Hemisphere Volume 20 Article 1 Issue 1 Energy Challenges in the Americas

2011 Energy Challenges in Latin America

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Abstract Co-edited by Peter Hakim, President Emeritus, Inter-American Dialogue and Genaro Arriagada, Non- Resident Senior Fellow, Inter-American Dialogue, this issue examines energy as a priority issue for nearly all Latin American and Caribbean countries and considers its impact on regional integration and both foreign and domestic policy. Articles present opportunities and challenges facing the region, as well as recommendations for addressing the energy issue in Latin America in a strategic, constructive and effective manner.

This issue is available in Hemisphere: https://digitalcommons.fiu.edu/lacc_hemisphere/vol20/iss1/1 A MAGAZINE OF THE AMERICAS VOLUME 20 • SPRING 2011 • HTTP://LACC.FIU.EDU

Energy Challenges in the Americas WHO? The Miami Consortium for Latin American and Caribbean Studies is a dynamic partnership between the Latin American and Caribbean Center (LACC) at Florida International University (FIU) and the Center for Latin American Studies (CLAS) at the University of Miami (UM). Designated as a U.S. Department of Education National Resource Center on Latin America, the Miami Consortium for Latin American and Caribbean Studies is recognized as one of the nation’s top institutions for the study of Latin America and the Caribbean. WHERE? From its incomparable location in Miami, the Miami Consortium for Latin American and Caribbean Studies creates unique and innovative opportunities for South Florida’s leading universities and the communities they serve. WHAT? Built on more than 25 years of UM and FIU faculty, student and community collaboration, the Miami Consortium for Latin American and Caribbean Studies reaffirms South Florida as THE hub for political, commercial, cultural, and scholarly exchange between the U.S. and its neighbors to the South, and strategically positions Miami at the center of a broader global dialogue that connects the rest of the world to Latin America and the Caribbean. HOW? The Miami Consortium for Latin American and Caribbean Studies spearheads cutting-edge research, expands and strengthens international linkages throughout the hemisphere, supports cultural and academic exchange, promotes outreach, training, and networking for a broad community of scholars, K-12 educators, journalists, governmental officials, and the business sector, and develops and implements projects designed to strengthen societies and improve the lives of people throughout the hemisphere.

Latin AmericanAmerican and andCaribbean Caribbean Center Center FLORIDA INTERNATIONAL UNIVERSITY School of International and Public Affairs Hemisphere VOLUME 20 • SPRING 2011 • HTTP://LACC.FIU.EDU

IN THIS ISSUE

LETTER FROM THE EDITOR 3 LETTER FROM THE GUEST EDITORS 4

FEATURES Leading Energy Policy Issues in Latin America Genaro Arriagada 6 Energy Conflicts: A Growing Concern Patricia I. Vásquez 12 in Latin America Latin America’s Nuclear Future Jorge Zanelli Iglesias 16

REPORTS What Climate Change Means Paul Isbell 19 for Latin America Central America’s Energy Challenges Cristina Eguizábal 21 Why the United States and Cuba Jorge Piñón 24 Collaborate Challenges of Designing an Optimal Petroleum Roger Tissot 26 Fiscal Model in Latin America Petrobras: The Unique Structure behind Genaro Arriagada and Chris Cote 29 Latin America’s Best Performing Oil Company

COMMENTARIES Argentina’s Energy Pricing Challenges Pablo Fernández-Lamela 32 Energy Consumption: Challenges and Heidi Jane Smith 33 Opportunities of Urbanization PetroCaribe: Welcome Relief for an Chris Cote 34 Energy-Poor Region

SUGGESTED FURTHER READING 36 Hemisphere

EDITORIAL STAFF

Founding Editor Anthony P. Maingot

Editor Cristina Eguizábal

Guest Editors Peter Hakim Genaro Arriagada

Associate Editors Liesl Picard Alisa Newman Andreina Fernández-Fuenmayor

Graphic Designer Rafael Ávalos

Production Manager Kristina Sánchez

EDITORIAL ADVISORY BOARD

Uva de Aragón Ana María Bidegain David Bray Carol Damian Troy Elder Eduardo A. Gamarra M. Sherry Johnson A. Douglas Kincaid Sarah J. Mahler Andrea Mantell Seidel Félix E. Martín Juan Martínez Patricia Price Ana Roca Mark B. Rosenberg Richard Tardanico Victor Uribe

Hemisphere (ISSN 08983038) (ISSN 08983038) is published once a year by the Latin American and Caribbean Center, School of International and Public Affairs, Florida International University. Copyright © 2011 by the Latin American and Caribbean Center, Florida International University. All rights reserved. Printed in the United States of America.

Hemisphere is dedicated to provoking debate on the problems, initiatives and achievements of the Americas. Responsibility for the views expressed lies solely with the authors. Editorial, Circulation and Advertising Offices: Latin American and Caribbean Center, Florida International University, Modesto A. Maidique Campus, DM 353, Miami, Florida, 33199, Tel.: (305) 348-2894, Fax: (305) 348-3593, E-mail: [email protected].

Cover Image: Ribeirao das Lajes dike with its forest bordering the reservoir, an example of Light S.A.’s reforestation program. Light, a subsidiary in Brazil of the French company EDF (Électricité de France), distributes electricity to 80% of the State of Rio de Janeiro and implements environmental protection programs. ANTONIO SCORZA/AFP/Getty Images. FROM THE EDITOR

Dear Hemisphere readers:

The energy situation in the Americas, not to say the world, is changing rapidly. Developments in the Middle East continue to surprise us daily. Contrary to popular belief, however, the principal US oil suppliers are countries not in the Middle East or Africa, but rather the Western Hemisphere: Venezuela and Mexico. China and India are increasing their energy demands faster than most analysts predicted and are assiduously courting suppliers for the long haul. The energy market has become a seller’s market and is likely to continue to be one in the coming years. Latin America’s oil and gas reserves, as well as the region’s hydroelectric potential and relatively low overall consumption, put most of the countries in this region in an enviable position when facing their energy future. The landscape, however, is rapidly changing. Traditional Latin American energy powerhouses are seeing a rapid decline in their energy production (Mexico), while new oil (Brazil) and gas (Bolivia) reserves are being discovered in places impossible to reach with available technology until very recently. Despite great technological advances, the recent oil spill in the Gulf of Mexico showed the world how fragile the ecological balance can be and the consequences of accidents, whether manmade or natural. The increasing double threat of global warming and climate change has introduced new variables to the energy equation. Price is no longer the only factor driving the search for alternative energy sources. Protecting the right to a clean environment for future generations is another very important determinant. This year we have devoted our annual issue of Hemisphere to the problem of Energy Challenges in the Americas. I would like to thank my colleagues and friends from the Inter-American Dialogue Energy Task Force for agreeing to join forces with LACC to produce this volume. In addition to the pieces authored by the Inter-American Dialogue Energy Task Force members we have included commentaries by two FIU faculty members and one graduate student. Some authors address broad themes; others focus on specific issues, regions or countries. As usual the idea is not to give you, the reader, an exhaustive view, but to invite you to explore the issues from new comparative and cross-disciplinary perspectives. With this issue of Hemisphere LACC begins a longer debate on energy in the Americas. This year’s Journalists and Editors Workshop on Latin America and the Caribbean, LACC’s traditional yearly gathering of media professionals covering Latin America and the Caribbean, will be devoted to discussing different aspects of this topic. Some of the issues we will address include opportunities and challenges from the perspectives of the haves and have-nots, those posed by the new global and regional geopolitics of energy, and the diminishing costs of alternative energy sources. Many people have contributed to this issue of Hemisphere and I am grateful to them all. In addition to the Dialogue’s Energy Task Force members I would like to thank Peter Hakim, Chris Cote and Alexis Arthur from the Inter-American Dialogue, and Liesl Picard, Andreina Fernández and Alisa Newman from LACC.

Thank you,

Cristina Eguizábal Director Latin American and Caribbean Center Florida International University

Hemisphere Volume 20 3 FROM THE GUEST EDITORS

Dear readers:

The fact that energy has become a priority issue for nearly all Latin American nations was our central motivation for establishing the Inter-American Dialogue’s Energy Policy Group. This assertion needs no explanation; energy is a critical element in every country’s thinking about and planning for its future. Energy has become a key factor affecting the pace and success of regional integration processes and is shaping the foreign policies and domestic choices of many Latin American countries. Moreover, the problems associated with energy are subject to rapid change. They must be tracked and analyzed on a regular basis. In the past year, we have witnessed wide swings in the price of energy. Latin American countries are giving renewed attention to nuclear power; Brazil has taken major steps to prepare for the exploitation of newly found petroleum deposits and is building the world’s third largest dam; and poor management is leading to declining oil production in Mexico and Venezuela, the region’s largest exporters. In country after country, energy has emerged as a central political issue. Politics and ideology (as much as calculations of national interest) are shaping and constraining energy decisions, and government choices about energy are affecting the national politics and foreign policies of many nations. In the absence of new discoveries, Mexico’s oil reserves are rapidly being depleted; yet, it is politically risky for any Mexican government to consider allowing foreign investment into the petroleum sector. Venezuela’s regional influence depends heavily on its ability to assist the resource- poor countries of Central America and the Caribbean to meet their energy needs. Protests and demonstrations, which forced Bolivia to rescind essential price increases in natural gas, have weakened the government of Evo Morales. Even Chevron’s court battles in Ecuador are as much about politics as they are about the environment. Decisions about energy production and use in any one Latin American country affect the economies and politics of many other nations. Brazil’s largest city, São Paulo, depends on natural gas exports from Bolivia, while the Bolivian economy relies on Brazilian purchases. Argentina has a similar link to Bolivia. Chile depends on natural gas imports from its neighbors Peru, Argentina and Bolivia but cannot fully count on a reliable supply. It is planning to turn to much higher priced LNG imports and perhaps develop a nuclear energy capacity. We are pleased to have this opportunity to showcase the initial work of the Energy Policy Group, which was launched in 2009 with the cooperation and support of the Inter-American Development Bank. The group’s approximately 20 participants include energy experts and political and economic analysts, who meet to discuss the most important energy policy challenges confronting the region’s governments, offer balanced analysis of issues and choices, and develop ideas and approaches for addressing them in constructive ways. Many of the articles in this issue of Hemisphere were prepared by members of the group during its first year of operation. The Dialogue also publishes the Latin America Energy Advisor, a highly regarded weekly newsletter that offers up-to-date information and timely analysis of hemispheric energy issues. We very much hope that you enjoy this issue of Hemisphere and find the conclusions and recommendations that have emerged from the Dialogue’s policy group to be instructive and useful. We owe a debt of gratitude to FIU’s Latin American and Caribbean Center and its director, Cristina Eguizábal, for giving us this opportunity to present the group’s work. We would also like to acknowledge and thank Alexis Arthur and Chris Cote of the Dialogue staff for the editing and other contributions they made to assembling this issue. It would not have been possible without their help.

