Politics and Energy: Now and for the Future

Petroleum, natural gas, hydroelectricity, supply networks, new renewable energy technology, nuclear energy and more… Managing the energy challenge each Latin American country faces is very complex nowadays and will be decisive for the future. The new energy grids and interconnections may one day lead to Latin America’s longed-for integration.

Rolf Linkohr

In probably no other region of the world are energy and politics so closely related as in Latin America. For a state to have control of a petroleum company or natural gas corporation is considered a sign of national sovereignty, and national symbols are very highly valued in the region. This might surprise Europeans or North Americans, who have learned that capital is clearly stateless, but in Latin America, a continent whose raw materials have been exploited by foreigners for centuries, being able to control a country’s own resources means much more than just a capital investment. It also reflects the desire to finally be able to use the country’s apparently immeasurable natural riches for its own benefit. Latin Americans want to work for themselves and not for foreign powers. It’s a desire beyond reproach.

This is not to say that other countries don’t also have a special relationship with their raw materials, above all when it’s about strategic reserves. Latin America is no different than the rest of the world in this basic feeling, but it does differ in the degree to which its countries connect politics and raw materials, and above all, politics and energy.

Oil and natural gas are two powerful tools

Raw materials, particularly oil and natural gas, are good tools for political leverage. When Buenos Aires had an extremely hot summer in 2005, President Néstor Kirchner arranged for Argentine natural gas to be used first for internal consumption, thus exporting less to Chile. As a consequence, energy had to be rationed in Santiago. Where politics comes in is that Bolivia then refused to sell natural gas to Chile as a way to pressure it to concede a strip of land that would return to that landlocked country the access to the sea it once enjoyed.

An appropriation policy for oil and natural gas has two faces, however, one favorable and the other not so much. Among the positive aspects is the fact that the revenues from their extraction provide the countries more latitude, internally and externally. In some cases, such as Mexico or Venezuela, state petroleum company revenues largely go to finance the public budget. Nationalization of these resources also blocks the multinationals, mostly US ones, from indirectly meddling in domestic political matters, thus serving as a defense against intrusion by foreign powers.

For those who know the history of US-Latin American relations, this attitude is understandable. For example, the nationalization of Mexican petroleum and creation of PEMEX in 1938, during the presidency of Lázaro Cárdenas, not only had economic motives, but also reflected Mexico’s complex relationship with the United States. To explain the importance Mexicans give to this decision, it’s enough to mention that it has constitutional rank. President Vicente Fox tried to change it, but failed. To be fair, every state except Texas, Louisiana and Mississippi prohibits foreign companies from extracting oil in their territorial waters.

In general, Latin Americans have a very strong national conscience, perhaps because nationalism is sometimes the only thing that keeps such heterogeneous and unequal societies united. National symbols replace social consensus, and the larger the gap between rich and poor the greater the need to carry out symbolic acts of compensation to keep the country united. Natural gas and oil are just such a symbol.

Are oil-producing countries wealthy countries?

One could conclude that the Latin American countries with oil and natural gas reserves are among the richest in the world. Their revenues should guarantee a high standard of living. Sadly, it isn’t so. On the contrary, the oil-producing countries are often poor.

The riches are divvied up by the upper class, leaving little or nothing for most of the population. Furthermore, neither the oil nor natural gas industries, nor mining, generate many jobs. Their value added comes only after refining and marketing. It’s evident that having oil isn’t enough to achieve well-being. Norway may be the only country that uses its natural resources to promote the common good. For a country to be rich, it isn’t enough to have oil or natural gas. Without democracy and social policies, not even the largest oil reserve would suffice.

The great risks of petroleum wealth

Even the implementation of social policies financed by oil revenues isn’t sufficient unless accompanied by a work ethic that doesn’t involve limousines for the high officials of a supposedly rich state. Energy nationalism limits the development of such a dynamic work ethic, and not only in Latin America. We can see how energy nationalism also paralyzes societies in Russia and the Middle East. Oil revenues make governments generous, at least as long as prices stay high, but in the end it creates a welfare culture.

Venezuela is a good example. The fact that a country so blessed by nature, and consequently so rich, has to ask Cuba for teachers and doctors to cover its basic needs speaks straight to the mentality created by petroleum wealth. Future investments, if there are any, will be directed only to the primary sector—oil and natural gas in this case—and not to those areas that create a country’s true wealth: education, research, social institutions, transportation infrastructure and, most importantly, industry. This explains why the most prosperous countries aren’t those blessed with large oil and natural gas reserves, but rather, amazingly, those that have to get their oil and natural gas in the world market and at high prices.

