ENERGY ADVISOR a WEEKLY PUBLICATION of the DIALOGUE April 8, 2016

LATIN AMERICA ADVISOR ENERGY ADVISOR A WEEKLY PUBLICATION OF THE DIALOGUE www.thedialogue.org April 8, 2016

BOARD OF ADVISORS FEATURED Q&A TOP NEWS Mary Rose Brusewitz Partner, OIL & GAS Strasburger & Price Will Colombia’s Jeffrey Davidow Ecuador Begins Senior Counselor, Drilling in Yasuní The Cohen Group Gov’t Be Forced Rainforest Block Ramón Espinasa Consultant, Ecuador has started drilling for Inter-American Development Bank to Ration Power? oil on the edge of a block of the Luis Giusti undeveloped Yasuní rainforest. Senior Advisor, Page 2 Center for Strategic & International Studies Jonathan C. Hamilton OIL & GAS Partner, White & Case Mexico to Cut Raul Herrera $10 Bn From Partner, Corporate & Securities Practice, Budget, Citing Arnold & Porter Oil Rout James R. Jones The Mexican government plans Co-chair, Manatt Jones Global Strategies to cut its spending in 2017 by an additional $10 billion as it Jorge Kamine Last month, the government of Colombian President Juan Manuel Santos said it would impose continues to experience lower Counsel, energy-saving measures in order to avoid blackouts caused by a drought due to the El Niño Skadden Arps weather phenomenon. // File Photo: Colombian Government. oil production, low oil prices and moderate economic growth. Craig A. Kelly Director, As Colombia continues to struggle with a protracted drought Page 2 Americas Int’l Gov’t Relations, caused by the El Niño weather phenomenon, concerns are Exxon Mobil mounting that the government may need to begin power POWER SECTOR Jeremy Martin Q Director, rationing. Colombia has launched an electricity-saving pro- ADM to Sell Energy Program, gram, though it is not expected to have a signifi cant effect on electricity Institute of the Americas Brazilian Sugar supply. What can President Juan Manuel Santos’ administration do to Larry Pascal Ethanol Ops Chairman, stave off power rationing? Will Colombia import more energy to offset Americas Practice Group, Global grain company Archer Dan- Haynes & Boone shortages? How will the power shortages and the government’s strate- iels Midland (ADM) announced it would sell its sugar cane ethanol Charles Shapiro gies to cut energy consumption affect the business sector? How would President, power rationing affect Santos’ political standing? operations in Brazil’s Minas Gerais World Affairs Council of Atlanta state to JFLim Participações, R. Kirk Sherr according to Chris Cuddy, pres- President, David Ross, global equity fund manager at La Financière ident of ADM’s corn processing Clearview Strategy Group business unit. de l’Echiquier in Paris: “We have seen this movie before. Garrett Soden Page 3 Director, While not a perfect analogy, two years ago Brazil’s electricity Etrion Corporation A situation became precarious, due to drought. Since then, the Mark Thurber economy fell, infl ation grew, and the president’s popularity plummeted Partner, Andrews Kurth from a 75 percent approval rating to 10 percent. Now, Colombia’s econ- Alexandra Valderrama omy is slowing, infl ation is growing and the president’s popularity is at Manager, 25 percent. Not keeping the lights on creates problems for governments, International Government Affairs, Chevron especially those with big initiatives like peace talks. Unfortunately, other Lisa Viscidi than praying for rain and ensuring ample supplies of diesel for on-site Program Director, Inter-American Dialogue generators, not much can be done in the short run to alter supply, so Max Yzaguirre demand must be curtailed and, if necessary, rationing imposed. However, President and CEO, this crisis is an opportunity for Colombia to change policy to protect The Yzaguirre Group its future economic security. Frequent El Niño events require Colombia to reduce its dependency on hydroelectricity, which currently accounts Cuddy // File Photo: LinkedIn. Continued on page 3

OIL & GAS SECTOR NEWS NEWS BRIEFS Mexico to Cut $10 Bn Ecuador Begins From Budget Due Over-Supply May Lead to Financial Losses for Drilling in Yasuní in Part to Oil Rout Brazil’s Energy Sector