Sincerely,

Peter Hakim Genaro Arriagada President Emeritus Non-Resident Senior Fellow Inter-American Dialogue Inter-American Dialogue

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FEATURES Leading Energy Policy Issues in Latin America By Genaro Arriagada

nergy is a leading world Energy Mix 2009 concern. A fundamental factor in determining Oil Gas Coal Nuclear Hydro Total the might and weight of nations is the skill North America 38.5 27.6 20.0 8.0 5. 9 100.0 with which they handle energy South & Central Epolicy. Tensions among states are 45.5 21.5 4.0 0.8 28.2 100.0 America increasingly linked to the security of energy supplies, prices and Europe-Eurasia 33.0 34.4 16.5 9.5 6.6 100.0 transportation. In this context, analyses from the viewpoint of Middle East 51.0 47.2 1.4 0.0 0.4 100.0 politics and strategic and power Africa 40.0 23.4 29.7 0.8 6.1 100.0 considerations among states gain new importance in addressing Asia-Pacific 29.1 10.8 51.9 3.0 5.2 100.0 energy issues. Compared to other world World Total 34.8 23.8 29.3 5.5 6.6 100.0 regions, Latin America’s energy mix reveals special circumstances, Source: BP Statistical Review of World Energy, 2010. challenges, problems and policies. The table illustrates the percentage sources—wind and solar—are Analysis of Energy Sources of total consumption by energy among the most expensive. A purely Having set the general framework, source and region. economic logic favors investment in it is important to analyze the Latin America is an area rich in oil, coal, which is the cheapest source different components of the energy hydroelectric power and gas, with but also the most polluting. grid. These are at varying degrees of enormous reserves and production Between now and 2030— development, pose distinct problems that exceeds consumption, making assuming that energy consumption and opportunities, and should be it a net energy exporter. By contrast, rises 60%, the mix remains clean, addressed through different policies. the share of coal and nuclear energy and the increase in energy costs is Oil. Excluding the Middle East, in the mix is very small. minor—Latin America should set Latin America is the region where oil Since energy policy should be the following general energy policy makes the largest contribution to the based on the use of all sources rather goals: (1) maintain the current share fuel pool, even more than in the “oil- than a single one, a view of the of hydroelectric power; (2) slightly addicted” United States. South and overall energy mix is fundamental to reduce the oil share; (3) maintain Central America, the Caribbean and discussing and formulating long- the natural gas share; (4) reduce Mexico together account for 15.8% term policy. Environmental concern the coal share; (5) reduce the role of proven reserves and 12.8% of about greenhouse gas emissions has of traditional biomass, especially world production, which compares given new momentum to once- if associated with extreme poverty; favorably to their 8.8% share of controversial energy sources, such (6) maintain or, ideally, increase the consumption. as dams and nuclear power plants. nuclear energy share; and (7) increase Recently, however, highly favorable Such considerations should not the Non-Conventional Renewable conditions have given way to obscure economic factors essential Energy (NCRE) contribution to 10- uncertainty due to stagnating, even to growth, for the cleanest energy 15% of the mix. declining production in most of

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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 close cooperation between neighboring countries: Chile and Peru, Brazil and Argentina. Coal. This will continue to be the fastest-growing 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. The role of coal is small and limited to Brazil, Chile and Colombia, which account for 85% of regional consumption. At the same time, however, Central and South America Itaipu’s Brazilian General Director, Jorge Miguel Samek, speaks to journalists about the controversial represent the world area where coal hydroelectric dam, which is co-owned by Paraguay and Brazil, during a press conference at the consumption is growing the fastest. São Paulo State Industry Federation (FIESP) headquarters in São Paulo, Brazil, on May 27, 2009. This increase will tend to muddy a Photo: Mauricio Lima/AFP/Getty Images. comparatively clean energy mix. Hydroelectric power. Latin South America and Mexico. The there is an effort to increase sector America, South America in Mexican state underfunds the oil efficiency, particularly in Mexico, particular, is the world’s richest sector, and oil reforms approved by Argentina, Venezuela and Ecuador. hydroelectric region, with the Mexican Congress are seen as too Natural gas. The contribution 22% of the global total for this limited. In Venezuela, too, the oil of gas to the regional energy mix is resource and four times the world situation is deteriorating rapidly. close to the world average: 22.2% average. However, opposition by Brazil, in contrast, has emerged compared to a global average of environmental groups to new dams as a success story when it comes to 23.7%. When it comes to reserves has led to conflicts in Chile, Brazil, oil exploration and production. In and production, however, gas is less Guatemala, Mexico, Honduras, 1997 it accounted for two-thirds satisfactory than oil. Latin America El Salvador, Peru and other of South America’s crude imports, owns 4.1% of proven reserves and countries. Such confrontations but by 2009 it was self-sufficient in production matches consumption, pit environmentalists, native energy and ready to join the exclusive 6.3% of the world total. Venezuela communities and large club of oil-exporting countries. Its and Bolivia have immense reserves international NGOs opposed to results are so favorable that by the but sector development is lagging. dams (and nuclear energy or even end of the decade it will probably Brazil, Peru and Trinidad & Tobago oil development) against large overtake Venezuela and Mexico as have more successfully managed their corporations, governments and the hemisphere’s leading producer. In gas sectors. multilateral lenders that support Brazil, an active state policy coexists The South American liquefied development based on such factors with a company, Petrobras, which natural gas (LNG) market as cost and security or clean energy combines the features of state-owned started in 2008 following the concerns. Proponents argue that and private enterprise within a announcement of plans to build at nuclear power is a sustainable option regulatory framework that allows it to least seven regasification plants. This for a continent that has decided to avoid the dilemmas of overly liberal strengthened the overall regional halt hydroelectric development and policies or unyielding statism. energy situation but weakened should not rely on coal. Outside of Brazil, Latin America’s integration efforts. A more optimistic Nuclear energy. Nuclear energy oil future is under threat unless way to view the relationship between comprises 6% of the world energy

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subsidy policies that poor and even middle-income economies, such as those of Latin America, cannot afford to any significant extent. Still, there have been success stories with some forms of renewable energy in individual countries. 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 total as much as double the reserves of Saudi Arabia. The technical and financial issues in developing these resources are enormous and the environmental impact is also being questioned, Itaipu’s Paraguayan General Director, Carlos Mateo Balmelli. Photo: Mauricio Lima/AFP/Getty Images. particularly with regard to tar sands. Interestingly, high-profile observers note that the distinction mix, but in Latin America it accounts for a very high share of the mix in between conventional and non- for less than 1%. Since 2006, the poor nations of Central America conventional oil is irrelevant since governments have espoused the and the Caribbean. Yet, firewood at the end of the day, any oil that necessity of developing this sector could be used rationally in countries markets can integrate in terms of given such factors as climate change, with vast forests, the technology to cost and price is conventional. In high oil prices, and dwindling process farm waste, and thoughtful this sense, the ultra heavy oils of reserves and production. Brazil forest management plans. One of the the Orinoco have better prospects and Argentina have announced Millennium Development Goals is than Canada’s tar sands. new nuclear plants, the debate in to give the poor, who otherwise have Mexico is growing more strident, only traditional biomass, access to Energy Regions in the Hemisphere and Uruguay has set up a bipartisan modern energy sources. Specific local circumstances and commission to review the issue. Non-Conventional Renewable issues call for different policies, Chile may soon become the fourth Energy. This includes run-of-river making it most expedient to view Latin American country to integrate hydroelectric plants, wind, solar, the hemisphere as not one zone nuclear energy into the mix. In geothermal, and non-traditional but three: Central America and the Venezuela, the Chávez administration biomass such as sugar cane, corn- Caribbean; South America; and has been flirting with nuclear energy based and cellulosic ethanol. While North America, including Mexico, that uses Russian and Iranian they currently contribute only 2% the United States and Canada. technology. of the Latin American mix, these Central America and the Traditional biomass. The oldest sources are critical to addressing Caribbean encompass 23 nations form of energy is traditional biomass climate change and will be a focal with an energy deficit. Only for heating, lighting and cooking. point of future debate. Clean to Guatemala and Cuba produce some Its use is often associated with varying degrees, some of these oil, although not enough to meet extreme poverty, and some 100 sources have non-trivial negative domestic demand. Oil accounts million Latin Americans rely on effects. Worldwide use of non- for more than 70% of the energy traditional biomass to meet their conventional renewable energy has mix in many of these nations. They basic energy needs. Firewood, the been rising rapidly but its overall possess limited refining capacities, most characteristic use of biomass, contribution remains scant. In compounding dependence. The is hard to quantify, but it accounts general, its development hinges on Central American and Caribbean

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zone also has virtually no gas, except Because of oil’s fungible nature, for Trinidad and Tobago, home to its use for political purposes is a significant exportable surplus. limited. Exports to one country Countries in this area possess that are diverted to another will modest hydroelectric resources and simply be replaced with other no access to nuclear energy in the exports. The main concern is foreseeable future. whether the reduction of one Energy is one of the bottlenecks source can limit the global supply. to growth in Central America and Natural gas is different, as about the Caribbean. Oil becomes an 70% of the gas supply does not instrument of policy whenever a trade on the open market. Prices strong imbalance of power emerges and quantities are fixed in long- between a country with a surfeit of term contracts between countries the resource and another that needs joined by a pipeline, creating it urgently. A state may prevail over strict, reciprocal dependence another in such a situation, reinforced between exporter and importer. by subsidized prices or soft financing The LNG market resembles the terms. Within the hemisphere, this oil market with the restriction zone is the most likely to experience that it requires consumers to build such relationships. regasification plants. South America, in contrast, is rich Experience shows that higher in energy resources. Exportable oil levels of energy security come surpluses are significant and proven Experience shows that energy security comes not from autarchy but from reserves very high. Venezuela, Bolivia from a diversification of the energy mix. diversification of the energy mix. and Peru have vast gas reserves Security through diversification and Brazil has recently reported The disparities among these three and leverage of economic benefits major discoveries. The hydroelectric zones create both challenges and are among the factors that drive potential is enormous. opportunities for energy partnerships. integration. The leading forms of Major differences underlie this energy integration are linkages scenario. Chile and Uruguay Security, Integration and through gas pipelines and power are weakest, with large energy Geopolitics grids, but development of either in shortfalls. Paraguay compensates its Energy security is an elusive Latin America is nascent at best. shortcomings with the enormous concept. At its most basic it In the case of natural gas, progress flow of electricity from large dams requires an uninterrupted flow of has been hobbled by political or on its borders with Brazil and energy at a reasonable price. geopolitical factors. Argentina. All other countries While cuts in supply are the Nations such as China or India, show positive balances but their foremost threat to security, whose greatest concern is to secure prospects differ. Brazil exemplifies responsibility for them varies. the energy supplies their growth successful policy management while Many cuts occur for reasons plans require, are increasingly Venezuela, Argentina and Ecuador beyond the fault or control of active in Latin America. As a face declining production and states or companies, although result, the geopolitical energy deteriorating energy sectors. cutting or threatening to cut the equation must consider not just Latin America is the leading oil energy supply may be used as an large producers, but also and most exporter to the United States. The instrument of political pressure. especially large overseas importers US has a strong energy deficit, in Security can also be threatened and their investments in the area. contrast to Mexico and Canada, when a relatively more powerful Prospects for energy security both with excess production. But country sets an unfair price—either would benefit greatly from a in Mexico, too, as we have noted, too high (if it is a supplier) or regional accord or convention energy production is on the decline. too low (if it is a consumer), thus designed to guarantee that energy In fact, North America is the region affecting a weaker nation. Cartels supplies will not be arbitrarily cut of the world where the reserves-to- may distort prices and, more by signatory states. This may not production ratio is lowest. seriously, put conditions on supply. be easy to achieve.