Latin American energy nationalism creates an additional disadvantage: it impedes foreign investment and thus diminishes the possibilities of innovation. Mexico is an example of this: the state required PEMEX to pay exorbitant taxes, and for this reason the investments needed for exploring new deposits weren’t made. Also, since the multinational corporations didn’t have permission to operate in Mexican territory, less oil and natural gas was being extracted. Now Mexico even has to import natural gas. Bolivia, under the direction of Evo Morales, runs an even larger risk. Nationalization can close access to capital and technology, and it’s doubtful that Venezuela’s PDVSA can fill the vacuum in Bolivia if other international corporations leave.

Countries with disadvantages

Not all Latin American countries control petroleum and natural gas deposits. Some, mostly the Central American ones, have a scarcity of oil. When sharing out these hydrocarbon reserves, nature also forgot Cuba. Argentina, Chile, Uruguay and Paraguay are also importers rather than exporters of oil or natural gas.

Latin American water reserves are also distributed unequally, even though there are still sufficient amounts. To make things worse, the distance to the source is often long and the population density where the water is needed is low. Large urban centers are usually well-supplied with electricity and natural gas, but energy is often a problem in the countryside due to its high costs. According to 2002 data from the International Energy Agency, 46 million Latin Americans lacked access to electricity.

The advantages of interconnection

The search for solutions to this situation is increasing. On the one hand, more grids are being built and, on the other, decentralized supplier institutions are being created. It’s encouraging that the efforts to interconnect the electricity and natural gas grids in the various Latin American regions or countries are getting stronger. If it continues, a Latin American energy grid and, as a result, a common energy market, could be guaranteed as the years pass.

Many recent examples confirm this hypothesis. On June 13, 2006, Mexican President Vicente Fox and his Guatemalan counterpart, Oscar Berger, inaugurated the construction of an interconnecting line with other Latin American countries. From that point, it’s a small step to transporting electrical current from the city of Chiapas in southern Mexico to Colombia. Construction of a joint thermal power station in Guatemala or Panama is expected, the cost of which will be in the billions of dollars. In addition, the completion of a natural gas pipeline that will unite Venezuela with Chiapas is scheduled for 2015.

There are plans to install electrical interconnection lines within South America as well. There are projects between Colombia and Ecuador, between Peru and northern Chile and between southern Bolivia and northern Argentina. The economic advantages are evident: the lines of electrical interconnection permit an exchange that transcends borders and avoids the costs of constructing unnecessary generating plants. Latin American Energy Organization (OLADE) experts calculate that energy integration will save US$4-5 billion per year.

Venezuela’s Great Southern Natural Gas Pipeline

A proposal that generated even more repercussions is the Venezuelan project to construct the Great Southern Natural Gas Pipeline, which starts in Venezuela and crosses Brazil until it reaches Argentina, later adding Bolivia, Paraguay and Chile. Its cost is calculated at some US$20 billion and its construction will generate jobs for an estimated million people. A group of experts from the countries involved is currently analyzing the project’s economic viability. The numbers are enormous: a supply of 150 million cubic meters of natural gas traveling a distance of 8,000 kilometers.

It’s still early to judge the feasibility of this project. It’s probably advantageous if it contributes to the continent tightening its links to form a unified natural gas market. In that case, it would be a tangible symbol of Latin American integration. Its suitability seems doubtful, however, based on what we know at this point. Up to now, it was always considered unprofitable to transport natural gas more than four thousand kilometers. Because the loss of pressure is very high, it’s preferable to transport it in the form of liquid natural gas by sea and regasify it in the terminals.

This mega-project was proposed by Venezuela, a country that has sufficient natural gas reserves and whose oil revenues offer it the capital necessary to drive projects. The initiative is also related to Venezuela’s desire to become a member of MERCOSUR. It isn’t the first time that Venezuela has used oil and natural gas for its foreign policy. In June 2005, President Hugo Chávez created Petrocaribe, an agreement that lets Caribbean countries pay their oil debts with 24-year credits at 1% interest, following a 2-year interest-free grace period.

Because of this project, the Dominican Republic alone saves some 240 million euros annually. Chávez has offered to provide fuel under these same generous conditions to municipal governments run by the FMLN in El Salvador and the FSLN in Nicaragua.

