~-Oiolade LATIM AMERICAN ENEIUlY ORGA/llZATIOH Energ~y Mlagazmne O) • Year 22, number 4, October-November-December 1998 Organización Latinoamericana de Energía ontents Editorial 2 Seminar on Energy Risk Management: Futures Markets 7 Seminar on Sustainable Energy for Restructured Markets 16 Energy Reform: Key Element for the Economic and lnstitutional Transformation of the Dominican Republic 22 Seminar on Modernization of the Electric Power Subsector in Latín America and the Caribbean 30 Energy News 32 Energy Statistics 36 Notes Calendar of Events Th~ Encrgy Mcigo.z1ne is a qul'lrtedy publlcnuon issucd by che Pcrmancnt S~crccarint oí thc latin Amerrean Encrgy Org:uil1ntion (OLA.DE). undcr che supervlslon of its Editorial Board. The s1gned ~!'liclcs are 1hc $Ole responsibiliiy of their' nuchors and do oot neces.sarily roflact tho ofílctal poslcioo oí the Organti.itlon cr its mcmbor coumries. OLAOE permits thc rcproducuon oí thc prosoot :u·rldcs. in part 01· in fulf, as wef as illustrations. ns long as the source 1$ quoeed. EDITOR-IN-CHIEF Luiz A M. da Fonseca lxcculive Secrewry, 01.ADE EDITORIAL BOARD Ana lia Duco and Lidia Mad•s.Argentina/Gloria Villa. Costa Rica/Pedro Morales Carballo, Cuba Dieuseul Anglade, Haiti/Ricardo Samanlego Breach, Mexico/David Small, Trinidad and Tobago Cristina Mattos. Uruguay EDITOR Gustavo Martinez PHOTOGRAPHS Technical Secretariat of the Office of the President of the Domlnkan Republic. Eliana Fernandes/Petrobros, lmage Bank Latín American Energy Organizatíon Avc.Anecmo lose de Sucre NS8·63 & Pcrnández Salvador. OLAOE Suilding. Sector San Carlos • P.O. Box l 7~11-06413. Quito. Ecuador· Phones: (593·2) 597-995/598.122 Fax: (593-2) 5)9.684 • E·maH: olade 1 @olade.oo-g.e< ISBN 02544.845 Organización Latinoamericana de Energía Editorial The countries of Latín America and The present edition oí the Energy the Caribbean, at differing degrees of Magazine providcs a surnrnarv of thc intensity, have been engaged in issues and conclusions of the principal events oí Enerlac '98: the restructuring their energy sector. The pre-Coníerencc Seminar on Energy element that they share in this process Risk Management and Futures is the promotion of widcr prívate- Markcts¡ the Scminar on Sustainable sector partíciparton in activities Energy for Resrructured Markets: and traditionally conducted by the State. the Seminar on ModerniLation of thc Elcctric Power Subsecior in Latín As part of thcse efforts, new legal America and the Caribbean. framcworks have been csrablishcd and national regularory institutions Thanks success to the sponsorship and havo been created or consolldated, participation of thc lnter-American thus fostering an environment of Oevelopment Bank (1 í)(l), thc conlidcnce and stability, which in European Commission, and thc World turn is luring ínvestment to the sector ílnnk, as well as thc support of various major cornpanies involvcd in the and contributing to its sustainahility, regional and world cnergy sector, as well as improving energv scrvice Enerlac '98 was a rcsounding succoss. to users. ·1 he kcv factor ensuring compl lance Over thc last few years, 01.ADE has with the objcciivcs of Enerlac '98 and been studying the evotution of rhcse its success was thc support oí the processes and is determined to governmcnt and public and privare quantilv their results as its institutions of thc Coníerence's host contribution to thc dovelopment of counrry, the Oominican Republic, thc region's energy sector. which cxtensively promoted the cvent with the leadership oí the In this context, the Fourth Energy Technical Secrctariat oí the Officc oí Conference of Latín America and the thc Presiden! of thc Republic. Caribbean iEnerlac '98) was hcld in The Dominie<111 Republic, in addition, Santo Domingo, the Dominican aroused the interest oí those Republic, on November ·¡ 6·'19, ·1998. participating in Enerlac '98 for the lts objectives were to analvze the important reforms it is promoting in current status and prospccts oí the country's electric powcr regional energv sector transformation subsector, which is thc subject of the processes and their insertion in the spotlight section of the Energy framework of globalization and Magazine's present issue. sustainable development and to promete business and investments in the energy sector of Latín América Luiz A.M. da Fonseca and the Caribbean. Executive Secrela_ry Organización Latinoamericana de Energía eforc the formal open ing oí the Fourth Encrgy Conícrcncc of Latín Amcríca and rhe Caribbean (Enerlac '98), a pre-Confcronce semi nar íocusi ng on Energy Sector Risk Management: Futures 1\A<Jrkets was held on November ·16, ·1993, under the auspices of i-he New York Mercantile Exchange (NYMEX) 2 Organización Latinoamericana de Energía l.3tin Arnerk.an Encrm,1 Otganl:a,t10;1 • OlADE The fundamental objective degree oí securitv and are resorting, with oí the event was to increasingly grearer coníidoncc, to thcsc contrihutc, with thc cxchango mcchanisms, of experienccs. to a greater understandlng o( fu tu res markets In this contexr. il is now Ieasible