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Geopolitically, the presence of by whom the company is governed; Latin America is not a large extra-continental powers in the and the sector’s price policy. Brazil’s contributor to greenhouse gas region as well as tensions between Petrobras and Venezuela’s PDVSA are emissions. The region adds a mere countries in the hemisphere should examples of NOCs that address these 6% to the world total, thanks to be watched. Examples include: issues in divergent ways. NOCs are low levels of industrial output and (1) any vacuum created by the likely to continue to dominate the public transportation emissions and suspension or reduction of projects oil industry, especially in Mexico and the weight of hydroelectric power in or promises made to countries and South America, and the quality of the energy mix. The region’s greatest governments by Venezuela, whose their performance is a central energy potential contribution to climate oil slump may make fulfillment policy issue in Latin America. change is deforestation. impossible; (2) how the United The study of pricing and subsidy Regional energy policies have States will address eventual export policies is an issue of special already begun to address the climate declines by Mexico and Venezuela; concern, as in Latin America these change challenge. Important and (3) tension between Brazil and can be an obstacle to consistent initiatives include hydroelectric Bolivia over natural gas, not only energy policies. They interfere with power and increased energy as related to Brazilian investments efficiency, discourage investment, efficiency. Nuclear energy too cannot in Bolivia, but also to those arising distort demand, do not always favor be ignored. The controversies over from Brazil’s shift from deficit the poorest and are a disincentive to its development, mostly political to self-sufficiency and even to integration. (nuclear weapon proliferation) and exporting. Subsidies, first cousins of pricing, safety-related (risk of accident) tend to be high in Latin America. cannot obscure the fact that it is a Savings, Prices and Public Venezuela, for instance, has some clean source of energy in terms of Corporations of the world’s lowest gasoline greenhouse gas emissions. Any energy policy must consider prices at enormous public cost. To the above policies—whether any three fundamental elements: Subsidies in Venezuela and Ecuador or all are adopted—one must add efficiency, public corporations and represent 8.3% and 6.7% of GDP, the fundamental role to be played by energy prices. respectively. In some cases, subsidies non-conventional renewable energy Energy efficiency is a priority are high and lack transparency. for its contribution to reducing objective of a consistent policy. Their cost and financing are unclear carbon dioxide emissions and fossil Nearly all Latin American and they sometimes benefit the fuel dependence. In general, non- countries have the ability to reduce affluent sectors of society. At the conventional renewable energy consumption at a reasonable cost same time, many non-conventional is expensive and hard to develop using measures within reach of renewable energy sources are without subsidy support. Production institutions and individuals. Energy costly and can only be developed costs have declined significantly efficiency can yield a remarkably if supported by subsidies. This in recent years, however, and high economic return and makes forces a discussion within a broad there is active discussion about a significant contribution toward perspective about the advisability international financing tools that addressing climate change. of investing in non-conventional could make it accessible to countries The largest players in the Latin renewable energy without with lower relative development. American energy arena, especially as impacting global economic growth Latin American countries should pertains to oil and gas, are National or diverting funds from other areas, continue their efforts to invest in Oil Companies (NOCs). Many especially social needs. non-conventional renewable energy types of NOCs exist, varying by and develop new, more accessible corporate governance systems and Latin America and Climate technologies. They should do so relations with the state, the private Change with caution, however, ensuring that sector and society. These models are Energy’s golden era of fossil fuels development does not create a heavy differentiated by the way NOCs is coming to an end. Humankind subsidy burden or pronounced address rent take (production sharing has agreed that such a system is energy price increases. ■ or concession-based contracts); unsustainable and must be stopped whether private participation exists due to high levels of carbon dioxide Genaro Arriagada is a non-resident (in exploration and production, or emissions and their contribution to senior fellow at the Inter-American in company ownership); how and climate change. Dialogue.

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IAD_full_bw.indd 1 3/8/11 10:47 AM Feature Energy Conflicts: A Growing Concern in Latin America By Patricia I. Vásquez

Protesters burning Christmas decorations in La Paz during a December 30, 2010 Gasolinazo protest against a decree by Bolivian President Evo Morales to remove fuel subsidies. Photo by James Brunker/Latin Content/Getty Images.

he past decade consolidate a particular political national and local levels share has witnessed a agenda across borders. As oil, gas two underlying triggers: first, proliferation of and hydroelectricity developments Latin America’s deep-rooted energy projects in have multiplied, so have conflicts economic inequality and the Latin America. Many brought on by the negative political, marginalization of certain societal have been central to the domestic social, environmental and/or groups; and second, weak state Teconomic development plans of economic externalities these projects management of the revenue from governments; others have been have generated. extractive industries. The region efforts to expand much-delayed While the dynamics of the succeeded in reducing inequality regional energy cooperation or conflicts vary, the disputes at levels in the last decade through

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improved education and increased political pressure on governments America’s poorest country, into transfers to the poor. The quality dependent on energy imports. In the region’s first exporter of liquid of the education the poor receive, other situations, they may use the natural gas (LNG). Instead, that however, remains lower than that wealth they accumulate through privilege is enjoyed by Peru, which attained by the top 10% of the exports to push broader political became Latin America’s first LNG population, and redistribution is or ideological agendas. Russia, exporter in 2010. minimal. in its handling of gas supplies to Persistent social and economic its European customers, fueled a Revenue Conflicts differences in spite of increased geopolitical conflict. Estimates of Bolivia’s proven natural resource revenues in In Latin America, Venezuelan natural gas reserves increased from producing countries create President Hugo Chávez has used roughly 4.3 trillion cubic feet (tcf) frustration among the population his country’s ample oil and gas in 2000 to 27 tcf in 2009. Bolivia and are at the heart of energy- reserves—80.5 billion barrels of has since been immersed in a related conflicts in Latin America. proven oil and 149 trillion cubic long period of political instability These conflicts can be regional, feet of natural gas—to craft energy as opposing groups struggle to national or local. Regional cooperation initiatives that have control gas resources. This struggle conflicts may be geopolitical; in gained political allies. The specter has highlighted Bolivia’s persistent other words, related to the use of of supply interruption hangs over class and ethnic differences: The energy, particularly oil, as a tool those who do not share his ideology. relatively small percentage of the for building political alliances Chávez, a strong critic of the United population of Spanish descent, across borders, or border conflicts States, has also used his country’s which controls the gas-rich related to unresolved, long-term hydrocarbon might to challenge southeastern provinces of Tarija, geographical frictions that hinder opposition political views. Santa Cruz and Cochabamba, has energy cooperation between squared off against the majority nations. At the national level, Border Conflicts indigenous population in the disputes stem from revenue conflicts The most challenging border country’s western highlands. or clashes over the distribution of conflict in the region is between Underlying these differences are natural resource revenues among Bolivia and Chile and traces its historical economic inequalities, as different ethnic or economic origin to more than century ago. revenues from the eastern energy- groups. Local conflicts, in turn, Since the War of the Pacific in producing departments have emerge from disputes within the the 1880s, when Chile took away usually failed to improve the living boundaries of areas under oil, gas or Bolivia’s access to the Pacific standards of the poor in the rest of hydroelectricity development. Ocean and left it landlocked, the country. Revenue and local conflicts Bolivians have maintained a In March 1990, a nationwide in particular build on historical historic claim for return of march organized by the indigenous economic inequalities, especially the coastline. That grievance population —Marcha por el those affecting ethnic minorities, resurfaced in 2002 in the form Territorio y la Dignidad (March in addition to weak institutional of massive popular opposition for Territory and Dignity)— frameworks and incomplete in Bolivia to proposals to export precipitated a series of laws implementation of the rule of gas from new reserves through a that increased recognition of law. If not addressed properly Chilean port. Violent uprisings indigenous peoples’ rights and and in a timely manner, these left dozens dead and ousted two their participation in the country’s disputes may prove a challenge for presidents—Gonzalo Sánchez de political life. Most important economic development models Lozada in 2003 and his successor, among them was the Law of based on extractive industries and Carlos Mesa, in 2005—in what Popular Participation, which threaten the stability of democratic became known as the “Gas War.” aimed to decentralize state power governments. When the private consortium by transferring political and project to export Bolivia’s gas fell administrative control – and 20% Geopolitical Conflicts through, the companies turned of the national budget – to local Countries with large hydrocarbon to Peru instead. Had the original municipalities. reserves sometimes leverage their export venture succeeded, it The ascendancy of indigenous abundant resources to exert would have turned Bolivia, South President Evo Morales in 2006,

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which marked the first time Bolivia’s Amazon has attracted the interest 1. The environmental and social majority indigenous population has of governments and oil and gas standards of the company held political power, can be traced producers. Similarly, attempts by involved in the energy to the push for inclusion that gained Latin American governments to projects. In the past decade, momentum throughout the 1990s. promote regional energy integration Latin America has seen a Morales also sought economic and cooperation have resulted in proliferation of small oil power through greater control of the several new hydroelectric projects, and gas companies as well as profitable gas revenues in Bolivia’s again mostly in the Amazon, as part large national oil companies southeastern states. Rather than of the South American Regional (NOCs), some of which acting as a balancing force, however, Infrastructure Integration Initiative observe less stringent social his election deepened the divide (IIRSA). The growing emergence of and environmental safeguards between the rich eastern lowlands oil, gas and hydroelectric projects than the big majors. and the poor western highlands. 2. The local community’s Morales set out to mandate a level of radicalization and redistribution of some 30% of gas opposition to the energy project. revenues to pay for social programs Indigenous movements have for retirees, public school students radicalized their actions and and other groups in the western gained more sophisticated states. The move weakened the negotiating skills across autonomy movement, but many Latin America in the past governance inefficiencies continue two decades. The extent of to create popular discontent. opposition and radicalization Clientelism, rent-seeking practices may depend on various and corruption persist, particularly factors, among them local within the state-owned oil company culture, the historical (Yacimientos Petrolíferos Fiscales de relationship between the Bolivia, or YPFB). Most important, community and extractive thriving gas revenues, which went industries, and NGO from $620 million in 2004 to $3.2 involvement. billion in 2008 (more as a function 3. The availability of institutional of price than increased investments), mechanisms to mediate have failed to improve the livelihood Protesters demonstrated against the construction conflicts. Latin American of most poor Bolivians. of the Belo Monte Dam in Brazil in front of countries often lack well- Morales is trying to reach a the Brazilian Permanent Mission to the United functioning institutions with balance between the gas industry Nations on April 28, 2010 in New York City. the capacity to effectively and growing discontent among Photo by Ben Hider/Getty Images. mediate conflicts. An indigenous groups who have yet exception to this rule is the to enjoy the benefits of oil and Peruvian Ombudsman’s gas projects in their territories. in areas inhabited by indigenous Office, which holds a high Pushing forward with hydrocarbon communities that are now more degree of legitimacy among development could erode Morales’s effectively voicing their grievances all stakeholders and has indigenous support, open the way has spawned a proliferation of local succeeded in de-escalating to increased confrontation from his conflicts. conflicts. Local NGOs own constituency and lead to the Energy-related local conflicts usually have lower success development of local conflicts. are arguably the most difficult rates in mediating energy- to solve because of the variety of related conflicts. Local Conflicts actors involved, the complexity 4. The extent of law enforcement. With conventional oil reserves of the issues that need resolution A constant source of energy becoming harder to tap around and the intricacy of the applicable conflicts is laws that are the world, a new and largely legal framework. The potential for overlooked or improperly undeveloped hydrocarbons such conflicts to spread depends on applied, or an abundance frontier in the heart of the several triggers: of overlapping rules that

