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LATIN AMERICA / THE CARIBBEAN
Integrating energy markets
Ariela Ruiz Caro
12/7/2006
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The long dream of a common energy market has new players.

Regional energy integration has long been a dream of Latin American and Caribbean governments, and it is a key goal of the forming South American Community of Nations bloc. This kind of integration is likely to become a decisive factor in improving the region’s geopolitical standing in the international arena.

But to achieve this, adequate infrastructure and strong institutions are necessary. Both the technical design and smooth institutional operations are important in creating a common energy market in the region, a big challenge for Latin America and the Caribbean, where there is, fortunately, growing political will for such a project.

The integration of Latin American energy markets has been discussed for more than three decades. One of the first attempts was in 1965 with the creation of the Mutual Assistance of the Latin American Government Oil Companies (ARPEL), the Regional Electric Integration Commission in 1964, and the Latin American Energy Organization in 1973.

Throughout the 1960s and 70s bi-national hydroelectric projects were launched such as the Salto Grande (Uruguay-Argentina), Itaipu (Brazil-Paraguay) and Yacyreta (Argentina-Paraguay), pushed by the respective governments, which operated the companies involved. These countries are the founding members of the Southern Common Market (MERCOSUR).

New ideas

In the 1990s, energy integration proposals took on a neo-liberal slant. Leaders launched the "Hemispheric Energy Initiative" following the 1994 Americas Summit in Miami. The project was proposed in the context of economic reforms that centered on free markets, fiscal sobriety and state deregulation.

This policy and others like it all had the mark of the 1989 Washington Consensus and 1990 Americas Initiative.

For the energy sector, these reforms meant the elimination of the operational obstacles of private domestic and foreign companies in all spheres of the energy industry, from oil exploration and production to the distribution of these products on the market. Even though many countries in the region took the same approach, they each had varying levels of liberalization. In many cases these proposals were rebuffed by these countries’ constitutions, while others considered energy a strategic sector for development.

Despite pressure to do so during negotiations for the North American Free Trade Agreement (NAFTA) — which went into effect in 1994 — Mexico has not privatized its state oil company PEMEX. NAFTA establishes that the Mexican government reserves the exclusive right to exploit and invest in its oil and other hydrocarbons, and to deny authorization to others, according to its Constitution. Except for certain countries such as Argentina, Bolivia and Peru, the aperture to private investment registered in oil-producing countries has not meant that state oil companies lost control of the industry. The majority of state oil companies in the region have maintained a predominant role in regional production, investment, sales, supply and regional exportation.

However, foreign investment laws in most countries in Latin America and the Caribbean — reinforced by the free trade agreements that many governments have signed or are negotiating with the United States — mean pressure to ensure that investment in general is not met with any obstacles.

It was thought that as long as these reforms were to deepen, integration processes would follow and that opening these markets would allow for a considerable increase in business opportunities for private companies in the construction the infrastructure required to handle these networks. Such projects were supported financial institutions like the World Bank, Inter-American Development Bank and the Export-Import Bank of the United States.

But these reforms have not brought the results that were hoped for, especially in countries that privatized their state oil companies.

In fact, energy integration proposals based on the privatization of the energy-sector, the opening of markets and deregulation have increasingly lost ground in the region, especially in South America. The current trend in several countries is to give governments a more active role in their energy sectors and to make state planning in energy markets an indispensable tool to channel money and coordinate public and private investments. Also, the preservation of nonrenewable resources and the autonomy of the governments to regulate their exploitation has become a big part of new energy policies. The hemisphere-wide energy integration project began to lose its appeal, and after 2001, neo-liberal energy policies were redrawn.

Petroamerica Initiative 

This is how the Venezuelan government launched the Petroamerica Initiative. This energy integration plan is based on the idea that regional integration is matter of governments, though it does not exclude the private business sector.

Petroamerica "proposes integration of the state energy companies in Latin America and the Caribbean to put the agreements into operation and for joint investment in exploration, exploitation and marketing of oil and natural gas," says the Web site of the country’s state-run oil company Petróleos de Venezuela, or PDVSA.

Petroamerica also proposes economic complementation and the reduction of the negative effects caused by energy’s high cost — rooted in the increasing worldwide oil demand as well as other geopolitical factors — for countries in the region. It suggests a process that will become more concrete over time through bilateral and sub-regional agreements.

The proposal also includes preferential oil prices for Central American and Caribbean countries. It advocates that the savings made by these countries thanks to agreements like Petrocaribe, which was signed in June 2005, be used for economic and social development programs, in sectors such as health and education.

Oil diplomacy

Venezuelan President Hugo Chávez is trying to promote energy integration, using his enormous hydrocarbon reserves to manipulate the playing field. High oil prices will ensure that Chávez’s petrodollar-infused initiatives last into the long term.

In this context, the governments of Argentina, Brazil and Venezuela signed a memorandum of understanding in 2005 that gave way to some initial studies into the construction of a gas pipeline to connect the Venezuelan gas fields with consumer centers in Brazil and Argentina. The presidents of these three countries said that this gas integration project will be a decisive step in South American energy integration given the importance of energy in economic and social development in the region.

For Brazilian President Luiz Inácio Lula da Silva, "the pipeline could become the largest works project in the next 50 years in Latin America and consolidate itself as an energetic solution in the mid and long term." Brazil’s Energy Minister Silas Rondeau told Rio de Janeiro’s Gazeta Mercantil in December 2005 that the project "is a demand of the presidents who have the strategic vision to integrate the region’s natural gas reserves and help the product to be marketed within the very South American region."

But many analysts are doubtful that such a large works project is economically feasible. Many agree that the first requirement is an inventory of the gas reserves in the Orinoco basin, which has still not been done.

The gas pipeline between the three countries could be complemented by the "energy ring," using the Bolivian and Peruvian gas fields.

However, since this project has hit many stumbling blocks (see below), participants may consider joining the Southern Cone with the northern section of the continent so other countries in the region could gain access to Venezuelan gas. Venezuela is home to more than three-quarters of South America’s gas reserves and close to 60 percent in all of Latin America and the Caribbean. But this is a long-term project whose viability has yet to be determined.

All of these energy interconnection proposals are politically charged, and energy investments respond to politics. Nevertheless, Latin American and Caribbean countries are conscious that a real integration also requires energy integration.

*Ariela Ruiz Caro is a peruvian economist and international consultant on integration and trade.


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