 million projects were awarded during the country’s fi rst result in many, many jobs for Albertans, and in investment. The plant is located in the Aca- renewable energy plant tender in 2014. it’s also a sign that there is a recognition by the jutla municipality, and will add to the solar en- new American administration that Canada can be a source of economic development and of China’s State Grid job creation on both sides of the border,” the The project is expected to Buys Majority Stake Calgary Herald reported. Carr said he did not be completed in the next know exactly what kind of terms Trump wanted in Brazil’s CPFL to renegotiate, but added he wasn’t concerned eight months. about new conditions for the project. TransCan- Chinese electric utility company State Grid ada has expressed interest in resuming work expanded its presence in Brazil, on Tuesday on the pipeline, though it is not immediately ergy infrastructure currently under construction signing a deal to buy a 54.64 percent stake in in El Salvador. The largest solar plant currently Brazilian electricity giant CPFL for $4.5 billion, under construction in the country is the 100 providing a boost to the Latin American country MW Providencia project. The majority of both as it struggles to pull out of its crippling reces- We’re going to put a lot of workers, FEATURED Q&A / Continued from page 1 a lot of skilled workers, important. More broadly, the overall health struggled for years to combine the geology back to work.” of Argentina’s economy, macroeconomic with the needed above-ground framework — Donald Trump policies and the international price of oil that would provide the incentives for major will also factor into investment decisions. investment and development of Vaca Muer- The national government’s push to improve ta. The deal announced by President Macri investment conditions and increase labor last week is a signifi cant effort aimed at clear if the company will be able to continue productivity bodes well, as do steps taken with its old plans for the project, The Washing- on several other fronts, including signifi cant ton Post reported. On Tuesday, Trump said that increases to infrastructure investment. The The Vaca Muerta “From now on, we’re going to be making pipe- bargaining power of Argentina’s historically accord ... on line in the United States. We build the pipelines, strong oil and gas unions has not been paper points to the we want to build the pipe. We’re going to put diminished. The willingness to participate in proverbial win-win for a lot of workers, a lot of skilled workers, back a deal refl ects their interest in ensuring that unions, the province, to work. We will build our own pipeline, we will Vaca Muerta creates jobs and income for investors and the build our own pipes, like we used to in the old workers. After a diffi cult 2016, which closed federal treasury.” days.” TransCanada had originally planned to with 40 percent fewer teams actively work- — Jeremy M. Martin source about 65 percent of the steel pipe from ing at Vaca Muerta in Neuquén province, U.S. manufacturers, but the other supplies from efforts to boost productivity are in the inter- Canada. ests of all parties. The challenge will now be putting the regulatory and legal framework to align other contributing factors.” in place to match the scope of investment required in one of world’s largest shale POWER SECTOR NEWS Jeremy M. Martin, member of plays. Indeed, thorny issues with regard to the Energy Advisor board and labor agreements with provincial and union Construction Begins vice president for energy and authorities, environmental elements and A sustainability at the Institute of highly-debated subsidies for both natural for El Salvador’s the Americas: “When the notorious Amer- gas and oil in Argentina have—at least in ican bank robber Willie Sutton was asked broad terms—been addressed with timelines 17.8 MW Solar Plant why he robbed banks, he responded: ‘That’s and policies. This appears particularly true where the money is!’ Argentina long fi gured for drilling costs that are now set to be U.S. and Spanish company Real Infrastructure as a potential energy investment destination, slashed from roughly $14 million per well has begun constructing a 17.8 megawatt photo given its world-class shale resource, con- to $9 million. The framework for the Vaca voltaic solar plant in El Salvador, PV-Magazine tained largely in Neuquén and the formation Muerta deal, and perhaps most importantly reported Thursday. The Trinidad and Márquez known as Vaca Muerta. But the government the atmosphere of dialogue between the project is expected to be completed in the next Continued on page 6