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make them confusing and with previous agreements the regional level; revenue conflicts inoperative. Combined with local communities. A at the national level; and local with government failure to government’s or company’s conflicts with the potential to reach comply with international failure to comply with a national importance unless properly legal standards, such as previous commitment to addressed. Geopolitical and border those imposed by the a community leaves locals conflicts normally receive the most ILO 169 Convention and feeling betrayed and is often a attention from the general public the UN Declaration of source of conflict. Trust that is and the media. Revenue and local the Rights of Indigenous eroded is difficult to rebuild. conflicts, however, carry a greater Peoples, ineffective law Communities often protest risk of destabilizing the region by enforcement could lead the breach of contract with building on largely unresolved populations affected by force or violence. inequalities, weak governance and energy development to resort the increasing radicalization of the to violence to seek answers to Frequently underlying these indigenous movement. their problems. seven elements are the historic Expanded energy projects are 5. The existence of old grievances economic disadvantage and social necessary for economic growth or a history of negative and political exclusion of the in Latin America, where installed externalities related to affected population. In many cases, hydroelectric capacity remains very energy projects. In areas indigenous communities find low and large oil and gas reserves with a history of social or themselves suddenly negotiating await development. At the same environmental damage from with large oil corporations for time, the infrastructure required previous energy projects, access to basic education. Quasi- for such projects constitutes a local inhabitants tend to isolated and forgotten groups see tremendous risk factor, as most of more actively oppose similar these negotiations as their only the still-untapped oil and water new developments. Such chance to draw attention to their sources are in environmentally and communities also tend to be living conditions and improve their socially sensitive areas. more radicalized. The best livelihood, or at least gain access to These social and environmental example is the widespread basic services. When the outcome fragilities, combined with the dire opposition to new dams in of the negotiations is perceived to economic reality and historical light of the deep scars left by be unfair, communities affected by marginalization of the communities similar projects in the past. energy projects may resort to protests affected by energy development, 6. The level and nature of and sometimes violence to express generate gradually more conflictive involvement of international their dissatisfaction. Conflict in situations. Unless addressed rapidly non-governmental these circumstances may become and properly, these conflicts could organizations in the conflict. an instrument for forcing some pose important challenges to Latin International NGOs kind of a solution to old grievances. America’s political stability and the have grown in power and Increased coordination over shared region’s prospects for economic sophistication over the last grievances by indigenous groups growth. ■ 20 years and are particularly at the international, national and active in the Amazon. They regional levels often exacerbates the Patricia I. Vásquez is an independent play a fundamental role in conflicts. Unless properly addressed, energy expert and former senior supporting communities discontent over historical injustices fellow at the US Institute of Peace, in their negotiations with could build and become a source and an advisor on energy and companies and governments, of democratic destabilization. sustainable development issues. but have also been accused of The deadly confrontations in the contributing to the escalation Peruvian Amazon city of Bagua in of some conflicts by imposing 2009 offered a glimpse of this threat. agendas that do not fully represent the demands of local Potential Political Repercussions communities. There are four types of energy- 7. The degree to which companies related conflicts in Latin America: and governments comply geopolitical and border conflicts at

Hemisphere Volume 20 15 Feature Latin America’s Nuclear Future By Jorge Zanelli Iglesias

hat are the challenges and opportunities for nuclear power in Latin America? Will nuclear energy continueW to be a marginal player in electric generation in the region (2% vs. 15% worldwide)? Are the drivers to revive the nuclear industry elsewhere in the world going to be observed here as well?

Nuclear Power: World Outlook As of 2010, 436 nuclear reactors generated about 15% of the world’s electricity. Hydraulic power, the other major low-emissions energy source, provided nearly 20%. But while hydraulic power is constrained by the availability of large rivers and depends on climate, nuclear power still has considerable room for growth. After a modest start in the 1950s and exponential growth in the 60s, the nuclear industry stagnated for 30 years in the western world, primarily as a result of the increase in interest rates caused by the 1973 oil crisis. During the stagnation period, the nuclear industry developed progressively simpler, safer and more robust reactors. Streamlined procedures improved performance, including decommissioning and concerns over greenhouse gas helped boost load factors from 60% waste management (comparable with emissions, the supply security of to 90%, and extended service life by coal-burning); and environmentally nuclear power has made it more about 30%. Since the first reactor friendly (tiny CO2 footprint) energy attractive. This has led to a rebound that produced enough power for four source. in construction, especially in light bulbs in 1951, the technology The last decade has witnessed East Asia, and prompted several has come a long way. Nowadays, the a revival of the nuclear industry European governments to revise nuclear industry is probably the safest driven by increasing demand for their nuclear policies. China (fewer accidents per MW generated); energy. In a context of uncertainty and India plan to increase their most reliable (load factors above in oil prices and supplies, especially nuclear capacity by some 100,000 90%); economically attractive, even in the emerging economies, and megawatts by 2020, and the US

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Nuclear Regulatory Commission 1960s the government concluded and, until recently, Argentina has received applications for 30 new that, at prevailing uranium prices, had a natural gas surplus. Such nuclear reactors to go online in the it made sense to sell oil abroad and abundance makes nuclear energy next decade. import nuclear fuel rather than unattractive as a short- or medium- A new concern is global warming, burn oil to produce electricity. term option. However, as economic presumably an effect of burning This led to the construction of growth forces up demand and fuel fossil fuels, which in a few decades the Laguna Verde Plant in 1988, prices, as CO2 emissions become returns to the atmosphere the CO2 which has successfully provided increasingly objectionable and that was captured by plants over some 1,330MWe to the Mexican eventually taxed, and fewer rivers several hundred million years. Even economy. remain untapped, burning fossil some environmentalists formerly The 5,300 MW of nuclear fuels for electric generation will opposed to nuclear power advocate generation in these three countries become uneconomical, unpopular the use of nuclear technology to covers about 5% of their internal and unethical. Sooner or later, eliminate fossil fuels from electric demand and accounts for 2% Latin American economies will generation worldwide. If the of Latin American electricity have to look for alternatives that growing trend is maintained, nuclear generation. Argentina and Brazil are can provide base-load electricity power could be generating more completing construction of third safely, reliably, affordably and than 20% of the world’s electricity reactors (Atucha II and Angra III, sustainably to replace today’s in 20 years. respectively). Mexico is expanding primary sources: hydropower, coal the capacity of its Laguna Verde and gas. Renewables – wind, solar Latin America’s Nuclear Countries facility by 20% and is considering and geothermal – are intermittent, Argentina and Brazil, like other construction of eight new reactors considerably more expensive and less world powers after World War II, as part of plans to reduce its carbon reliable than the standard primary developed nuclear energy as an footprint. This vigorous growth, sources and, contrary to standard outgrowth of military programs in which could triple output by opinion, not as environmentally the 1950s. Nuclear programs in 2025, has wide political support, friendly with current technology. these South American countries a big change from the opposition Scale is also an issue: It takes were sparked by the hegemonic the original plant encountered in around 20,000 acres of wind ambitions of the authoritarian, the1980s. turbines to match the output of nationalistic governments headed a standard coal-burning plant. As by strongmen Juan Domingo Perón New Concerns, New Players energy–storing technology evolves, and Getúlio Vargas, respectively. In In recent years, several Latin some nonconventional alternatives the 1970s, military regimes in both American governments have should play an important role in countries covertly attempted to expressed interest in starting new the future matrix, but which ones develop missiles and to master the nuclear programs. Apart from and when remain open questions. complete nuclear fuel cycle. Although Cuba, however, where efforts in Since the only certain fact about their civilian nuclear industries this direction were started and then the future is the growing need for did not require it, both succeeded aborted, no new programs have been energy, countries with limited energy in controlling the heavy water launched since the 1980s. After so resources that could jeopardize their enrichment and production cycle. many unfulfilled announcements, economic future would be wise to Nuclear electricity was essentially a and the abundance of hydraulic and invest in a proven technology such as cover for military programs rather fossil fuel resources in the region, nuclear, which could deliver energy than a true attempt to secure the those claims can reasonably be to the required scale at a reasonable energy supply. With the return to dismissed as sheer advertising for cost and in reasonable time. democracy, both Argentina and image-building, without a serious Chile and Uruguay are seriously Brazil abandoned their military goals, commitment. considering nuclear power as an developing civilian nuclear power Brazil, Venezuela, Mexico, alternative. These two countries are programs that have safely and reliably Colombia, Peru, Ecuador and net energy importers, with limited delivered 935MWe and 1,900MWe Bolivia are rich in fossil fuels; Brazil fossil fuel deposits and little room to their respective grids. has vast untapped hydroelectric for growth in hydropower. They Mexico, in contrast, never started potential; Paraguay exports five seem the most likely candidates a military nuclear effort. In the early times the electricity it consumes; to join the regional nuclear club.

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Reaching this goal, however, is peace. All Latin American and SIEPAC project in Central America a complex affair for any nation, Caribbean countries have ratified or similar efforts in the Southern hinging on unpredictable factors the Tlatelolco and Nuclear Non- Cone, would make the grids more and internal and external political Proliferation treaties, but recent stable, economically efficient and barriers that must be overcome. ambiguous statements by Brazilian robust under local or seasonal authorities with regard to the climate fluctuations. Finally, an Challenges and Opportunities legitimacy of the military use of integrated Latin American nuclear Countries that intend to start nuclear energy have cast a shadow energy effort could play a role civilian nuclear power programs over the civilian nature of that similar to that of EURATOM, must not only have the financial country’s program. Venezuela’s which started the European resources to invest in the technology, plans to join Iran’s nuclear efforts economic integration that gave rise but must also be technologically have also raised concerns in the to the EEC 40 years later. sophisticated and institutionally international community. Although The recent earthquake and mature, with the necessary legal and there are no signs that Venezuela tsunami that struck Japan have regulatory government agencies. has the technological knowhow or raised legitimate concerns about the These nations should also have a the intention to become a rogue safety of the nuclear industry. The safety culture that goes beyond state like North Korea, it is still a accident at the Fukushima power having enough manpower to operate matter of concern that Venezuela, plant prompted antinuclear voices nuclear reactors, a regulatory Brazil and Argentina have yet to demanding the suspension of new body and a minimal technological endorse the Additional Safeguards reactor construction and possibly network to support the nuclear Protocol to allow unimpeded reducing existing nuclear generation. industry. They must have the human nuclear inspections. Although it is too soon to tell resources trained for high standards Recurring international concerns whether human responsibilities of safety and rigor. about terrorist groups getting hold contributed to the magnitude of the Civilian nuclear power programs of fissile material to make weapons, accident, the lessons learned from require broad social consensus. or spent fuel and other radioactive this experience will be incorporated Both imaginary fears and legitimate material to produce “dirty bombs,” into the next generation of nuclear concerns about nuclear energy are exaggerated given the enormous reactors, significantly improving the must be addressed, and the long- technological difficulties involved in safety and reliability of the nuclear term commitments cannot be building a working nuclear bomb industry, in an evolution similar to overlooked. The first power that and the inefficiency of a dirty bomb that of the aviation industry. The nuclear reactors generate brings with as terrorist propaganda. nuclear industry will certainly suffer it irradiated fuel containing high- Regional integration is probably in the short term as governments activity, long half-life radionuclides the key to ensuring viable, robust and investors revise their plans that must be kept in isolation for and transparent nuclear programs. and the technology absorbs the several centuries. Although this International cooperation could help lessons learned. As the dust settles is not technologically difficult to newcomers establish their regulatory in a scenario of increasing energy do, it underscores the fact that infrastructures. The industry could demands, however, renewed growth starting a nuclear power program benefit from an extensive network can be expected. The image of requires having answers to questions of advanced technology providers, nuclear energy will suffer in the that might arise a hundred years with training and certification of eyes of the public, but its safety down the road. In participatory operators and inspectors carried record will not change much from democracies, this requires a out at regional centers. Integration its historical level, keeping it one of high level of public consensus could also provide assurances to the safest and most environmentally and governments that guarantee all stakeholders of compliance friendly forms of electric transparency, thoroughness and with non-proliferation agreements generation. ■ best practices through competent, and avoidance of the military rigorous, independent and fully use of nuclear power, similar to Jorge Zanelli Iglesias is a researcher empowered regulatory agencies. the ABAAC agreement between at the Centro de Estudios Científicos Nuclear countries must also Argentina and Brazil for the (CES) in Valdivia, Chile. This is a satisfy the international community enrichment of uranium. Electrical condensed and updated version of a with a clear commitment to integration of the region, like the longer article.

