The changing energy landscape in Latin America — and why it matters

From the northern-most point in Mexico to the tip of Tierra del Fuego in Argentina, Latin American countries are experiencing an energy transformation.

Some countries are moving faster than others. Some are struggling with long-running political battles that either loom or break into the open, threatening development.

Some have adopted dramatic plans to meet their people’s growing demand for power and one small, poor country is dealing with the bounty and, simultaneously, the burden of a gigantic oil discovery just off its coast.

The issues may seem like a world away for energy consumers in the United States, which, in the space of less than a decade, has experienced what’s been called an “energy renaissance” in oil and natural gas production while also seeing renewable energy sources — especially in California — make up an increasing amount of the power mix.

So what does energy in Latin America have to do with North America?

Plenty, especially when it comes to exports, says Erin Blanton, director of natural gas for Medley Global Advisors, a research and analysis company with offices on four continents.

“It is a huge benefit for U.S. jobs and U.S. industry to have those export markets,” said Blanton during a recent international energy conference in La Jolla sponsored by the Institute of the Americas at UC San Diego.

“I think a lot of people in the United States are viewing relationships in Latin America as we’re getting ripped off in some way. What they’re not seeing is, definitely in the energy industry, we are benefiting so much. This is a huge center of demand for us, for our energy products. I think that is the story — to maybe shift the way that we’re thinking about those relationships because this is an area where we’re benefiting a lot.”

Mexico

Just south of the U.S. border, Mexico may be the single country in the entire hemisphere that is going through the most number of changes.

Four years ago, Mexico initiated a massive reform of its energy sector, aimed at ending the monopoly status of its state-run oil and gas company (known as Pemex) and its electric company (known as CFE).

With an eye toward meeting the country’s growing energy demands, Mexico has opened the sector to private investments.

“This is a big deal,” said Blanton. “It’s opening up the industry. Gas use is growing phenomenally with the interconnections of pipelines. And one of the biggest beneficiaries is U.S. gas.”

Mexico imports huge amounts of piped natural gas, most of it from Texas. Nearly 20 gas pipelines enter Mexico from the U.S.

In recent months, San Diego-based Sempra Energy, through its IEnova subsidiary, closed on a $1.1 billion purchase of a 50 percent stake in an infrastructure company that includes natural gas pipelines.

The Sempra subsidiary already has a liquefied natural gas (LNG) import facility on the Baja Peninsula outside Ensenada and is looking to expand the site to include an export facility, in the hopes of capturing part of the booming global LNG market.

Oil giant BP earlier this year opened its first retail site in Mexico and plans to open around 1,500 more locations in the next five years.

Mexico’s energy reform also includes growing the country’s renewable energy sector. Last December, Sempa’s IEnova acquired the largest operating wind farm in Mexico for about $900 million.

Jaime Martinez, business development director for ERM Mexico, a private consulting company, said Mexico’s energy reforms have succeeded in attracting companies willing to make large investments.

But he adds a note of caution, especially considering Mexico has a presidential election coming up next year.

“For me, a critical aspect for the energy reform to be successful is (meeting) some expectations for the people,” Martinez said.

“Because it was put (to them) that energy is going to be cheaper, more jobs were going to be created, and the benefits of all this are going to end up (going to) the people and their communities. We need to see that. …The risks are related to that. Big expectations, but not results.”

South America

The energy prospects for countries in South America are mixed.

Raul Gallegos, a senior analyst based in Colombia for the consulting group Control Risks, said opportunities and risks vary from one country to another.

“In Venezuela there are number of opportunities that are popping up in the oil sector even though if you were watching the news you wouldn’t think there are,” Gallegos said. “In Colombia on the other hand, which is moving toward peace, it’s a mess as far as the opportunities. So it very much depends on the jurisdiction, really.”

In Brazil, home to South America’s largest economy, its president is battling corruption allegations that may oust him from power and threaten to disrupt the country’s economic agenda.

But that doesn’t mean foreign energy investment is running away.

“The future of Brazil looks healthy from an oil and gas standpoint for the long term,” said Jay Thorseth, vice president of Americas Exploration at BP.

A day barely goes by in which the news from Venezuela doesn’t appear to get worse as the country’s economy under socialist President Nicolas Maduro battles hyper-inflation and shortages in food and medicine.

Oil is estimated to account for a staggering 96 percent of Venezuela’s hard currency revenue and two and a half years of low prices for crude have decimated its economy. Gallegos said the Maduro government is desperate to increase production, which creates opportunities for multi-nationals such as Chevron, Shell and Repsol.

Even if Venezuela seems to be on the verge of collapse?