Energy and politics:
Alliances and counter-alliances

Not everyone in Latin America is enthusiastic about these initiatives. Mexico and Colombia, for example, see them as a provocation. On June 3, 2004, the Presidents of those two countries announced the construction of a refinery in Central America to reduce fuel costs in the region. This refinery is planned to process 360,000 barrels of oil a day, 70% of which will come from Mexico. The construction will cost an estimated US$6 billion. The project has financing from the Inter-American Development Bank and will be implemented in Panama or Guatemala. Once it is fully operational it’s expected to generate savings of up to US$8 a barrel. As this initiative shows, Mexico has its own foreign policy goals. In December 2005, in Cancun, the groundwork was laid for the creation of a Central American electric and natural gas market, a project that links Chiapas with its closest neighbors in Central America.

Venezuela, meanwhile, is strengthening its ties with Cuba as a counterpart. Chávez proposed modernizing the Cienfuegos oil refinery, built by Cuba in the 1980s with Soviet aid and technology; a project that, according to official figures, is expected to cost somewhere between US$635 million and US$780 million. Almost all the petroleum processed in Cienfuegos is of Venezuelan origin, and some of its refined products are sold in Central America.

Other projects interconnecting the natural gas grids of neighboring countries include adding Mexico to Bolivia’s grid. Mexico currently exports some of the natural gas it extracts to the United States, which is increasingly becoming an energy importer. Since it can’t extract enough to supply its giant market and has to fill the hole with natural gas imports, it’s logical that South America provide it.

These few examples show to what point energy investments respond to political schemes. Alliances are reaffirmed, such as the existing one between Cuba and Venezuela. Or the Central American countries link up with Mexico and are thereby transformed, in a certain way, into its “backyard,” or in the best of cases, into a bridge to Colombia. With its Great Southern Natural Gas Pipeline, Venezuela is also trying to get closer to MERCOSUR to create a counterweight to the US, together with Brazil and Argentina.

Bolivia-Chile-Argentina: A complex triangle

It’s often difficult to build a bridge between countries. Take for example the case of Chile and its relations with its neighbors. Chile generates a third of its energy from natural gas—15 million cubic meters a day—that comes exclusively from Argentina. But Argentina’s extraction capacity doesn’t cover its internal demand and these exports to Chile. Also, since the Argentine government decided to keep natural gas prices low, the companies didn’t invest enough. Furthermore, Argentina’s natural gas reserves are limited, so the country has to import 5 million cubic meters of additional natural gas from Bolivia. Even though Argentina paid US$3.35 per million BTU (British Thermal Unit), the price was fixed at US$5 after a negotiation between Presidents Kirchner and Evo Morales.

So, one might ask, where’s the problem? Argentina could pass on the increase to Chile and Chile, already accustomed to paying high energy prices, would have to see how to manage it. But things aren’t so simple. Chile and Bolivia interrupted diplomatic relations in 1978 because Chile refused to cede a strip of coast to Bolivia so it could recover its access to the Pacific Ocean. For that reason, Bolivia doesn’t sell natural gas to Chile, and even considers Chile’s supply from Argentina illegal in that it can’t be proven that it’s extracted solely from Argentine deposits. The possibility that Bolivia could decrease its exports to Argentina, thus possibly resulting in suspension of the supply to Chile, isn’t discarded.

From this perspective, Chile faces a tough road. It would have to replace Argentina’s natural gas with liquid natural gas from Asia, which is very expensive. But to be able to import it, it must first construct terminals and negotiate agreements with the suppliers, which takes time. Consequence: Chile could suffer energy deficits in the short term.

It must be noted that this situation mainly affects northern Chile, the mining area. For geographic reasons, the northern, central and southern areas of Chile don’t have energy interconnections and therefore wouldn’t be able to supply each other internally in case of a deficit. All of this means that Bolivia’s refusal to supply Chile by way of Argentina could deal a hard blow to the Chilean mining sector.

Borders and flags worsen the problem

Economic arguments are often appealed to in the attempt to eliminate political obstacles. There’s no doubt that it would be beneficial for the electricity and natural gas currents to flow freely across borders, for there to be investment security and judicial security, and above all, for there to be a politically neutral court capable of intervening to resolve conflicts. That’s why the oil and natural gas companies in South America insist that the energy question be separated from politics, and that they be permitted to construct pipelines and electrical power plants according to economic criteria, without having to respect borders. They also demand that a “South American Energy Charter” be drafted in line with the European Union’s “Energy Chapter Treaty” model.