18 Hemisphere Volume 20 REPORTS What Climate Change Means for Latin America By Paul Isbell

Compared to the US or China, each of which contributes 20% of the world’s annual greenhouse gas emissions, Latin America accounts for a mere 10%. Agriculture (a major source of methane) and deforestation account for nearly two-thirds of the region’s greenhouse gases.

atin America’s position to its geography. Much of Mexico main low-carbon energy source – in the energy and and Central America lies within the hydroelectric power. climate change landscape hurricane belt, which now operates How such environmental generates unique with greater force and volatility as instability will interact with ongoing strategic policy choices. a result of global warming. Latin geopolitical frictions and heightened Like Africa, Latin America has America’s low-lying coastal zones, instability in different parts of the Lcontributed relatively little to climate which include many of the region’s region is far from clear. Climate change, but the region is set to largest urban areas, will come under change is poised to impact Latin absorb more than its fair share of threat from warming-induced America just as many of the region’s the environmental and geopolitical rising sea levels. In addition, much economies are breaking away from consequences of the problem, leading of South America’s agriculture a traditional cyclical dependency to a range of strategic incentives and urban activity depends on on the world’s core developed and disincentives that require more water flowing from the Andean economies. The region’s economies than mere replication of the policy glaciers, which are now in retreat. are slowly but surely diversifying responses elsewhere. This threatens the sustainability their domestic production, internal Latin America is particularly of the region’s populations and demand, and external trade vulnerable to climate change due economies and, in particular, its and financial linkages. Brazil in

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particular is emerging as a pioneer tons per capita. This is in line with the rate of global greenhouse gas in energy and climate policy. At Chinese per capita energy-induced accumulation in the atmosphere the same time, however, the region CO2 emissions. (the key in this regard resides remains vulnerable to traditional What this emissions profile in the US and in China). The maladies – from the oil curse to the should tell policymakers about expansion of livestock agriculture, debt trap – that typically interact Latin America is that energy on the other hand, which leads to destructively with the sources and consumption there is less dirty (in both increased methane emissions impacts of human-induced climate climate terms) than in most other and forest clearing-induced change. parts of the world. Although Latin CO2 accumulation, significantly Compared to the United States America is still more dependent contributes to global warming. or China, each of which contributes on petroleum, which comprises Efforts to halt deforestation in more than 20% of the world’s 44% of its energy mix compared developing countries, such as annual greenhouse gas emissions, to 35% in the world as a whole, the REDD+ program, have been Latin America’s impact is a mere it is less dependent on coal (4% recognized by the international 10%. In per capita terms, these compared to a global average of climate change community as figures correspond to more than 23 24%). Coal is by far the energy critical elements in the fight against metric tons per person in the US, source that emits the most CO2. In global warming. Unfortunately, compared to just over 10 metric its place, Latin America relies on while Latin America has improved tons in Latin America. This is down large-scale hydroelectric power for on the land-use front, its from more than 13 metric tons 20 approximately 25% of the region’s traditionally low energy-induced years ago. primary energy mix. In Brazil, carbon dioxide emissions have Furthermore, Latin America’s the figure is 75%, an even greater increased significantly in recent carbon footprint has a distinctive electricity share than France’s fabled years, even if from a low base. structure and obeys a different nuclear power, while in Paraguay Some Latin American countries dynamic than in other parts of hydropower approaches 100% of may see little strategic gain in the world. While CO2 emissions the electricity mix. undertaking the arduous and from energy use make up nearly For policymakers, the battle costly effort of deploying low- two-thirds of global greenhouse gas against deforestation is even more carbon energies to reduce global released from all sources, in Latin important than decarbonization emissions in time to avoid the worst America they account for less than a of the energy economy in Latin manifestations of climate change. third. Instead, agriculture (a major America. This is particularly true Yet many of the same countries source of methane) and changes in Brazil, where biofuels add even have much to gain from significant in land use patterns, including more low-carbon energy – 25% of efforts to pursue low-carbon energy livestock-driven deforestation, all transportation fuels – on top of deployment, simply because such a account for nearly two-thirds of hydroelectricity. But while Brazil’s commitment is often the best way the greenhouse gases the region energy economy is relatively clean to garner financing for the costly produces. in terms of carbon emissions, its mitigation efforts and even more If we removed all greenhouse economy accounts for much of expensive climate adaptation they gas contributions stemming from the significantly higher level of will soon need. Even without the changes in land use patterns, greenhouse gas emissions in the threat of climate change, many the region’s share would drop to region in total. Latin American countries would see around 6% (around 5 metric tons To some observers, all of this strategic benefits from displacing per capita). The US contribution suggests that the push toward imported, high-priced fossil fuels in relative terms would remain at a post-fossil fuel energy future with domestic renewable and more than 20% (22 metric tons is less urgent in Latin America other low-carbon energy sources, per capita). But if we discounted than in other parts of the world. reducing direct energy costs and all non-energy related greenhouse On the one hand, given the low freeing themselves from potentially gas emissions, Latin America’s level of CO2 emissions stemming destabilizing dependence on contribution would fall even further, from energy across the region, unstable and unreliable sources. ■ to between 3 and 4% of the global even if Latin America completely total (compared to 19% from the decarbonizes its energy economy Paul Isbell is a visiting senior fellow US), around four to five metric it will make little difference to at the Inter-American Dialogue.

20 Hemisphere Volume 20 Report Central America’s Energy Challenges By Cristina Eguizábal

f the three poorest countries in the Americas, two are in Central America. With the exception of Costa Rica and OPanama, poverty rates are high and inequality is profound. Central American countries spend much of their resources on imported hydrocarbons despite the fact that the region’s main source of energy for household use remains firewood. This is even true of Belize and Guatemala, the region’s only oil producers. As a result, the seven small economies of the region suffer when oil prices are high, as was the case in 2008. Hydroelectricity, administered by the state through public utilities and transmission companies, has dominated electricity generation in the region. In the 1990s, economic liberalization and privatization reached the energy markets and attracted foreign investors to develop new power plants. Investors preferred thermal (diesel- powered) plants as they were less costly and faster to build than hydropower plants, let alone river dams. In the 1980s, approximately 75% of the region’s energy came from hydroelectric dams; that Guatemalan woman carrying a load of firewood from the slopes of the mountain to her home. In the percentage has since dropped to Quiche region, more than 90 percent of families rely on firewood for cooking. less than 50%. In 2009, according to ECLAC, 47.5% of electricity 1.8% came from coal and 1% fairly diversified, although much in Central America was generated was wind-powered. Of that total, work remains to be done for the by hydraulic power, 37.3% came 60.8% of electricity was generated countries to reach energy output from oil, 7.9% was geothermal, from renewable sources. As a result, levels capable of maintaining 4.4% was generated by sugar cane, the region’s energy matrix looks economic growth and lifting their

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Windmill farm on the shores of Lake Nicaragua. The Concepción Volcano on Ometepe Island dominates the background.

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populations up from poverty entire Río Grande de Matagalpa generation but power efficiency, by while reducing the proportion of watershed. linking the power grids of Panama, hydrocarbon-generated electricity. The Chalillo hydropower project Costa Rica, Nicaragua, Honduras, Energy profiles vary among in Belize provides another example. El Salvador and Guatemala. Central American countries: 95% Since 2005, Belize Sugar Industries After 20 years of discussion, of Costa Rica’s energy production (BSI) has been working on a plant Central American governments comes from renewable sources that runs on both oil and sugar cane finally began construction of the (mostly river dams), while in bagasse (92% renewable). It will Central American Interconnection Nicaragua the figure is 26.6%. In produce 30 megawatts of power, of System (SIEPAC) in 2006; the El Salvador, Guatemala, Panama which 25 megawatts, representing interconnection of Panama and and Honduras the proportion of 20% of Belize’s national grid, are to Costa Rica became operational renewable energy is around 50%. All be sold directly to the state-owned on October 25, 2010. As of the countries in the region need Belize Electricity Limited. The part of the Puebla Panama to expand their power-generating remaining five will be for use at the development initiative (which capacity quickly to extend the BSI factory. includes Colombia as well), the electrical grid to rural areas and Other renewable public-private Regional Electrical Market plans complete the electrification of partnerships in energy projects to complement SIEPAC with their territory. Out of a total of 40 include wind parks in Costa Rica electrical interconnections between million people living in Central (Plantas Eólicas de Costa Rica) Guatemala and Mexico, Guatemala America, approximately 10 million and Nicaragua (Amayo I and II), and Belize, and Panama and do not have electricity in their which are already operational, and Colombia. Supporters of the project homes and almost 20 million still Cerro de Hula in Honduras, still argue that the interconnection of use firewood for cooking. The under construction. El Salvador is the nations’ electrical transmission challenge confronting Central Central America’s larger producer grids will optimize shared use of American countries is their need of geothermal energy. Two plants hydroelectricity, reduce operating to reduce reliance on traditional in Ahuachapán and Berlín generate costs and create a large enough biomass sources of energy –e.g., approximately one-quarter of the market to attract foreign investment firewood—which are not only big country’s total output. in power generation and transmission polluters but also contribute to At the other end of the continuum systems. Some critics fear that the region’s rapid deforestation. It are small-scale renewable energy SIEPAC will facilitate electricity is imperative to build renewable initiatives that allow poor rural exports to Mexico and Colombia energy-generating capacity while populations to avoid the need for but not expand access in Central reducing emissions of greenhouse- fixed lines. There are no reliable data America, and others voice concerns effect gases. on the spread of off-grid renewable about the associated environmental Central America’s hydroelectric energy on a small scale, but a large and social costs of large hydropower potential is far from exhausted. Big number of these systems are being facilities. Supporters and critics alike dams are not only costly in financial installed. Small solar projects, stress the weakness of the region’s terms, however; by dramatically underground biogas chambers and regulatory environment at all levels, changing the social and ecological “mini” hydroelectric dams deliver national and regional. systems of an entire region, they can electricity at a price that even the Central American countries must also become costly politically. The poor can afford and are sufficient to expand their electricity generation Brazilian conglomerate Quieroz- power cell phones, fans and high- considerably in the coming years. Galvão-Electrobras is building a efficiency light bulbs. These initiatives To do so responsibly, they need new dam, Tumarín, in Nicaragua’s will not replace the need for the more to establish a truly diverse energy South Atlantic Autonomous reliable electricity delivery systems pattern based on financial and region. The dam will revert to necessary to power major appliances environmental sustainability. ■ public property after 30 years, but such as refrigerators, but until that the communities that surround happens, they will make life easier for Cristina Eguizábal is a professor Tumarín –which claim they were millions of people, particularly poor of international relations and the not consulted about the project— women and children. director of the Latin American and environmentalist groups allege The most ambitious energy and Caribbean Center at Florida that it will negatively impact the initiative involves not power International University.