Rainforest Block The Mexican government plans to cut its Brazilian electricity distributors said they have spending in 2017 by an additional $10 billion over-contracted power supplies from gener- Ecuador has started drilling for oil on the as it continues to experience lower oil produc- ators, which may lead to big fi nancial losses edge of a block of the undeveloped Yasuní tion, low oil prices and moderate economic for the distributors, as the ongoing recession rainforest inhabited by two of the world’s last growth, the Finance Ministry said April 1, The decreases the demand for energy, Reuters re- tribes living in voluntary isolation, The Guardian ported Tuesday. Brazil’s electricity distribution reported Monday. The well platform is known association, Abradee, said the excess supply of as the Tiputini C, which is now operational a Mexico will cut an electric energy may undermine the demand for few kilometers from the Peruvian border in the additional $10 billion future contracts for energy generation projects Yasuní National Park, and is one of as many as from its 2017 budget, on that are to be auctioned off April 29. The as- 200 wells that would be needed to extract the sociation estimates that distributors now hold estimated 920 million barrels of crude beneath top of the approximately supply contracts for 113.3 percent of expected the Ishpingo Tambococha Tiputini (ITT) block. $7.4 billion budget demand in 2016, up from contracts for 107.1 Many Ecuadoreans have said they expect oil percent of predicted demand. exploitation in Yasuní to lead to pollution, for- cut this year. est destruction and the decimation of the two tribes, the Tageri and the Taromenane, living Wall Street Journal reported. The preliminary Venezuela’s Maduro within the national park. The government’s min- outline of next year’s budget said the govern- Declares Fridays istry of strategic sectors said in a statement ment would cut spending by 175 billion pesos, in addition to the 132 billion pesos cut from Holidays Amid Blackouts the budget this year. The Finance Ministry’s Venezuelan President Nicolás Maduro late plan is to lessen the fi scal defi cit to 2.5 percent Wednesday declared all Fridays for the next of GDP from 3 percent this year and to have two months to be holidays in an effort to save the federal government reach a balanced energy in the economically troubled country, budget excluding fi nanced investment at state Reuters reported. A severe drought, coupled enterprises. The budget proposal is based on with what Maduro’s opponents say is a lack of an estimated crude-oil price of $35 per barrel investment in energy infrastructure, has led to for 2017, above the $25 per barrel prediction blackouts in Venezuela. for this year. Crude-oil production is expected Oil exploration activities in Yasuní // File Photo: Ecuador- ean Government. to fall to 2.03 million barrels a day in 2017 from 2.12 million this year, due in part to budget that state oil company PetroAmazonas would cuts from state oil company Pemex. Peru Only Using 1% of use directional and horizontal drilling to extract Wind Energy Potential crude and would adhere to high international standards. Ecuador’s decision to allow oil com- Sales of Venezuelan Peru’s Ministry of Energy and Mines on Monday panies to drill the ITT block, which contains said that Peru has a wind energy potential of nearly 30 percent of the country’s remaining oil Crude to the U.S. about 22,450 megawatts, but that power plants reserves, has been a controversial topic since Fell 7% in March only use about 1 percent of the potential, or 2007 when President Rafael Correa sought about 239 megawatts, Peru This Week report- $3.6 billion from the international community ed. In 2014, the ministry had declared that Exports of Venezuelan crude to the United in exchange for not drilling for oil. In August by 2024, hydroelectric, wind and solar energy States fell by 7 percent in March year-over- 2013, Correa withdrew the proposal, saying sources would meet 66 percent of Peru’s en- year, to 793,581 barrels per day, according to pledges received from countries were minimal ergy needs. There are currently a total of four Thomson Reuters Trade Flows data, Reuters and that the international community had failed wind farms operating in Peru, which provide reported. The fall in exports is due in part to Ecuador. energy for the National Interconnected Electric delays at Venezuela’s main oil port. Howev- System.