So far these initiatives have come up against resistance from some governments. Bolivia believes it holds the best cards for the long term, considering its natural gas reserves and its neighbors’ needs. But it could be wrong. The more it pressures Brazil, Argentina and Chile, the more these countries will look for alternatives.

Another example is the natural gas sales to the west coast of North America. Since Bolivia has no access to the sea, Evo Morales’ predecessors began negotiations with Chile to create a natural gas terminal in northern Chile so liquid natural gas could be exported to Mexico and California. But it rejected the proposal that it create an economic zone inside Chile and, as ever, insisted on getting back its coastal territory. Chile, as always opposed to that demand, suggested Bolivia construct its natural gas terminal in southern Peru instead, but that alternative was not cost-effective. Meanwhile, Mexico and California are buying liquid natural gas from Indonesia, and Bolivia lost an interesting market.

The conflict probably won’t be resolved even if Chile accepts ceding a strip of its land to Bolivia. In the War of the Pacific in 1879, Chile not only won Bolivia’s coastal territory, it also appropriated some from southern Peru, including the city of Arica. Therefore, even if Chile ceded a coastal strip to Bolivia so it could construct a natural gas terminal there, it would be what was originally Peruvian territory. The conflict would continue, but under two other flags.

How much oil is left? How much coal?

Assuming that the growth of current demand continues in the future, Latin America’s energy reserves are calculated as follows: hydroelectric power plants, with a capacity to generate 109,720 megawatts, have an unutilized potential of 444,501 megawatts; oil reserves for 31 years; natural gas reserves for 36 years; and at the current extraction levels of 75 million tons a year, coal for another 280 years.

This somewhat schematic calculation by OLADE needs some clarifications. First, the development of hydraulic energy faces increasing resistance; not everyone favors flooding the Andean valleys or creating great lakes in the Brazilian plain to take advantage of the potential of the river flows. Something else is often forgotten: Brazil’s large dams emit as much carbon dioxide in the form of methane as a coal-fueled power station does because they forgot to remove the trees and bushes from the bottoms of the reservoirs before flooding them. Even though doing so would add to the investment costs, the projects would still be feasible.

Until now, coal has occupied a secondary role. It’s extracted mostly in Colombia and exported to Europe. For technical reasons, it can virtually only be transported by sea, which is why coal-fueled power plants are built in coastal areas. In the future, however, coal could take on a larger role because of “clean coal” thermal power plants, which reduce carbon dioxide emissions. Not all coals are equal. Brazilian coal, for example, is very rich in sulfur and using it without damaging the environment requires a very complicated process.

The crisis will begin in the mid-21st century

Some calculations show that Latin America only has enough oil and natural gas for 40 years. The estimate is conservative since Venezuela controls reserves almost as large as those of Saudi Arabia, thanks to orimulsion, an unconventional, highly energy-producing and non-explosive fossil fuel that combines 70% bitumen (heavy hydrocarbon) and 30% water with a special mix of sulfactants. Together with Alberta, Canada, Venezuela has one of the largest unconventional petroleum reserves in the world. Venezuela will probably continue for some time to be the center of Latin American petro-politics. It’s also possible that what remains of other reserves will prove to be greater than is calculated today. Brazil, for example, has been able to extract so much off-shore petroleum that it ended up becoming an exporter.

Even supposing that a more intensive use of fossil fuel reserves and hydroelectric power plants is achieved, however, it’s clear that supply problems will begin in the second half of the 21st century at the latest. We can’t forget that the Latin American population is still growing and a good part of it still doesn’t have access to the energy supply.

New projects for “clean” development

Added to all this is the climate question. The flexible Clean Development Mechanisms (CDM) included in the Kyoto Protocol could benefit Latin America. As the industrialized countries fail to reduce their carbon dioxide emissions sufficiently, they are increasingly obliged to buy natural gas emission rights from the developing countries.

For Latin America to be able to sell its emissions rights, it must take on a commitment to the environment, and to negotiate more effectively, it will have to present itself as a single unified block. This could generate capital transfers of billions of euros. If the projects are designed adequately and can count on that capital, the knowledge and technology will flow. In the short term, the search for adequate CDM projects has begun. There are currently almost 200 certified projects in the world and a large part of them are being implemented in Latin America, mainly Mexico and Brazil.

Renewable energy: Plants, sun and wind

More intelligent energy management offers great possibilities. Although Mexico is the only country so far that has improved its energy efficiency, there are very simple and inexpensive techniques that can be applied. In Brazil, for example, replacing the electric shower with a solar water heater would virtually eliminate the peak electricity demand at night. Energy suppliers could save costly investments and the clients would spend less, since the investments would be amortized in a few years.