“The oil sector is an animal that looks 20, 30 years down the line,“ Gallegos said. “The oil sector is a business where they operate in Iraq with people blowing themselves up all over the place. Venezuela is a cake walk for some of these guys.”

Peru’s population is about the same as Venezuela and has elected a number of presidents promoting business-friendly policies.

Sempra has its own South American utilities division and the company is considering a bid on a massive pipeline project in Peru.

At the same time though, Gallegos said doing business in Peru can be tricky. Concerns over things like water issues have roiled some communities, prompting resistance to industry. Gallegos said some people actually throw rocks to scare away company executives.

“Latin America is a place you can invest, it’s a place where you can come in but you have to do your homework,” Gallegos said. “That is the key message.”

BP’s Thorseth described the energy landscape in Latin America as “huge.”

“We obviously look at every country’s political risk and then have to make an assessment whether it’s manageable or not,” Thorseth said. “To take Brazil for example, we think that’s manageable and you’re going to have ups and downs in the political climate and it’s something that a company like BP can deal with.”

Panama

In Central America, Panama has emerged as a economic superstar, averaging 8 percent annual growth as late as 2015. Although its gross domestic product is slightly smaller than Guatemala, Panama’s per-person GDP is tops in Central America.

Its energy consumption is surging.

The country’s first natural gas power plant is expected to come online in 2018.

And thanks to a $5.4 billion expansion of the Panama Canal that was completed last summer, LNG tankers can now pass through, shaving off days from their trips and slashing transportation costs for companies.

Looking at the number of LNG cargoes passing through each day, Panama recently announced it’s building its own LNG terminal, the first in Central America. Panama expects the privately funded venture will make the country an LNG distribution hub for the region.

“That brings a new fuel into the picture,” said Victor Urrutia, Panama’s secretary of energy.

Panama is also expanding into renewable energy, especially solar and wind power. “Years ago, it was too expensive, and now it’s very affordable,” Urrutia said.

Renewables

The market for clean-energy sources in Latin America is growing “massively,” said John Padilla, managing director of IPD Latin America, an energy consulting firm based in Miami.

Renewable energy auctions are an increasingly popular tool for governments to procure renewable electricity at competitive costs and Chile, Argentina, Peru, Brazil and Costa Rica have each completed successful rounds.

Padilla said renewables make sense for countries like Argentina, which is highly dependent on sources from outside its borders, such as natural gas from Bolivia.

“Renewable energy kind of comes at the right time, at the right place,” Padilla said.

Carlos Barerra, the CEO of Florida-based Atlas Renewable Energy, said countries like Mexico, Chile and Brazil offer promising markets for solar while Argentina and Colombia figure to be great resources for wind.

“You also have a constituency that does not want coal,” Barerra said.

Plus, many of the markets in Latin America are based on the U.S. dollar, which makes long-term financing attractive to investors.

“I would say it’s a great area for renewable investments,” Barerra said.

A small country with enormous potential

The average person in the U.S. would probably have a hard time finding Guyana on a map.

But the country of well under 1 million on South America’s northern coast, has literally struck oil.

In January, deepwater drilling confirmed that one of the richest oil and natural gas deposits has been found off the shore of Guyana, bringing development from energy giants Exxon Mobil and Hess.

Starting, essentially, from nothing, one of the poorest countries in the hemisphere is about to launch a major fossil fuel-based economy. It’s estimated that Guyana can start exporting oil by 2020.

Government officials in Guyana say they are committed to making the transition a smooth one, looking to avoid what is known as the “resource curse,” in which countries that acquire a windfall end up concentrating so much on the new industry that it ignores others while mismanagement and corruption grow.

Nigeria is one country that has fallen prey, and Venezuela is next door to Guyana.

But some nations, such as oil-rich Norway, have sidestepped the trap.

“What (the Norwegians) have done is adopt sound policies and that have created a set of incentives that makes it so that the government doesn’t spend money like a drunken sailor whenever oil prices come up,” said Gallegos of Control Risks.

Guyanese officials have received advice from Norway as well as a host of government and non-governmental organizations such as the U.S. State Department and the International Monetary Fund, which have offered guidelines for establishing regulatory, environmental, financial and legal frameworks.

“I really hope they adopt sound policies to save some of that wealth and spend it properly,” Gallegos said. “It’s going to be challenging. This is a government that has never faced a situation like this before, that has weak institutions, where graft is an issue and has been for many years. The hurdles are high, but I want to stay positive.”

rob.nikolewski@sduniontribune.com

(619) 293-1251 Twitter: @robnikolewski

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