COPYRIGHT © 2016, INTER-AMERICAN DIALOGUE PAGE 2 LATIN AMERICA ENERGY ADVISOR April 8, 2016 er, export levels were higher in March than in the ethanol market. Cuddy also emphasized mately 650 people work at the plantation and they had been in the previous two months. that ADM would continue to invest in Brazil and plant. The sale is expected to close in the Venezuelan state-run oil company PDVSA and partner with Brazilian farmers. Included in the second quarter of this year, pending the results its joint ventures shipped 52 crude cargoes to transaction are a sugar cane plantation and an of a regulatory review. ADM employs a total of the United States. Of those, most were sent ethanol distillery with the capacity of producing about 3,900 individuals in Brazil, and operates to PDVSA’s refi ning unit, Citgo Petroleum, but 37,000 gallons of ethanol per year. Approxi- Brazil’s largest biodiesel plant. Valero Energy, Phillips 66 and Chevron were other main recipients, as well. Sales of tradi- FEATURED Q&A / Continued from page 1 tional crudes from ports other than the José Petroterminal remained stable, but exports of for 70 percent of its electricity production. power plant falling victim to an incident like diluted crude oil and blends, such as Merey, While diversifying the baseload production the one at Guatapé in mid-February, would had signifi cantly decreased. Major delays to by using Colombia’s abundant natural gas also force the government to start rationing. loading and discharging at José caused a reserves will cost more, this additional The news that rationing is not necessary will backlog of tankers around Venezuela at the cost should be viewed as an investment, be welcomed by President Santos, whose end of March, extending to the Caribbean is- insuring baseload capacity during droughts. disapproval rating currently stands at around land of Curaçao, where PDVSA has storage and Wind and solar are less than 1 percent of 70 percent. Much of this public discontent blending facilities. At the end of last month, production; developing these should be a stems from rising infl ation and a struggling PDVSA’s shipments from both Venezuela and long-term priority. Additionally, Colombia has economy. Power cuts would have further Curaçao, including oil and diluents, declined ample coal reserves. Coal-fi red plants pro- affected industry and provided another by almost 300,000 barrels per day from a year vide fl exible, cheap peaking and emergency headwind for economic growth.” earlier, to 1.64 million barrels per day. baseload capacity. Finally, accelerating the Connect 2022 initiative for regional electric César Cuervo A., vice presi- grid interconnection should be a priority. dent of North Andean Equities POWER SECTOR NEWS Colombia will experience a slowdown in Research at Credicorp Capital: economic growth. Business costs will rise, A “The drought conditions have as will infl ation. The country should take certainly ignited an energy crisis that has put ADM to Sell steps to ensure it avoids this the next time El Colombia on the verge of power rationing. Brazilian Sugar Niño appears.” Besides promoting the 5 percent saving program, the government doesn’t have much Ethanol Operations Joel Ross, Americas analyst room for additional measures to prevent at risk analysis fi rm Verisk such a scenario from happening. The Global grain company Archer Daniels Midland Maplecroft: “The government intensity of El Niño has indeed started to (ADM) announced on March 31 that it would A has managed to stave off power fade gradually, and rains have come in some sell its sugar cane ethanol operations in rationing due to the population’s positive areas of the country, but reservoirs still are reaction to a public request to save energy. at historic low levels (hydro facilities repre- In fact, consumption fell by 6.9 percent, con- sent roughly 80 percent of the total installed ADM has determined its siderably above the 5 percent goal that the capacity of the power generation grid), and it sugar cane ethanol government had set. Therefore, Colombia will take a while for hydro plants to be ready achieved the desired electricity savings in to generate at full throttle after heavy rains operations are too just four weeks—that is, two weeks ahead start in a few months. This situation has small to compete in of schedule. However, while there is no forced thermal facilities to dispatch at full the ethanol market. rationing at the moment, the country is by capacity over the last six months. Unfortu- no means out of danger. El Niño is expected nately, this has not worked as the ‘perfect’ to end in late May, but any prolonging of lifeline defi ned (and expected) by the regula- Limeira do Oeste in Brazil’s Minas Gerais state the phenomenon would also sustain the tory framework and the scheme under which to JFLim Participações. “We have determined current drought and jeopardize hydroelectric the national power system operates. The low that our sugar cane ethanol operations in Brazil power generation, upon which the country fi nancial fl exibility of some companies and are unlikely to meet our long-term returns is so reliant. Additionally, a fall in electricity the necessity of generating with liquid fuels objectives,” said Chris Cuddy, president of imports from Ecuador, or another large instead of (much cheaper) gas have revealed ADM’s corn-processing business unit, adding Continued on page 6 that the asset is too small for ADM to compete

