South America has enjoyed robust economic growth in recent years, in part driven by rising global prices for commodities such as oil. Yet energy shortfalls loom on the horizon, both in electricity generation and oil and gas production. Meanwhile, greater state intervention in the energy industry threatens oil and gas production levels in Bolivia and Venezuela, where decisions often stem from political rather than economic considerations. The region’s governments also show little interest in cooperating on energy policy. Though analysts point to some instances in which economic pragmatism trumps politics, South America appears largely resistant to integrating its energy markets. Experts say this lack of cooperation could hinder regional economic growth.
Energy Supplies in South America
While many countries in South America have domestic energy resources, only Venezuela, Bolivia, and Ecuador export significant amounts of oil and gas. Venezuela ranks among the top ten oil producers in the world and boasts a robust 80 billion barrels in proven reserves (according to the U.S. Energy Information Administration, Venezuela produced 2.8 million barrels per day of oil in 2006, ranking ninth globally). Bolivia holds the second-largest natural gas reserves in South America, behind Venezuela. Ecuador has roughly 4.5 billion in oil reserves; it exported 376,000 barrels of oil a day in 2006, over half of which went to the United States. Ecuador is the smallest oil producer in OPEC.
Brazil, Colombia, Argentina, and Peru also produce oil and gas, most of which currently goes toward meeting domestic demand. Of these countries, only Brazil has the potential to become a significant global oil producer in the next decade. It has 11.8 billion barrels of proven oil reserves and produced some 2.2 million barrels per day in 2006. It consumes nearly all of the oil it produces, however, due to accelerated energy demand in recent years. A large find in the offshore Tupi field in 2007 could make Brazil an oil exporter, but experts caution these deepwater reserves are difficult to extract and will take years to come online. According to the country’s state-run oil company, Petrobras, Tupi could hold between 70 billion and 100 billion barrels of oil, which would place Brazil among the world’s top ten in terms of total reserves, close to Venezuela. An offshore natural gas find holds similar promise.
Colombia, Argentina, and Peru are smaller oil and gas producers. Though Argentina produces a substantive amount of natural gas, it must supplement domestic supplies with imports from Bolivia due to excess demand created in part by government-subsidized natural gas prices. Peru has major natural gas fields in its southeastern Amazon basin. Colombia, which adjoins oil-rich Venezuela and Ecuador, is focused on exploration, but has yet to discover significant new reserves. It produced roughly 540,000 barrels of oil per day in 2007. Only three countries in the region—Chile, Uruguay, and Paraguay—must import the majority of their oil and gas.
Though much of the region is energy rich, experts caution that it will be difficult for South America’s oil and gas producers to sustain, let alone increase, their existing oil and gas production. Alan Hegburg, deputy assistant secretary for international energy policy in the U.S. Department of Energy, writes in Energy Cooperation in the Western Hemisphere that energy production depends on four factors: resource endowments, oil prices, investment contract terms, and domestic political climate. In South America, those countries with the largest reserves currently have political climates that discourage the private investment necessary to fully exploit those resources. Venezuela, Ecuador, and Bolivia have all reversed reforms made in the 1990s and increased state participation in their oil and gas sectors. “Over the past couple of years politics has trumped economics,” says Sarah O. Ladislaw, an energy fellow at the Center for Strategic and International Studies.
The Current Energy Landscape
Experts say the nationalization of resources and populist energy policies have complicated efforts among South American countries to cooperate on energy issues, dampening prospects for the future. “The gung-ho feeling of integration you had in the early part of the 1990s is gone,” says Jed Bailey, managing director for Asia and Latin America at Cambridge Energy Research Associates. As some countries have moved toward greater state involvement, others have pursued market-based energy policies. These divergent paths have produced “incompatibility in the domestic political economies of the major exporters and the major importers,” says David R. Mares, professor of political science at the University of California, San Diego.
Analysts point to Bolivia’s 2006 decision to nationalize its hydrocarbon industry as a prime example of this conflict. The move was met with anger from Brazil, which imports gas from the country and has significant investments in its energy industry. Though it has continued imports, the Brazilian government has made no secret of its desire to wean itself from Bolivian gas. It is building liquefied natural gas (LNG) terminals on its coast to enable imports from other markets, and also seeks to develop its domestic reserves.
Bolivia’s ability to supply gas has also been imperiled by resource nationalization. An uncertain investment climate has cooled foreign interest in the country’s oil and gas industry, causing a significant drop in total proven and probable reserves. According to Carlos Alberto Lopez, former Bolivian secretary of energy and hydrocarbons, probable reserves may have fallen from 54.8 trillion cubic feet (in 2002) to 31.5 trillion cubic feet (in 2007). He says Bolivia is no longer a reliable natural gas supplier to its neighbors.
Argentina’s domestic energy policy has been equally detrimental to regional energy integration. Since its fiscal crisis in 2001, the country has heavily subsidized domestic energy prices. As a result, foreign investment in the oil and gas industry has dwindled at the same time that domestic demand has skyrocketed. Once seen as a viable exporter, Argentina is now dependent on gas imports from Bolivia. Chile also feels the pinch of Argentina’s shortfalls. Though Chile and Argentina signed a natural gas integration agreement in 1995, in mid-2004 Argentina violated that agreement and cut off exports to the country. “Increasingly, whatever is written in a contract [with Argentina] is irrelevant,” says Bailey. Chile realized it could no longer depend on Argentina as a source of natural gas and has since sought supplies elsewhere. This situation is unlikely to change. Due to uncertain supplies from both Bolivia and Argentina, “even if Chileans say we want to trust the Argentines, there isn’t any gas for Argentina to send,” says Mares.