The second potential is renewable raw materials. Brazil demonstrated that it’s possible to obtain alcohol from sugar cane and that alcohol is now being utilized as fuel, without subsidies, for a large number of cars. Many other countries now have programs for manufacturing biological fuels as well, giving particular importance to second-generation fuels that use the whole plant from which they are obtained in the manufacturing process.

Solar energy is hardly used in Latin America, even though it has an important future, particularly in the most remote regions, far from the traditional supply networks. The same occurs with wind energy. In the Argentine Patagonia, probably the windiest place on the planet, there are large wind projects, but they lack money and confidence.

Brazil, Mexico and Argentina
have nuclear energy

Three countries—Mexico (Laguna Verde), Brazil (Angra dos Reis) and Argentina (Atucha and Embalse) —already use nuclear energy. Nevertheless, no Mexican politician has been willing to officially inaugurate the two Laguna Verde nuclear reactors, even now that they’re on line, because nuclear energy isn’t popular. The construction of Angra III in Brazil and of Atucha II in Argentina has been suspended for several years. The Juraguá nuclear plant, near Cienfuegos, Cuba, turned out to be a disastrous investment.

It’s difficult to foresee the future of nuclear energy in Latin America since the governments also avoid making statements about it, perhaps influenced in part by the fact that the first to initiate such projects in Latin America were the dictatorial governments, creating suspicions about the industry’s relation to military interests. But in times of democracy many Latin American countries continued developing peaceful nuclear energy technology.

Despite the silence about nuclear power, however, some signals suggest it is being reappraised. The inauguration in early May this year of an innovative uranium enrichment production plant in Resende, Brazil, strongly suggests that Brazil wants to continue using nuclear energy in the future. Production will first be used to supply scarcely enriched uranium (between 3.5% and 4%) to the Angra I and Angra II nuclear plants and later will add Angra III. For the moment, the goal is to cover 60% of domestic demand. Brazil aims to begin supplying the world market by 2014. At some moment, Brazil will have to finish building Angra III, if it doesn’t want the investment to become a multimillion dollar tomb. Surely the decision will be made after the presidential elections in October 2007.

Two years ago, Argentina sold a research reactor to Australia in an open international bid. Under the presidency of Hugo Chávez, Venezuela is trying to support itself more and more with nuclear energy. To further this plan, he signed a cooperation agreement on nuclear material with Brazil. Mexico and Argentina are working on a “fourth generation” international nuclear plan, which provides for a new generation of secure plants that would be finished in 20-30 years. It could also occur to someone to emulate the work of the European Union’s EURATOM and sign a Latin American agreement to create a joint atomic authority. Brazil and Argentina already created the Argentine-Brazilian Agency for Nuclear Energy Applications in 2001.

For all that, it’s true that Latin America’s nuclear plans continue to be quite diffuse. How are Venezuela and Mexico preparing for when their oil reserves are exhausted? What will Argentina do when faced with price hikes in oil and natural gas? Will construction end on the Atucha II nuclear plant, 70% of which is built by Siemens-KWU? Will Chile keep its experimental reactors or will it try to fill its deficit with nuclear energy? Will Cuba become interested in nuclear energy again, as it was when the former Soviet Union approved the construction of four platforms in Juraguá?

The wasted potential of volcanoes

We shouldn’t forget about geothermics. With its mountain chains extending from north to south of the whole continent, from Mexico to Tierra del Fuego, Latin America possesses an immense geothermic potential, which, surprisingly, it barely uses. The only countries that have developed some experiences worthy of mention are Mexico, El Salvador and Nicaragua. The topic has recently been studied in Chile.

One interesting alternative is to jointly develop a Latin American research and development center, in which the industrialized countries could also participate. Ten years ago, the European Union financed a study on Latin America’s geothermic opportunities which concluded that there’s great potential. Sadly, it hasn’t advanced much.

Towards integration?

Latin America’s energy supply has widespread political leverage and its importance grows all the time. Each country’s handling of this challenge is critical for the continent’s economic and industrial future. Perhaps some day the energy grids will become the links of a chain that leads to Latin American integration. It would be a good thing. After all, the unification of Europe also began decades ago with an energy agreement.

Physicist Rolf Linkohr is a special consultant to the European Union Energy Commission, and was a German Social Democratic Party representative in the European Parliament for 25 years. This article appeared in Nueva Sociedad, July-August 2006, and was edited by envío.

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