Enel Hooks 79 MW PV ADVISOR Q&A Plant to Chile’s Grid What Will the Canal’s Expansion Italian renewables company Enel Green Power said Wednesday it had connected its 79-mega- Mean for Panama? watt Pampa Norte solar photovoltaic plant, located in Chile’s Antofagasta Region, to the The $5.3 billion expansion of Canal’s expansion will beneﬁ t the people and grid, SeeNews reported. A long-term power the Panama Canal, a project economy of Panama. As for the shipping purchase agreement between Enel and Chile’s Q that has been beset by contrac- companies using the expanded canal, it Central Region Interconnected System is in tor disputes and cost overruns, depends mostly on the price for fuel used by place. The solar park cost $150 million to build will open in late June, although there is ships transiting it. With the current volatility and has a capacity to generate more than 200 still much work to be done, Canal Authority in fuel prices around the world, this issue gigawatt-hours per year, the equivalent of the Administrator Jorge Quijano said March 23. must be watched carefully. Very low fuel energy consumption needs of approximately How important is the canal’s expansion for prices could mean vessels traveling farther 100,000 Chilean households. Enel’s Chilean Panama’s economy and for the companies to avoid tolls at both the Suez Canal and the unit currently operates 340 megawatts of that would use it? How long will it take for Panama Canal. As for the current decline in wind parks, 253 megawatts of solar plants the expansion project to pay off, given the global trade, that will change sooner rather and 92 megawatts of hydropower facilities in economic slowdown in China and other than later, and I do not feel that it will have the country, and has more than 500 additional emerging economies and the recent fall in a long-term impact on the future of the Pana- megawatts of projects in execution. the level of global trade? ma Canal. There is one other issue which deserves attention. That is the effort by Robert McMillan, retired attor- Chinese ﬁ nancial interests in trying to build a

POLITICAL NEWS ney and former chairman of the competing 170-mile canal across Nicaragua. Panama Canal Commission: The Panama Canal is only 48 miles long. A “First, it is important to remem- There are serious questions about the Nica- Gov’t Creating ber that the United States had as many ragua Canal effort, and I have my doubts as glitches in the construction of the Panama to whether it will be successful.” Panel in Wake of Canal, more than a century ago, as Panama ‘Panama Papers’ has had in the canal’s current expansion. For example, it took the United States years to EDITOR’S NOTE: More commentary on this Panama’s president announced Wednesday realize that there was a tidal difference be- topic appeared in Wednesday’s issue of the that the government will create a panel made tween the Caribbean and Pacifi c sides of the Latin America Advisor. up of international experts in an effort to canal. There is little doubt that the Panama improve transparency in the country’s offshore fi nancial industry, BBC News reported. Presi- conceal money in offshore accounts. “The minister in Varela’s government but stepped Panamanian government, via our foreign min- down earlier this year after allegations were istry, will create an independent commission leveled against Mossack Fonseca in connec- of domestic and international experts,” Varela tion with the massive corruption scandal at said in a televised address. Varela added that Brazilian state-run oil company Petrobras. The the panel would study working practices and law fi rm’s Brazilian unit was accused of helping propose measures that could improve transpar- people implicated in the Petrobras case to ency in the Central American country’s fi nancial open offshore accounts in order to launder

Varela // Photo: Panamanian Government. and legal systems. Mossack Fonseca has said money. Fonseca has denied wrongdoing and it is a victim of computer hacking in the leak of said he stepped down from his government dent Juan Carlos Varela’s announcement came more than 11 million documents spanning from post “to defend my honor and my fi rm,” BBC in the wake of the massive “Panama Papers” 1977 through 2015. The law fi rm added that it News reported. Panamanian media reports data leak, which named heads of state, sports has fi led a complaint with Panama’s attorney have quoted Varela saying that he is still in fi gures and other celebrities among the clients general’s offi ce. A partner and founder of the touch with Fonseca and considers him a friend. of law fi rm Mossack Fonseca. The documents fi rm, Ramón Fonseca, previously served as a Another of the law fi rm’s founders, Jürgen detailed how the law fi rm helped clients

NEWS BRIEFS Mossack, also defended the ﬁ rm, saying it did recent monthly meetings in an effort to curb in- nothing wrong and cannot control how the shell ﬂ ation. The increase in consumer prices means Mexico Changes Top companies it creates are used, The Wall Street more tightening is likely, analysts say. Diplomats to U.S. Journal reported Thursday.