Hemisphere Volume 20 23 Report Why the United States and Cuba Collaborate (and What Could Happen If They Don’t) By Jorge Piñón

and responsible manner, the almost five-decade old unilateral political and economic embargo keeps them on the sidelines. Cuba currently relies on heavily subsidized oil from Venezuela for two-thirds of its petroleum needs. This supply contributes to the Cuban government’s ability to maintain a politically antagonistic and belligerent position towards the US. The collapse of the Soviet Union in 1991 made Cuba aware of the political and economic risks and consequences of depending on a single source of imported oil. Only when Cuba diversifies suppliers and develops its offshore hydrocarbon resources, estimated by the United States Geological Survey at 5.5 million barrels of oil and 9.8 trillion cubic feet of natural gas, will it have the economic independence to consider political and economic f Cuba’s suspected but yet International oil companies such reforms. It is in the US interest undiscovered hydrocarbon as Spain’s Repsol, Norway’s Statoil to develop a new policy toward reserves are proven real, it will Norsk Hydro and Brazil’s Petrobras the island based on constructive take between three and five are actively exploring Cuba’s engagement to support the years to develop them fully. Gulf of Mexico waters. Cuban emergence of a Cuban state in which Production volumes would have to authorities have invited United Cubans themselves can determine the Ireach more than 200,000 barrels States oil companies to participate political and economic future of their per day to have the same positive in developing the island’s offshore country through democratic means. economic impact currently derived oil and natural gas resources, Cuba is about to embark on an from foreign oil subsidies. If this but US law does not allow this. 18-month oil exploration drilling occurs, significant revenues from oil, Although US oil, oil equipment and program to validate the presence of natural gas and sugarcane ethanol service companies have the capital, recoverable hydrocarbon reserves. would integrate Cuba into global technology and operational know- US support of such endeavors would and regional markets within the next how to explore, produce and refine be beneficial in the framework of a five years. Cuba’s potential reserves in a safe constructive engagement policy.

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The Deepwater Horizon drilling semi-submersible incident and the resulting catastrophic oil spill demonstrate the urgency of developing a policy of energy and environmental cooperation between the United States and Cuba. As Cuba develops its deepwater oil and natural gas potential, the possible consequences of a spill call for proactive planning by both countries to minimize or avoid an environmental disaster. To respond effectively to an oil-related marine accident, any company operating in Cuba would require immediate access to US oil services companies for the near- instant technology and know-how needed to halt and limit damage to nations are tasked with developing lease or loan of emergency relief and the marine environment. Obviously, and maintaining adequate reconstruction equipment and the the establishment of working capabilities to deal with such an travel of expert personnel to Cuba relations between the US and Cuba emergency. In the case of Cuba and following an oil spill. in the area of marine environmental the United States, the capabilities Cuba’s long-term energy protection would assist enormously must be transnational, as there is no challenges will be a consequence in the contingency planning and barrier to the movement of oil from of its future economic growth and cooperation necessary for an early one country’s waters to another’s. rising standard of living within and effective response to an oil spill. The United States, therefore, must a market environment. This The United States and Cuba develop appropriate regulatory and anticipated growth will depend are already parties to a number of procedural frameworks for the free largely on the development of multilateral oil pollution agreements, movement of equipment, personnel a competitively priced, readily such as the 1973 International and expertise between the two available and environmentally sound Convention for the Prevention of countries as part of any oil spill long-term energy plan. Cuban Pollution from Ships (MARPOL) response. energy policy should embrace and the 1983 Convention for the The 1980 Agreement of energy conservation, modernization protection and Development of Cooperation between the United of the energy infrastructure, and the Marine Environment in the States and Mexico Regarding balance in sourcing oil/gas supplies Wider Caribbean Region (Cartagena Pollution of the Marine and renewable energy sources that Convention). Both agreements Environment by Discharges of protect the island’s environment. address prevention of pollution of Hydrocarbons and Other Hazardous The country would benefit from the the marine environment by ships Substances (MEXUS Plan) provides guidance of a variety of partners, from operational or accidental the foundation for a similar protocol including the United States. ■ causes. The 1990 International with Cuba. This would include Convention on Oil Pollution the establishment of joint response Jorge R. Piñón is a visiting research Preparedness, Response and teams, coordinating roles, rapid fellow at the Latin American and Cooperation also offers a precedent incident notification mechanisms, Caribbean Center’s Cuban Research for cooperation. The convention joint operations centers and Institute at FIU. The opinions is designed to encourage and communication procedures, along expressed in this paper are among facilitate international cooperation with regular exercises and meetings. the recommendations resulting from and mutual assistance in preparing The United States government, the Brookings Institute April 2010 for and responding to major oil irrespective of the current embargo, seminar, “U.S. Policy toward a Cuba pollution incidents. Signatory has the power to license the sale, in Transition.”

Hemisphere Volume 20 25 Report Challenges of Designing an Optimal Petroleum Fiscal Model in Latin America By Roger Tissot

he ability to replace only modest exploration activities in the rents are captured: the later hydrocarbon reserves the most prospective areas. the payment is required, the more is influenced by the Sometimes NOCs manage to progressive the system is. level of investment in achieve a high level of independence The main challenge in the exploration activities. from the government despite design of optimal fiscal system is Governments have two options for being their main source of cash. to achieve alignment of different Tconducting exploration activity: 1) The sustainability of NOC and sometimes diverging objectives investing in exploration activities “independence” depends upon between the government and the directly; or 2) asking private three factors: 1) its ability to meet IOC. The government’s primary companies to make the investments. the government’s financial needs; objective is to maximize the value In the first case, the ability of 2) its capacity to produce and of its petroleum resources while the entity – usually the National replace reserves efficiently; and 3) attracting sufficient interest from Oil Company (NOC) – to make endorsement of NOC strategic IOCs to invest in E&P activities. investments depends on the skill activities by top-level political IOCs in turn seek to ensure that level of the country’s workforce, the authorities. If these conditions are the rate of return on the capital government’s financial capabilities, not met, the result is often a cash- employed is consistent with the its aversion to risk, and the level of starved and risk-averse NOC unable project’s risk and with the strategic financial and strategic independence to carry out exploration alone. objectives of the corporation. of the NOC from other government The other option is for authorities. governments to offer the rights Latin American Experience Political authorities tend to for developing the resource via Latin America has been a fertile be risk averse and would prefer concessions to international oil ground for petroleum fiscal models. to use scarce financial resources companies (IOCs), or to partner Whether the region’s policies are for projects aimed at improving with them in exchange for a share open or closed usually obeys shifts social conditions or economic of production or profits. The in the political pendulum from development. Their investment option selected depends on the populism to economic orthodoxy. preferences are also influenced government’s choice of petroleum In the 1990s, therefore, Latin by political ideology and the fiscal models. America adopted market-oriented preferences of their constituencies. The different “families” of models, reduced government take, The NOC has to compete with models represent legal contracts ended NOC monopolies and, other government authorities for the or agreements covering rights in some cases, privatized them. funding to make its investments. granted over a period of time and The private sector response was The more dependent on NOC for an agreed level of activity. The positive, resulting in rapid growth revenues the government is, the less difference between these systems of reserves and production. Most of independence will be granted to the mostly involves the mechanics of the fiscal models, however, failed to NOC. In this case, the NOC is more risk and reward sharing between respond to the steep price increases. likely to be risk averse, focus most the contractor and the government. That failure coincided with the investments on sustaining production Fiscal models can be more or less rise of new populist regimes that from existing wells, and implement progressive depending on when relied on resource nationalism as

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a key component of their political Figure 1 platforms. South America and Mexico Oil Reserves (billion b) and % Change Since this most recent “turn to the left,” Latin America has faced two very different paths with regard to oil policy. The first favors state corporatism and maximization of rents even at the cost of investments and additional reserves. This is the case of Venezuela, Bolivia, Ecuador and, to a certain degree, Brazil and Argentina. The second path advocates strengthening market- oriented models, resulting in a boom in investments in Colombia, Peru and, to a lesser extent, Trinidad & Tobago.

Figure 2 Oil Reserves and Production Changes in Latin American Oil Reserves 2009-2004 (billion b) Figure 1 shows the evolution of petroleum reserves in Latin America from the 1990s through 2009. Reserves increased modestly (0.7% on average) from 1990 to 2005, followed by a drastic jump since then. Figure 2 shows the change in oil reserves in the main oil-producing countries of Latin America between 2004 and 2009. Venezuela explains most of the jump in reserves over A

the last few years. This is not Latin America Change Reserves Billion b “new oil” but rather a change in the definition of already recorded reserves from the heavy crude oil Orinoco fields. Brazil has increased its reserves almost constantly in Figure 3 the last two decades, due in part Changes in Oil Production 2004-2009 to more active exploration efforts by Petrobras, the Brazilian NOC, and IOCs since the opening of the sector a decade ago. Brazil has also captured international headlines since 2008 due to huge discoveries of pre-salt oil, described as a “game changer” for Brazil’s petroleum outlook. The country is expected to become an important oil exporter in the next decade. Latin America’s oil production peaked at 10.65 million b/d in 2005. Since then, production has

Hemisphere Volume 20 27 Report

slowly declined to less than 10 and governments have imposed the political, social and economic million b/d. Average production higher taxes and royalties and/or characteristics of the host country. changes since 2005 on a country stricter qualifying requirements In some countries, allowing basis show Mexico with the biggest for IOCs. Resource-nationalist concessions to IOCs may be seen decline, followed by Venezuela, countries have experienced a drastic as highly offensive, for historical Argentina and Ecuador. Gains were decline in production and, in reasons. In others, the need to made in Brazil, Colombia and Peru. some cases, reserves. The economic secure new reserves to postpone sustainability of these countries the need to import oil is a Petroleum Policy Outlook is tied to new investments. There sufficient incentive to grant IOCs According to a recent report by is uncertainty about local NOCs’ attractive fiscal conditions. the Fitch Rating agency, capital abilities to meet the investment The main challenge in Latin expenditures by the largest five challenge, while foreign investors America is to design petroleum Latin American NOCs could reach would expect a reward attractive fiscal models that are flexible US$550 bn in the next five years. enough to compensate for political enough to incorporate price Coinciding with the ambitious and fiscal risks. volatility and political change and expansion plans is a deterioration In the last decade, some stable enough to allow private of fiscal balances in the region due countries have successfully investors to focus on long-term to increased spending caused by increased their hydrocarbon development. ■ the fiscal stimulus in 2009 and reserves, with high rents for natural disasters during the 2010 governments, increased investment Roger Tissot is an economist and rainy season. and attractive rates of return for independent consultant focusing Countries that were seen as investors. It would be tempting on Latin American energy policy, “business friendly” have become to “copy” the fiscal models markets and strategy, advising mostly victims of their own success. Access of successful countries, but a Canadian and international oil and to land is becoming more expensive successful fiscal model must reflect gas companies.

28 Hemisphere Volume 20 Report Petrobras: The Unique Structure behind Latin America’s Best Performing Oil Company Genaro Arriagada and Chris Cote

razil’s oil and gas giant Petrobras stands among the world’s most successful businesses, admired by the public as well as by private and state-owned Bnational and transnational oil companies. Petrobras today is active in 23 countries in the exploration, production, refining, distribution and sale of oil, gas and energy, as well as petrochemicals, biofuels and electricity. Latin America’s most successful oil company owes its success at least in part to Brazil’s condition as an oil-poor country with a government that does not see it as a cash cow. Unlike the other state- owned powerhouses in the region, Mexico’s PEMEX and Venezuela’s PDVSA, Petrobras grew gradually on a reputation for efficiency, ensuring crucial funding from government and other sources. The recent discovery of pre-salt oil now presents the company with the opportunity to exploit immense new reserves.

