Read the Oil 35 Magazine
During President Obama’s second term, Latin America ended in the spotlight as the driving force behind an integrated and self-sufficient “western hemisphere” in energy terms. Thanks to the huge oil reserves in Venezuela, the potential of the pre-salt fields off the coast of Brazil, and unconventional prospects in Argentina, Latin America could significantly contribute to the American continent’s energy emancipation, one presently driven by the shale revolution underway in the United States and the exploitation of bituminous sands in Canada. Despite these prospects, this important growth of the region is held back by political and economic uncertainties in certain key countries and the nationalist tendencies of the main South American players that are chronically reluctant to embrace energy cooperation.
Majors at a crossroads
Venezuela’s serious problems are clear to everyone: the top country in the world for oil reserves could soon have to deal with a serious debacle. A daily output of just over 2 million barrels per day—in steady decline since 2014—is not only insufficient to avoid a third consecutive year of recession, but even fails to guarantee domestic supplies of oil products. The risk of paralysis of the Venezuelan oil industry not only represents an element of major uncertainty for global markets, but also hinders any attempt at energy integration on a regional level. Albeit in much less dramatic terms, the political scenario in Brazil is also concerning. Despite the problems that have partly characterized the oil industry, in recent months the production of Brazilian crude oil and natural gas has recorded major progress (3.36 million barrels of oil equivalent at the end of 2016, up eleven percent compared with the previous year). However, due to the financial difficulties of the industry, difficulties aggravated by the collapse in crude oil prices, the development of Brazilian pre-salt resources has not met the initial positive expectations of the IEA (International Energy Agency), postponing the expected success of the country and limiting its influential role on a regional level. The prospects for Mexico, however, are different. Thought to be destined to sink into a fate of energy anonymity (in light of the 32 percent reduction in output compared with its peak in 2004), Mexico appears to have countermeasures that trace back to China. Thanks to the enthusiasm generated by the shale revolution over the border, and active investment attraction policies that overcome the multipledecade monopoly of Pemex, Mexico has regained its stride. The results are substantially less than those of the early 1990s, but they are a positive example for a region rich in resources, but one still searching for a way to exploit them appropriately.
A potential yet to emerge
Alongside Venezuela, Brazil and Mexico—which, with a total of 9 million barrels per day constitute the majority of South American output— a group of countries are attempting to develop an energy profile that will enable them to emerge in the regional and global energy scenario. Peru and Trinidad and Tobago are active in natural gas, which, for several years, they have exported in the form of LNG to European and Asian markets. Ecuador and Colombia are operating mainly in the oil market; the former is a traditional exporter and member, albeit second-tier, of OPEC, while the latter has experienced a substantial increase in production in recent years, supported by more favorable exploration activities. Argentina is also worth mentioning. Traditionally a producer and exporter of hydrocarbons, despite the great potential of shale resources and the first extraction activities launched in the Nequen basin in 2015, Argentina has become a net natural gas importer. Despite potential availability and some major complementarities among the regional players, Latin America is still underachieving in terms of energy. 22 million citizens still have no access to electricity, with an electrification rate of 85 percent in the rural areas of the continent, and despite abundant crude oil reserves, in recent years imports of products from the United States have doubled with an attendant cost of approximately $50 billion per year due to an inadequate refinery industry.
Nationalism and fragmentation
The tendency towards energy nationalism that is still widespread on a regional level continues to fuel this situation. Although crude oil prices have contributed—as in the case with Mexico—to making matters worse, too many governments are still barricaded behind their protectionist positions. On the other hand, the adoption of excessively liberal policies by national governments risks exposing the Latin American energy industry to the growing volatility of the international markets. A balance between these two extreme positions may be reached through greater convergence and regional energy integration, which overcomes fragmentation and enables the complementarities between the various players on the Latin American chessboard to be fully exploited. A process of integration—physical, legislative and regulator— which, on the one hand, would guarantee greater levels of energy security, especially in the gas sector, and a more competitive and sustainable access to energy, and, on the other hand, would ensure greater economic returns for the exploitation of local resources. These are, however, strategic choices that guarantee positive returns in the medium-long term only, time frames which, unfortunately, some populist South American leaders do not seem to have either the option or desire to consider.