The Mexican government on Tuesday changed BUSINESS NEWS two of its top diplomats responsible for U.S. Brazilian Lawmakers relations, citing concerns of increasingly Move Closer to anti-Mexican attitudes across the border, Fiat Chrysler to Reuters reported. Carlos Sada, who had Impeaching Rousseff Invest $500 Million previously been the consul in Los Angeles, has been named ambassador to the United States. Brazilian President Dilma Rousseff came a in Argentina Plant Paulo Carreño, one of Mexican President step closer to being impeached on Wednesday Enrique Peña Nieto’s communication chiefs, as the head of a congressional committee Italian-U.S. automaker Fiat Chrysler Automo- was appointed deputy foreign minister for set up to examine the allegations against her biles, known as FCA, on Wednesday announced North America. The new ambassador must recommended that legislators proceed with the a $500 million investment in Argentina for its be approved by the Mexican Senate. Mexican process that could remove the president from plant in Córdoba to produce a new vehicle for offi cials have expressed concerns about an- offi ce, The Wall Street Journal reported. “There the Latin America market, The Detroit News ti-Mexico rhetoric from Republican presidential is serious evidence of illegal conduct of the candidate Donald Trump. president,” legislator Jovair Arantes wrote in the report. “This shows serious enough [acts] to authorize the installation of an impeachment Puerto Rico Bond Prices process.” Rousseff is accused of using loans Reach Record Lows from government-owned banks in order to illegally conceal a budget defi cit, an allega- Some Puerto Rico bond prices have reached tion that Rousseff denies. Rousseff’s offi ce record lows after Governor Alejandro García declined to comment on Arantes’ report, but a Marchionne // File Photo: FCA Group. Padilla signed a bill that would allow the island top cabinet member, Secretary of Government to delay debt payments while it waits for Ricardo Berzoini disputed the report, saying, reported. The plant is scheduled to begin federal help to deal with the commonwealth’s “There is no crime to support impeachment.” production on the vehicle in the second half fi nancial crisis, The Wall Street Journal of 2017 and will produce more than 100,000 reported Wednesday. The bill allows García vehicles per year, FCA said. “This plant will Padilla to suspend debt repayment in order to ECONOMIC NEWS operate using the most advanced technologies allow government funds to continue paying for available to FCA today,” CEO Sergio Marchionne essential services. Under the bill, the governor said in a statement. “This choice demonstrates could decide whether to pay debt on an “enti- Colombia’s Infl ation a major strategic change, giving the Córdoba ty-by-entity basis.” Rises to Highest plant a central role in FCA’s industrial activities in Latin America.” Marchionne was joined by Rate Since 2001 Argentine President Mauricio Macri and other ICSID Reportedly Orders government offi cials for the announcement, Venezuela to Pay Nearly Colombia’s rate of infl ation has risen to its which was made at the company’s Ferreyra highest level since 2001 due to higher food plant in Córdoba. The investment from FCA $1.4 Bn for Seized Mine prices and a fall in the peso, which has driven will include funding to retool the facility, install The World Bank’s International Centre for up the cost of imports, Bloomberg News more than 150 robots in the body shop and will Settlement of Investment Disputes, or ICSID, reported Tuesday, citing the country’s central fund supplier development as well as training has ordered Venezuela to pay Canadian miner bank. Consumer prices increased 7.98 percent and research development. The company Crystallex International nearly $1.4 billion for as compared to a year earlier, twice the upper gave few details as to the model of vehicle the expropriation of its Las Cristinas gold min- limit of the central bank’s target. Food costs that would be built. FCA said the investment ing project in 2008, the company said, Reuters increased 12.35 percent as compared to a year coincides with the Argentine government’s reported. Venezuela’s oil and mining ministry earlier due to the lack of rain caused by the guidelines for the automotive sector, which did not immediately comment. El Niño weather phenomenon. Policymakers focus on increasing local integration and have boosted interest rates at their seven most improving competitiveness.