COPYRIGHT © 2017, INTER-AMERICAN DIALOGUE PAGE 3 LATIN AMERICA ENERGY ADVISOR January 27, 2017 sion, Agence France-Presse reported. Chinese companies currently have approximately $15.2 THE DIALOGUE CONTINUES billion worth of investments in Brazil, according to Bloomberg News. State Grid said the acqui- sition of CPFL Energy will help the company Will Pushback Derail Mexico’s diversify its international business portfolio and increase its presence in the electricity Energy Reform? transmission and distribution sectors in Brazil, as well as generation from renewable sources. Protests erupted across Mexico was fast and furious and included street CPFL is the largest private power company this month, resulting in the demonstrations, the blocking of highways, in Brazil, and the country’s third-largest utility Q deaths of at least six people and looting. Political parties expressed provider. CPFL President Andre Dorf said in a and the arrests of hundreds, their opposition to the ‘gasolinazo,’ given its statement that the deal is “fundamental” to the following the government’s decision to adverse effect on consumers and produc- company’s “path of growth.” allow gasoline prices to rise 20 percent as ers. Beyond that, the decision served as a part of its larger push to deregulate the lightning rod for a wide array of complaints energy sector. Will popular pushback derail against the government and an opportunity POLITICAL NEWS President Enrique Peña Nieto’s energy for politicians to position themselves ahead reform agenda? How should the govern- of the 2018 presidential election. Even some Trump Signs Orders ment address the public’s concerns over the steep increase in gasoline prices, which are [The price hike] nearly double the current price across the to Crack Down on may yet play a border in the United States? How is Mexi- signifi cant role in the Illegal Immigration co’s energy reform faring, on the whole? presidential election.” U.S. President Donald Trump on Wednesday Antonio Ortiz-Mena, senior — Antonio Ortiz-Mena signed two executive orders in a crackdown advisor at Albright Stonebridge on illegal immigration. One of the actions ad- Group and adjunct professor at PRI politicians, such as Sonora Governor vances Trump’s key campaign pledge to build a A the Edmund A. Walsh School of Pavlovich, have criticized the gasolinazo. massive wall along the U.S. border with Mexi- Foreign Service at Georgetown University: President Peña Nieto had ill-advisedly sold co, and the other directs government agencies “On Dec. 27, when most Mexicans were en- the energy reform to lower energy price, his to strip federal grant funding from so-called joying their Christmas vacation, the Finance Jan. 5 televised address rhetorically asking “sanctuary cities,” which protect undocumented Ministry announced the details of fuel price ‘what would you have done?’ backfi red, and immigrants by not prosecuting them for vio- hikes that would take effect on Jan. 1. Until on Jan. 9 Coparmex, a major business as- lations of federal immigration laws. “A nation that date, there had been a single national sociation, refused to sign the government’s without borders is not a nation,” Trump said price for gasoline and diesel, and now there Agreement for Economic Strengthening and during a visit to the Department of Homeland is a maximum price which varies by region, Protection of the Family Economy. The mea- Security headquarters in Washington, The Wall according to differences in transportation sure will have no immediate effect on the Street Journal reported. Trump said his aim in and logistics. By Feb. 18, maximum prices energy reform, given all key provisions were signing the orders is to keep the United States will be set daily. The new price scheme is a included in the Constitution, which requires safe and put an end to “one injustice after transitory measure before a full, competitive an onerous process for any amendment. another” for the families of Americans who market for gasoline and diesel is implement- However, the government will fi nd it hard to have been killed by people in the United States ed. The original plan, part of the energy re- backtrack from this high-stakes measure, illegally, NBC News reported. “We hear you, we form, called for the gradual liberalization of the PRI will pay a heavy political price for the see you and you will never be ignored again,” fuel prices to start later, but the government gasolinazo; it may yet play a signifi cant role Trump told relatives of victims at the Depart- decided to start in January, given deterio- in the presidential election.” ment of Homeland Security after signing the rating fi nancial conditions: an increase in orders. “Your children will not have lost their the price of imported fuel, a depreciation lives for no reason.” In addition to redirecting of over 20 percent of the peso against the EDITOR’S NOTE: More commentary on this existing department funds to build the multi-bil- dollar last year, and the need to cut spending topic appeared in the January 13 issue of lion-dollar wall, the fi rst order also calls for the (especially fuel subsidies), for the govern- the Latin America Energy Advisor. construction of additional detention facilities ment to reach its fi scal targets. The reaction along the border and for quick processing of