Consequences of Current Policies
The current energy landscape in South America could have significant consequences. First, it limits the potential for developing regional infrastructure—including power plants for electricity generation, pipeline systems for natural gas, refineries, gas storage facilities, and LNG terminals. Such improvements are often financed by the private sector, but need government planning and oversight. The International Energy Agency estimates the Western Hemisphere will need about $200 billion in annual oil and gas infrastructure investments between now and 2030. In South America, the opportunity to develop a lucrative natural gas market is hindered by the lack of sufficient infrastructure. More broadly, some experts say lack of cooperation could severely impede economic growth. “The future growth potential of the hemisphere is undermined and the region’s economies risk a major contraction if oil prices drop significantly anytime over the next decade,” said energy consultant David L. Goldwyn in March 2008 congressional testimony (PDF).
Other analysts suggest there would be a shift in policy to avert such a scenario. “The needs of the populace will drive governments to moderate or find middle ground,” says Bailey. So far, however, the countries pursuing nationalist energy policies continue to profit from high oil prices and have shown no sign of changing trajectory. Though Venezuela’s oil industry is poorly managed, it still functions. “High oil prices have allowed governments to sustain these policies and forgo certain levels of investment longer than most people originally thought. Whether and how long it will be before governments need to reconsider these policies is still an open question.” says Ladislaw. “As governments and companies adapt to the new price environment and rules for investment, it becomes harder to determine what the turning point will be.” Mares believes these policies are sustainable for less than five years.
Forging a Pragmatic Energy Policy
Aspirations toward regional energy integration have to some degree fallen by the wayside. Some countries are cooperating bilaterally; others have decided to go it alone; and some are striking bilateral agreements but working toward self-sufficiency. Bilateral cooperation is motivated by a mixture of politics and economics. Perhaps the best example of this approach is Venezuela. The country signed a joint investment agreement with Bolivia in 2008, an ideological ally. The previous year, it built a gas pipeline to Colombia, which remained open during the diplomatic crisis in March 2008 that saw Venezuela briefly sever ties with Colombia. Venezuela has also spearheaded the region’s only major integration proposal, a “Great Gas Pipeline of the South” that would run from Venezuela to Argentina via Brazil and Uruguay. Such a project is estimated to cost $20 billion, and experts widely agree it is not economically viable.
Venezuela marks the extreme of energy policy in the region, but experts say Ecuador, Bolivia, and Argentina have also adopted policies that are impractical and unsustainable. The countries that have adopted the most prudent policies are those that have liberalized their oil and gas industries, those that have started to look outside the region for supplies, or both. Brazil, Colombia, Peru, and Chile are all included in this group. Analysts hold up Brazil as an example of the benefits of opening the country for energy competition; Petrobras has engaged in energy partnerships with foreign investors since 1997 and is now considered a top-flight energy company. Colombia has consciously sought to replicate Brazil’s success. Of countries in the region, Colombia “is the most in touch with its situation,” says Ladislaw. It knows it needs a diversified energy portfolio, she says, and that it can only realize its domestic energy potential if it attracts investment. “The challenge is to respond to what you can’t control,” says Mares. He says Brazil and Chile have adopted “prudent, reasonable” policies that allow them to do this at a low cost to the country overall.
Looking to the Future
Experts present several different scenarios for the future energy landscape in South America. Many suggest that the notion of regional integration will be superseded by global integration. South America is currently cut off from the international natural gas market because its abundant regional supplies have limited the need to seek imports elsewhere. Chile and Brazil, however, have begun to look outside South America to secure additional supplies. Both countries are building LNG terminals that will create a disincentive to buy natural gas from neighboring countries. Those terminals will be in operation for decades, says Bailey, and they will connect South America to the global LNG market. This will lower gas prices in the region, which benefits some countries and hurts others. Bolivia will have to become a more competitive supplier, for instance, but Brazil will see lower natural gas prices.
Given the history of energy regulation in the region, some experts believe the current wave of nationalizations will abate, bringing increased foreign investment. “People need to take a look at what is going on in energy in the larger political sector,” says Ladislaw. She believes that popular dissatisfaction with the Washington Consensus, a set of macroeconomic policies implemented in the 1990s, has subsided. Oil and gas companies have reduced or frozen investment in places such as Bolivia and Argentina now, but some experts say these companies have short memories and are likely to reinvest eventually. In the interim, the economic consequences of falling or static production will only grow.
While regional integration of the sort envisaged in the 1990s is unlikely, analysts say bilateral initiatives will continue. “In the areas where there is very clear physical need but also political imperative to keep interconnections going, you will see those continue,” says Bailey. These pragmatic agreements might be preferable to tackling political disagreements directly. As economist Sidney Weintraub writes in Energy Cooperation in the Western Hemisphere, “Deep-seated political impediments to cooperation cannot be resolved by a simple recommendation that they should be resolved.” Instead, he suggests, addressing basic and regulatory and technical matters can illustrate the tangible benefits of cooperation and diminish political tensions.