A Remarkable Success After recovering quickly from the recent financial crisis, Petrobras is considered the world’s eighth largest corporation and is often described as Latin America’s best- managed company. Brazil’s oil and natural gas production are rising: Oil production is projected to increase by 60% by Petrobras headquarters, Rio de Janeiro, Brazil.

Hemisphere Volume 20 29 Report

2014 and 130% by 2020 (compared under state monopoly to private or of the industry, Law 9478 of 1997 to 2008). Natural gas production government-owned companies.” ensured that private shareholders is estimated to increase by 100 and Two years later, Congress set a had practically no non-economic 245%, respectively. Company reports new industry framework segregating rights, especially over management estimate that in 2014 Petrobras Petrobras’s business and regulatory function, by separating stock will produce 3 million barrels of oil roles. Petrobras kept the former into voting common shares and per day and 623,000 barrels of oil while the latter was transferred to non-voting preferred shares. It equivalent (boe) in natural gas. a new National Petroleum Agency also required state ownership of Petrobras’s investment is (ANP), effective in January 1998. 50%-plus-one of voting shares. A enormous. Its 2010-2014 Business The interaction between Petrobras complementary 1999 law extended Plan calls for an investment of $224 and the ANP is among the keys to the possibility of stock ownership billion (some $45 billion per year), understanding the success of Brazil’s to foreign companies and more than five times the investment oil policy. individuals. Foreign-owned stock level of PDVSA, according to The ANP’s ample powers include now exceeds the share in private independent estimates. the awarding of exploration and Brazilian hands. Petrobras’s efficiency compares production bids for oil, natural gas exceedingly well to oil companies and other liquid fuel concessions; State Business of similar size, although accurate approving the import, export and A nine-member board of comparisons are difficult as most transportation of natural gas, oil directors heads Petrobras. Seven similar sized national oil companies and its derivatives; and playing a members are government- (NOCs) —the majority in the regulatory, oversight and dispute- appointed, one represents non- Persian Gulf—do not provide settlement role in substantive government minority common audited figures. Industry analysts cases. While maintaining a state shareholders, and another is elected believe that Petrobras vastly monopoly on oil and gas, Brazil by preferred shareholders. The outperforms all of them. Petrobras grants exploration and production board is made up of cabinet-level also ranks exceptionally high when concessions to Petrobras, private officials (President Dilma Rousseff compared with the supermajors. companies and joint efforts. In was previously a member), former January 2002, the country also military officials and academics, Statists vs. Free Enterprisers deregulated imports, exports and all with close or direct ruling party The history of Petrobras is rife prices. ties. One responsibility of the CEO with tension, largely between those is to propose a slate of six general who wanted a fully state-owned A Very Special Government managers for board approval or enterprise (“statists”) and those who Corporation rejection. Along with the CEO, envisioned Petrobras as a private The recurring conflict between these general managers make up company (“free enterprisers”). statists and free enterprisers, which the executive board that runs the The Brazilian government has never been fully resolved, is company. All board members cemented Petrobras’s status as a fundamental to understanding except the CEO have had at least state institution with several laws how Petrobras became a sui generis 30 years of experience in Petrobras. between the 1940s and 1960s, and national oil company. Petrobras Petrobras works closely with the Federal Constitution of 1988, has dual status as a government Congress and the administration. which enacted a state monopoly corporation with a crucial role in State oversight is exercised through over all aspects of the hydrocarbons Brazilian growth and as a dividend- legislative approval of multi- industry, put Petrobras firmly in paying private company. year plans that establish general state hands. Private involvement in Petrobras company goals and budgetary After several unsuccessful would not have been possible and investment guidelines. The attempts in the early 1990s, reform without a legal framework plan helps entrench in law a proponents finally had some guaranteeing government control. medium-term budget timeframe success under the presidency of Brazil shares with many other free from Finance Ministry fiat. Fernando Henrique Cardoso. A countries a nationalistic concern Petrobras operational, economic and 1995 Constitutional amendment about oil resources, especially with government policy are harmonized authorized the federal government regard to selling into foreign hands. through executive approval of a “to outsource oil and gas activities Rather than risk denationalization Global Expense Program.

30 Hemisphere Volume 20 Report

sole operator of pre-salt projects and gave it a 30% minimum stake in each. Finally, the fourth law created a social fund that will invest pre-salt profits in education, anti-poverty initiatives, the environment, science and technology. This legislation—especially Petrobras’s required operatorship in each project—presents an enormous opportunity to increase production levels over the next decade, but it also demands of Petrobras a high level of capitalization, skilled labor and management, technical expertise and efficiency. While Petrobras is widely considered to be capable and experienced enough to tackle the pre-salt, the amount of new production projects coming online will test the company’s human resource capacity and could Oil drilling platform off the coast of Brazil. undermine the sound management and organization that have brought it success up to this point. Critics Private Investment and Oversight Opportunities and Challenges in of greater state control over the Private ownership in Petrobras has Pre-Salt pre-salt are also concerned about the expanded dramatically in the last When the pre-salt oil reserves— loss of competition and resulting decade. The number of shareholders estimated to contain 50 billion inefficiencies that may arise. grew by 153,000 between 2000 boe—were discovered off Brazil’s These obstacles notwithstanding, and 2008, and today one million southeast coast in 2006 and 2007, Petrobras is well positioned to individuals hold shares in Petrobras- the Lula administration quickly take on the pre-salt projects. Its related securities. moved to bring the oil under more investment is on the rise, and capital Privatization proponents often direct state control. The government inflows are increasing from foreign claim that companies are more passed four laws in 2010 that and domestic sources. The technical efficient and profitable in private effectively limit foreign participation challenges are surmountable and will hands. Petrobras has performed and guarantee Petrobras a majority give the company greater experience outstandingly in state hands while hand in production. in ultra-deepwater fields, cementing keeping the private sector in the role The first law created a new, state- its position as the most successful of a mere investor. Placing stock owned company, Pré-Sal Petróleo and experienced deepwater driller. in private hands, however, had a S.A. (PPSA), to manage pre-salt Brazil is already self-sufficient in fundamental effect on efficiency. It production sharing contracts oil production and consumption. made Petrobras subject to the same entered into by the Ministry of When all of the pre-salt projects oversight standards that apply to Mines and Energy. The second come online—probably around private multinationals, including the authorized the government to 2020—Petrobras should become a Sarbanes-Oxley Act, with audits and cede Petrobras exploration and major oil exporter. ■ oversight conducted by a securities production rights to the equivalent commission. The presence of private of 5 billion boe in the pre-salt Genaro Arriagada is a non-resident shareholders also serves as a check in exchange for a company share senior fellow and Chris Cote is a on government attempts to milk package whose value is set by law. program assistant for economics at the NOCs for cash. The third made Petrobras the Inter-American Dialogue.

Hemisphere Volume 20 31 COMMENTARIES Argentina’s Energy Pricing Challenges By Pablo Fernández-Lamela

rgentina’s most immediate energy challenge is pricing—a situation it has in common to varying degrees with many other LatinA American countries. Since 2002, the Argentine government has capped the price of oil, gas and electricity substantially below market levels. The result has been a sharp drop in energy investments, rising consumer demand and growing subsidies. The government has taken some measures to address the situation but the central problem persists: To attract investment, reduce privatized and new policies and the Argentine government $55 wasteful consumption and increase regulations promoted foreign billion. Energy subsidies have hydrocarbon reserves, Argentina investment in energy companies. also been a source of friction in needs to let markets determine Production of oil, gas and electricity Argentina’s external relations; for most energy prices. went up, while costs per unit came example, high domestic usage For the past two decades, down. Argentina became an energy allowed the Argentine government Argentina has been a net energy exporter. to halt exports of natural gas to its exporter, but low prices, declining Since the country’s 2001-2002 neighbor, Chile. production and rising domestic economic collapse, the Argentine Raising energy prices is an demand have brought the country government has kept energy prices extraordinarily sensitive political close to becoming a net energy artificially low. The price of oil is matter in Argentina, as it is in many importer. Oil output decreased by 70% of its international reference other Latin American countries, but 27% between 1998 and 2010, and price. Gas and electricity prices it is essential for the health of the gas production has declined by 10% have fared worse at only 20% and energy sector and for the country’s since 2004. Oil exports dropped 30% of international references. longer-term development. Without by 64% from 2001 to 2009; gas Sustaining low consumer prices higher prices, neither foreign exports plummeted by 88% from (which leads to inefficiently high nor domestic investment will be 2004 to 2009. Proven reserves of oil use) requires the government to available for energy exploration declined 22% in the last 10 years subsidize imports during months of or production, and subsidies will and gas reserves have fallen by 55%. elevated demand, with major fiscal continue to drain Argentina’s fiscal In the 1990s, Argentina shifted consequences. During the first three resources. ■ its heavily state-managed energy quarters of 2010, the Argentine sector to private ownership and government spent approximately Pablo Fernández-Lamela is a Master introduced a series of other energy- $4.5 billion on energy subsidies, or of Public Administration candidate at related reforms. State oil, gas and about 1.3% of GDP. From 2002 Harvard University’s John F. Kennedy electricity companies were mostly to 2009, oil and gas subsidies cost School of Government.

32 Hemisphere Volume 20 Commentary Energy Consumption: Challenges and Opportunities of Urbanization By Heidi Jane Smith

atin America and the it created its own rapid transit Organic Waste (SIMEPRODE), a Caribbean is the most bus system, the TransMilenio. decentralized government agency. urbanized region in the Project development received The renewable energy project has developing world. Of unprecedented sub-national the capacity to capture 12 MW the mega cities with financing from the Inter-American of electricity per day, sufficient to populations of five million or more, Development Bank. Former Mayor generate overnight public lighting Leight are located in this region, Enrique Peñalosa, who presided for seven municipalities. According and the World Bank estimates this over the initial project, is now to SIMEPRODE, the plant has number to increase to 15 by 2030. advising other cities interested in generated more than 400,000 MWh Faced with the challenges of rapid building rapid transit bus programs of power and avoided 85,000 tons urbanization, a number of cities of their own. of greenhouse gas emissions, or have developed innovative ways A metropolitan giant of 20 1,800,000 tons of CO2. The effect is to deal with increased waste, air million inhabitants, São Paulo has equivalent to planting 970 hectares pollution and the rising cost of used international cooperation of forest. energy. The transportation systems, from the EU and US to provide Around the world, the rapid sanitation sites and waste-to-energy clean technologies around the growth of cities is exacerbating models developed in Latin American city. Its waste-to-energy plants global warming, with as much cities have been replicated around reduce approximately three as 78% of total greenhouse gas the world. million tons of municipal waste emissions generated in urban areas. When the southern Brazilian city every year. By using a thermal This transformation has enormous of Curitiba began growing rapidly treatment to decompose the implications from an energy and in the 1960s, Mayor Jaime Lerner garbage, these plants generate climate perspective: Buildings and his planning team restructured approximately 750,000 tons of fuel alone account for up to 40% of the city’s traffic flow to reduce cars oil. The decomposition processes the energy consumption of some in the downtown area. Curitiba within landfills create anaerobic countries, urban development lacked the funding for a subway molecules that are absorbed into patterns affect emissions from system, so the team designed a the atmosphere as H2O instead transportation, and solid waste and system of express lanes to speed of greenhouse gases. With more sanitation systems are significant buses through traffic. The system than 13 million tons of CO2- sources of greenhouse gases. In saves around 27 million auto trips equivalent savings, waste-to-energy some cases, however, the pressures annually and approximately 27 technologies are of particular of urbanization have provoked million liters of fuel. As a result, interest for climate change a response from cities to reduce Curitiba uses 30% less fuel per policymakers. greenhouse gas emissions. As capita than any other Brazilian Monterrey’s sanitation system was the Latin American cases above city of its size and has one of the in the spotlight when Secretary of illustrate, how cities develop and lowest rates of air pollution in the State Hillary Clinton visited this respond to energy challenges today country. Curitiba residents spend northern Mexican city in March will have an indelible impact on only about 10% of their income on 2009. The project is operated by a the world’s carbon footprint in the travel, much less than the national public-private partnership between future. ■ average, ensuring accessibility for Bioelectrical Monterrey, S.A. de low-income residents. C.V., the government of Nuevo Heidi Jane Smith is a PhD candidate Bogotá replicated much of León state, and the System for in Public Administration at Florida Curitiba’s transportation ideas when the Handling and Processing of International University.