NEWS BRIEFS asylum claims, The Wall Street Journal report- Cabral from 2007 to 2014 in order to gain an ed. In the companion order, Trump restores the advantage in some government contracts, The At Least Six Killed “Secure Communities” program, in which local Wall Street Journal reported. Unnamed lawyers law enforcement offi cials are directed to detain representing the former billionaire said he is in Chile Forest Fires undocumented immigrants until they are picked traveling and that he plans to turn himself in Six people—four fi re fi ghters and two police up by federal agents. Trump also expanded the upon his return to Brazil. Batista was once offi cers—were killed while battling forest group of undocumented immigrants targeted Brazil’s richest man, worth approximately $35 fi res in central Chile, offi cials said, Agence billion less than fi ve years ago, but the crash France-Presse reported Wednesday. The following Brazil’s commodities boom caused fi res have raged through 238,000 hectares, the collapse of his mining, energy, shipbuilding or 588,000 acres, of land in Chile and are and logistics conglomerate, Grupo EBX. not showing signs of slowing, the National Forestry Corporation said in a statement. Pres- ident Michelle Bachelet on Tuesday called for ECONOMIC NEWS more funds to help fi ght what she called the country’s worst forest fi res ever. At least 4,000 Peru Expecting people have been evacuated due to the fi res, Trump signed the directive to build a border wall on the National Forestry Corporation said. Wednesday. // Photo: @realDonaldTrump on Twitter. Lower Growth Due to for deportation. The order said sanctuary cities “willfully refuse” to assist federal immigration ‘Odebrecht Eff ect’ Haitian President- authorities. “These jurisdictions have caused immeasurable harm to the American people Peruvian Finance Minister Alfredo Thorne on Elect Denies Money and to the very fabric of our Republic,” the Wednesday predicted Peru’s growth this year Laundering Allegations order reads. Trump has said he will force Mex- would not be as robust as originally projected, ico to pay for the wall, an assertion repeated Haitian President-elect Jovenel Moïse on as the government works to eliminate corrup- earlier on Wednesday by his press secretary, Wednesday denied allegations that he tion, following the “Odebrecht effect,” Reuters Sean Spicer. In a recorded message released laundered money as part of his efforts to reported. Brazilian construction conglomerate Wednesday, Mexican President Enrique Peña secure loans years before running for offi ce, Odebrecht last month admitted to bribing Peru- Nieto reiterated his stance that Mexico “will not the Associated Press reported. Moïse, who vian offi cials over the span of a decade in order pay for any wall.” Trump and Peña Nieto were is scheduled to take offi ce Feb. 7, answered to receive preference in the bidding process for scheduled to meet in Washington on Tuesday questions from a judge for four hours in a public works projects. President Pedro Pablo of next week, but the meeting was canceled on closed-door session on Wednesday. He said Kuczynski’s government subsequently barred Thursday. his rivals fabricated the allegations to “create the construction conglomerate and other instability” in the country. companies known to have been involved in the corruption from continuing to work on projects. Brazilian Authorities The government had forecast 4.8 percent Seek Batista’s Arrest economic growth this year, but that level now Top Brazilian Labor seems unlikely, said Thorne. The government Prosecutor Calls Temer’s Brazilian police and federal prosecutors on this week took back a $5 billion natural gas Proposed Reforms Illegal Thursday issued a detention order against pipeline project from Odebrecht and other com- former billionaire businessman Eike Batista panies after the companies failed to secure Brazilian Prosecutor-General for Labor Ronaldo in connection to the wide-reaching corruption fi nancing for the project, due to concerns over Fleury said in a report published Tuesday probe at state oil company Petrobras, Reuters liability for graft. A new auction for the pipeline that President Michel Temer’s proposals to reported. Offi cials issued warrants against will be held within a year, Energy Minister Gon- modernize the country’s labor laws were illegal, eight others as well amid raids related to the zalo Tamayo said. The government also wants Reuters reported. Part of Temer’s plan to re- probe. A spokesman for the police told the Odebrecht to sell its stake in the $500 million duce business costs includes updating labor wire service that Batista and others allegedly Chavimochic III irrigation project it was build- laws to allow outsourcing and more fl exibility took part in a $100 million money laundering ing with Peruvian construction conglomerate in contracts and work hours. However, the ring in connection with the corruption scandal. Graña y Montero, Thorne said. “We’re not going proposal came under fi re even before it was The warrant for Batista’s arrest involved to tolerate corruption,” he said. “If that means discussed in Congress. allegations that he had paid bribes during the we have to pay for it with a bit of growth, well, I term of former Rio de Janeiro Governor Sérgio think we’re ready to do that.”