FEATURED Q&A / Continued from page 3 LATIN AMERICA ENERGY ADVISOR is published weekly by the Inter-American Dialogue Copyright © 2016 the system’s fundamental weaknesses of operate at 25 percent capacity by the end of the system, which are very diffi cult to solve May and 100 percent by August–September. Erik Brand in the short term in order to avoid rationing (3). Use the infrastructure of large compa- Publisher [email protected] and/or increasing imports. That being said, nies to input power into the grid. The other we don’t expect the economic impact of a path is to import energy from Ecuador, which Gene Kuleta Editor potential rationing to be dramatic. According is already happening at a rate of 7 giga- [email protected] to our estimates, and considering the previ- watt-hours per day, at an estimated cost of Nicole Wasson ous (and much more serious) experience of around $100 million. Colombia‘s grid is also Reporter, Assistant Editor the 1992-1993 El Niño event, a very extreme linked to Venezuela and Panama. Venezuela [email protected] and unlikely scenario of a one year-long is also experiencing a major energy crisis, rationing could have a negative direct impact so it is not likely to be selling power anytime on economic activity of 0.3 percent of GDP. soon. Colombia is unlikely to import much Michael Shifter, President Provided that El Niño disappears by this energy to offset shortages, because of the Genaro Arriagada, Nonresident Senior Fellow year’s third quarter, as climate scientists aforementioned situation in the neighbor- Sergio Bitar, Nonresident Senior Fellow across the continent expect, the direct ing countries and because the capacity of Joan Caivano, Director, Special Projects impact could be 0.1 percent of GDP in 2016. the grid infrastructure between Ecuador Kevin Casas-Zamora, Director, Peter D. Bell Rule of Law Program Adding spillover effects, the total impact and Colombia is insuffi cient. The effect of Maria Darie, Director, Finance & Administration (direct and indirect) could reach 0.25-0.3 energy shortages on the business sector Ramón Espinasa, Nonresident Senior Fellow percent in a base case scenario.” will probably be very negative. Businesses Ariel Fiszbein, Director, Education Program will have to resort to diesel generators in Alejandro Ganimian, Nonresident Fellow Andrés E. Ángel H., geologist, order to keep running during the shortages, Peter Hakim, President Emeritus consultant and researcher which will obviously generate extra operating Claudio Loser, Senior Fellow at Terrae Geoenvironmental costs and reduce their profi t margins. Some Nora Lustig, Nonresident Senior Fellow Research in Bogotá: “President offi ces might opt for changing their working A Margaret Myers, Director, China and Santos can do very little to stave off power hours. However, energy shortages are not Latin America Program rationing. At a domestic level, I believe the likely to affect Santos’ political standing very Manuel Orozco, Director, Migration administration has three options, which have much, given the present discussions on the Remittances & Development to be applied concurrently to achieve some agenda and the media focus on the peace Jeffrey Puryear, Senior Fellow Lisa Viscidi, Director, Energy Program results: (1). Order the operation of all coal- process (among other topics), but it will based generation plants at full capacity. This have a considerable impact on the agencies Latin America Energy Advisor is published resource provided only 7.56 percent of the that regulate the market.” weekly, with the exception of some major country’s energy as of January 2015. (2). Fo- U.S. holidays, by the Inter-American Dialogue 1211 Connecticut Avenue NW, Suite 510 cus efforts on repairing Guatapé, a dam that The Advisor welcomes comments on its Q&A Washington, DC 20036 generates about 4-5 percent of the country’s section. Readers can contact editor Gene Phone: 202-822-9002 total energy and was seriously damaged by Kuleta at [email protected]. Fax: 202-822-9553 a fi re in February. It is estimated that it will www.thedialogue.org ISSN 2163-7962 Subscription Inquiries are welcomed at [email protected]

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