Hemisphere Volume 20 33 Commentary PetroCaribe: Welcome Relief for an Energy-Poor Region By Chris Cote

he international Venezuelan President price of oil has an Hugo Chávez and enormous impact Cuban Acting President on the economies Raúl Castro on of the energy-poor December 21, 2007, countries of Central America and in Cienfuegos, Cuba, Tthe Caribbean, nearly all of which at the fourth summit are substantial importers of fossil of PetroCaribe, an fuels. Venezuela has been the initiative created by region’s lone source of relief from Venezuela to provide oil to Caribbean neighbors the skyrocketing prices of recent at preferential prices. years. It created PetroCaribe in June Photo: Adalberto Roque/ 2005 to help Central American and AFP/Getty Images. Caribbean governments finance their oil imports. intelligent one: the higher the price regardless of the source. Moreover, Today, PetroCaribe, which is of oil, the greater Central America Venezuela has gained a measure of managed by Venezuela’s national and the Caribbean’s need for good will across the Caribbean and oil company, PDVSA, serves 17 help, but rising prices also expand Central America as a result of its of the 24 Central America and Venezuela’s capacity to assist. When PetroCaribe mechanism. Caribbean countries, excluding prices are low, Venezuela cannot The longer-term prospects of Barbados, El Salvador, Panama, and help much, but the region also PetroCaribe are uncertain. Despite Trinidad & Tobago (the region’s requires less assistance. high prices, the Venezuelan oil only energy exporter). Although Besides financing oil purchases, industry is deteriorating. PDVSA’s questions have been raised about PetroCaribe has promised to oil production has fallen by PDVSA’s reporting, the Venezuelan contribute to the cost of developing approximately one-third since oil company’s own figures show and repairing refineries and other 1997 (from 3.30 to 2.20 mbd). PetroCaribe supplied the region with infrastructure. So far, repair of Exports fared even worse; due to approximately 160,000 barrels per the Cienfuegos refinery in Cuba rising domestic demand, Venezuela’s day on average from 2007 through is the only project that has been shipments abroad dropped by one- 2009. This amounted to nearly completed. Plans call for building half (from 2.90 to 1.50 mbd). There 20% of Central America’s and the or repairing some 20 refineries in is no question that PetroCaribe has Caribbean’s oil supply—although the next 10 years. Petrocaribe has become more costly to Venezuela, half of the total went to Cuba. also pledged to contribute to a food with shipments from PDVSA The recipient countries benefit security fund for Central America through PetroCaribe continuing to most from PetroCaribe’s special and the Caribbean when oil prices rise as a share of total oil exports. financing. As the price of petroleum exceed $100 a barrel. In response, Venezuela appears increases, so does the amount PetroCaribe has been a to be tightening the terms of its PetroCaribe is prepared to finance. constructive way for Venezuela to PetroCaribe sales. ■ The terms become particularly gain political influence. Venezuela generous when the price of oil is has been criticized for seeking Chris Cote is a program assistant above $40 per barrel, which will political advantage from its support for economics at the Inter-American likely be the case for some time of PetroCaribe, but this is an Dialogue, where he specializes in into the future. The scheme is an objective of almost all foreign aid, energy and Brazil-related issues.

34 Hemisphere Volume 20 Disaster Risk Reduction Program Latin American and Caribbean Center Florida International University “Conceptualizing, Identifying, Analyzing, Stimulating, and Strengthening Transferable Disaster Risk Reduction Models”

Project Information: The Disaster Risk Reduction Program, housed at the Latin American • Monitoring the conceptual development of DRR globally and Caribbean Center (LACC) at Florida International University • Promoting and strengthening DRR “Communities of (FIU), was created in 2008, with support from the United States Practice” (CoPs) in the LAC region Agency for International Development’s Office of Foreign Disaster Assistance USAID/OFDA. • Identifying and supporting educational and professional development of the next generation of DRR “agents of Project Area of Focus: change” in the LAC region Disaster Risk Reduction (DRR) is a complex combination of prevention, mitigation, and preparedness and is still conceptually and • Highlighting LAC capacity in DRR technically underdeveloped. Disaster response capabilities cannot • Collaborating with organizations, scholars and practitioners keep pace with increasing human and economic vulnerabilities. throughout the hemisphere Project Objective: • Contributing to the Comprehensive Approach for Prevent or limit adverse hazardous impacts and provide a model for Probabilistic Risk Assessment (CAPRA) Initiative in the more sustainable and effective disaster response in an effort to save Latin America and Caribbean region, supported by the lives, alleviate human suffering, and reduce the social and economic World Bank, the Inter-American Development Bank and the impacts of humanitarian emergencies by: United Nations

For more information, please contact the Latin American and Caribbean Center (LACC) at Florida International University at (305) 348-2894 or visit http://casgroup.fiu.edu/drr

New from the University Press of Florida Venezuela’s Petro-Diplomacy Hugo Chávez’s Foreign Policy

Edited by Ralph S. Clem and Anthony P. Maingot

Over the last decade, Venezuela has exerted an influence on the Western Hemisphere and global international relations well beyond what one might expect from a country of 26.5 million people. Since coming to power in 1999, President Hugo Chávez has used the windfall of high oil prices to remake Venezuela internally along the model of twenty-first-century socialism and, even more audaciously, to rewrite global relations by directly challenging U.S. Ralph S. Clem is Professor influence. While revenue from petroleum exports has swelled national coffers Emeritus of Geography and and allowed the expansion of public programs and aid to foreign countries, International Relations at FIU. bolstering Chávez’s popularity at home and abroad, the volatility of petroleum Anthony P. Maingot is Professor prices and the neglect of other export industries have the potential to render the Emeritus of Sociology and regime’s power tenuous. Anthropology at FIU.

ISBN 978-0-8130-3530-7 Foreword by Cristina Eguizábal, Director, Latin American and Caribbean www.upf.com Center, Florida International University.

Hemisphere Volume 20 35 SUGGESTED FURTHER READING

Acquatella, Jean. Energía y cambio Deutch, J., and E. Moniz. The Future Ross, M. “The Natural Resource Curse: climático: oportunidades para una política of Nuclear Power. Boston: MIT How Wealth Can Make You Poor.” In energética integrada en América Latina y Interdisciplinary Study, 2003; Natural Resources and Violent Conflict, el Caribe. Washington, D.C.: ECLAC, updated 2009. Options and Actions, edited by Ian December 2008. Bannon and Paul Collier. Washington, ECLAC. Economics of Climate Change D.C.: The World Bank. 2003. Arguello, I. Confidence Building in in Latin America and the Caribbean: Regional Conflicts Involving Nuclear Summary 2010. Washington, D.C.: Samaniego, José Luis. Cambio climático Dangers. Oslo, Norway: International ECLAC, November 2010. y desarrollo en América Latina y el Conference on Nuclear Disarmament, Caribe: una reseña. Washington, D.C.: February 2008. Fontaine, G. Petropolítica: una teoría ECLAC, February 2009. de la gobernanza energética. Quito, Arriagada, Genaro. Petropolitics in Latin Ecuador: FLACSO, 2010 Stewart, F., and G. Brown. “Motivations America: A Review of Energy Policy and for Conflicts: Groups and Individuals.” Regional Relations. Washington, D.C.: Fontaine, G. “Política petrolera y crisis In Leashing the Dogs of War. Conflict Inter-American Dialogue, December de gobernabilidad.” In El precio del Management in a Divided World, 2006. petróleo. Conflictos socio-ambientales y edited by Chester A. Crocker, Fen gobernabilidad en la región amazónica, Osler Hampson and Pamela Aall. British Petroleum. “BP Statistical edited by G. Fontaine. Quito, Ecuador: Washington, D.C.: United States Review of World Energy.” June 2010. FLACSO and Institut Français d’Études Institute of Peace, 2007. http://www.bp.com/productlanding.do? Andines (IFEA), Ediciones Abya-Yala, categoryId=6929&contentId=7044622 2007. Tordo, Silvana. Fiscal Systems for Hydrocarbons. Washington, D.C.: Collier, P. The Bottom Billion. Why the Lovelock J. “Nuclear Power Is the Only World Bank, 2007. Poorest Countries Are Falling and What Green Solution.” The Independent, Can Be Done About It. New York: May 24, 2004. www.ecolo.org/ Vergara, Walter, ed. Assessing the Oxford University Press, 2007. media/articles/articles.in.english/love- Potential Consequences of Climate indep-24-05-04.htm Destabilization in Latin America. Daniel Johnston. International Petroleum Washington, D.C.: World Bank, Fiscal Systems and Production Sharing Marc, Alexandre. Delivering Services Sustainable Development Working Contracts. Tulsa: Pennwell, 1994. in Multicultural Societies. Washington, Paper 32, June 2009. D.C.: World Bank, 2010. De Ferranti, David, Guillermo E. Perry, Weintraub, Sidney. Energy Cooperation Francisco H.G. Ferreira, and Michael Medinaceli Monrroy, Mauricio. in the Western Hemisphere. Washington, Walton. Inequality in Latin America. Contratos de exploración y explotación de D.C.: Center for Strategic and Breaking with History? Washington, hidrocarburos en América Latina. Quito, International Studies, 2007. D.C.: World Bank, 2004. Ecuador: Organización Latinoamericana de Energía (OLADE), June 2010. Zanelli, J. Latin America’s Nuclear De la Torre, Augusto, Pablo Fajnzylber, Future. Washington, D.C.: Inter- and John Nash. Low Carbon, High Muller, R.A. Physics for Future American Dialogue Working Group on Growth: Latin American Responses Presidents. New York: W. W. Norton & Energy, November 2010. to Climate Change - An Overview. Company, 2009. Washington, D.C.: World Bank, 2009. Psacharopoulos, G., and H.A. Patrinos, eds. Indigenous People and Poverty in Latin America. Washington, D.C.: World Bank, 1994.

36 Hemisphere Volume 20

Latin American and Caribbean Center School of International and Public Affairs

An integral part of the School of International and Public Affairs, the Latin American and Caribbean Center (LACC) is one of the largest and most comprehensive area studies program at FIU. The center coordinates a robust program that spans across the disciplines, supporting and ehancing the university’s academic mission.

Designated as a National Resource Center for Foreign Language and Area Studies by the U.S. Department of Education, LACC fosters high quality research, education and services on Latin American and the Caribbean.

LACC’s academic offerings include graduate and undergraduate certificate programs and a variety of summer and foreign study opportunities. The center’s programs build on the unique assests of FIU’s inter-American setting and the expertise of approximately 200 faculty associates who work on Latin America and the Caribbean.

For more information, contact LACC at 305-348-2894 or by email at [email protected] Please visit our website at lacc.fiu.edu

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