FEATURED Q&A / Continued from page 3 LATIN AMERICA ENERGY ADVISOR is published weekly by the Inter-American Dialogue Copyright © 2017 federal government, provincial authorities to compete in the markets. In this context, it and unions, was key to creating a road map is necessary to understand the agreements Erik Brand and path forward. It will also be the lynchpin reached between the national government Publisher [email protected] to fi lling in the details and fi ne print, partic- and the unions to reduce drilling costs. The ularly on subsidies. Rather than diminishing Gene Kuleta Editor the power or ability of any of the parties [email protected] to reach the deal, the Vaca Muerta accord The development of Nicole Wasson underscores the upside to working together the oil and natural Reporter, Assistant Editor and on paper points to the proverbial win-win gas in Vaca Muerta is [email protected] for unions, the province, investors and the seen as a great oppor- federal treasury.” tunity for the country to recover self- Gerardo Rabinovich, vice pres- Michael Shifter, President ident of Instituto Argentino de suffi ciency and obtain Genaro Arriagada, Nonresident Senior Fellow la Energía “General Mosconi”: an export surplus.” Sergio Bitar, Nonresident Senior Fellow A “The Argentine government — Gerardo Rabinovich Joan Caivano, Director, Special Projects has fi xed three very clear strategic lines Kevin Casas-Zamora, Director, Peter D. Bell Rule of Law Program in the energy sector, while waiting for the Ramón Espinasa, Nonresident Senior Fellow new energy long-term plan: 1) to promote volume of investments estimated to reach a Ariel Fiszbein, Director, Education Program investments in non-conventional renewable scale of competitiveness exceeds $25 billion Alejandro Ganimian, Nonresident Fellow energy sources (wind, solar, hydroelectric, over the next 10 years. Currently, the cost of Peter Hakim, President Emeritus geothermal, biomass) and achieve greater producing oil in Vaca Muerta is around $70 Claudio Loser, Senior Fellow energy balance diversifi cation; 2) encourage per barrel, and the natural gas produced in Nora Lustig, Nonresident Senior Fellow energy saving and effi ciency; and 3) encour- tight or shale formations varies between $5 Margaret Myers, Director, China and age the exploitation of non-conventional oil to $7.50 per million British Thermal Units. As Latin America Program and gas resources in the world-class Vaca productivity increases in these areas, these Manuel Orozco, Director, Migration Muerta fi eld. The fi rst two goals have a great costs are expected to fall to be competitive Remittances & Development consensus, while the development of the oil in the domestic and international markets. Jeffrey Puryear, Senior Fellow and natural gas in Vaca Muerta is seen as a This requires long-term trust. It’s a task that Tamar Solnik, Director, Finance & Administration Lisa Viscidi, Director, Energy Program great opportunity for the country to recover exceeds the energy sector and depends on self-suffi ciency and obtain an export sur- the confi dence that will generate Argentina’s Latin America Energy Advisor is published plus. The biggest challenge to achieving the economic policy to attract the necessary weekly, with the exception of some major development of Vaca Muerta is to increase volume of investments, at reasonable U.S. holidays, by the Inter-American Dialogue 1155 15th Street NW, Suite 800 the productivity of operations and obtain a interest rates, after being out of international Washington, DC 20005 Phone: 202-822-9002 scale of production that allows the country fi nancial markets for more than 12 years.” www.thedialogue.org ISSN 2163-7962

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