lO train skllled in the wide-ranning market o( tearns, who by using instrurnents for the analvsis Latín America and the Caribbean. and rnanagement of financia! opcrauons. which have been lacilitatcd by tho outbreak oí new lt is ovídcnt that, al prcscnt, unccrtainty tcchnologies, can provide sophisticated and characterizes markets in general and financia! and accurare risk assessrnents. energy markcts in particular. Bccausc of this, it is ncccssarv to find the appropriate mechan ísms to During the Serninar, the experiences of rhe Ncw reduce the vol a ti 1 ity of prices. interest rates, and York Mercantile Exchange (NYMEX), Norway and exchange rates on the energy market. Sweden, the Brazilian state oíl cornpanv Petróleo Brasi leí ro (Petrobras), the Mexican starc oi 1 lnternational energy prices, especially those for oíl company Petróleos Mexicanos (PEMEX), the and producrs, manifcst sharp and constant Vcnezuclan oil state company Petróleos de fluctuations, which are a risk íor both producers and Venezuela, S.r\. (PDVSA), and the Electric Power consumers. Because of this, sorne companies, both Regulaticn Entity of Argentina (ENRE), were public and prívate, find that energy fururcs market presentad. mechanisms provide them with an acceptahle 3 Organización Latinoamericana de Energía NYMEX emphasized the strategy As a result of this experience. the of providing advisorv services Serninar highlightecl the to natíonal, provincial (statc), ímportance of prornoting and municipal govemrnents. incentive programs to distribute Regardi ng this, it described the both earnings and losses with case of the State of Texas, which end-users and providcd tho in 1 'J91 appl ied coverage for example oí 1 he Staic oí Delawarc. which providcs risk coverage for its heating fuels. u indicated that one of the major arlvantagos of 1 h is procedo re in vol ves the granting of certainty to the approved budget for price Iluctuations that might occur. NYMEX also underscored the tmportancc of usi ng standard- ized contracts in order to ensure the effk.loncy that chamcrnrizcs ncgotiatlons in futuros markors, whcrc rhcrc is no time to discuss nt grc<lt longrh contraer condi- tions. sincc rbcso transartions Me carricd OL1t simplv to elimi- nare price volatility. f'he market rule coosísts or always gc.1lling involved in the oppcsüe opera- tion: "lf 1 arn selling t buy myselí and vice-versa." íhe experience of Norway and Swcdcn '1S pionccrs oí the inclusion oí the electric power subscctor in futuros markcis is of t he utmost imcrcsr. For (wo royal tv earn i ngs of the srate vears now, thcse [wo cou ntrics cornpany. lt also Iocused on the havo been worki ng togcthcr gas markcr. which has been on this, and as of 1999 the involved in risk management and actions of the other Scandinav- occasionally has unburdened its ian counrrics will be opcrations on ruturcs markots, incorporated. sinco its dcrcgulanon. 4 Organización Latinoamericana de Energía Lut:n t\1neric.:c:1n Eut::rgy Ory.inizdtion • OLADE The experience of Norway and are the so-cal lecl col lars and Sweclen highlight the fact that swaps. both the plannecl solution and the market solution minimize The Mexican oil state companv, short-run marginal costs. which PEMEX, considers rhar prices, is val id (or investments but not credits, exchange rates, tax for daily financia! operatlons. pavmenrs, and project lags are The latter are supported by spot the company's principal risks. In tariffs, which is not the case tor this situation, the handling of thosc derorm inecl al a distanco. asset and liability risks (amount, Neverrheless. the Scandinavians, rnaturity, and toreign currcncy) is bccause tbev are pioneors in the vcry intcrcsting. In this case, thc installation of futuros markets in question is: vvhat is rhe cosr- bonofit ratio oí incomc the electric power sector, have J<ittz1re: ...; stabilization/ been addressing severa! marleets artd problcrns, cspccla l ly t he PEMEX also formulares a concerns of their custorners who price deúnüion oí the cornpanv's risk botleve tha: prices could be aooourc. as wcll as a definition lowcr. itrzcertaitzi_y oí benchmark or tradeoü between risk and bendits. Tlle rn a rt{,tp, e rrtert I The presentations on cornpany compa ny is promoi i ng 1 he oxporiencns in tho Seminar are incorporation oí the so-called sianed wilh that oí Petrobrás. real opt ions. is which emphasized the wide niechan ms volatilitv of cncrgy products and In the Venezuela state oil that help to underscored the íact that the compa 11y, PDVSA, fina ncial greater the volatility the greater auoicl engineering has been applied for the uncertaintv, which in turn three vcars now, especial ly in the uriexpected makcs i l impcrauvc to covcr arcas oí rnarkcung and ihird- risks. lt also indicated that party production. Withoul any chanr:tes in lcavi ng thc out come lo markct basclíno risk, zcro­cost swaps or comj)anies forces is also a valid decision, but collars are used on crudo oil which can be laken as a result of purchases and sales to generare analysis, rarhcr ihan lgnorance of addirional incomc.