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Players or mere spectators?

The energy world has been changed completely by the unconventional fuel revolution. Are Latin America companies ready to make the change?

To be successful in the energy world, you not only need to have reserves, but also know how to develop them. With the discovery of new conventional and alternative fuel reserves, countries in the Americas will be among the main players for decades to come. With the United States at the lead, followed by Canada, the question is just how ready Latin America is to accept the challenge of developing its natural riches.

Five years ago, it was impossible to imagine that the United States would stop buying Venezuelan and Middle Eastern oil. The United States, as the world's largest fuel consumer, has a global impact on the energy industry.

But it was precisely five years ago that something completely unexpected happened. Seismic phenomena and human ingenuity combined to favor the United States. An earthquake revealed in shale rock previously trapped fuel deposits. These discoveries of oil and gas in places such as North Dakota and Idaho, as well as large investments in the industry, led to a revolution of epic proportions.

The result has been the development of specialized technology that allows the extraction of unconventional fuels. Gas for example, is extracted through carbon deposits and from the production of shale basins. This same technology is also used to extract oil from formations known as "tight oil" and tar sands in Canada.

This exploitation of unconventional sources has transformed the global energy scene. The United States will not only be self-sufficient by 2020, but an energy exporter as well.

The unconventional fuel revolution has flipped the world's energy statistics. Data from the United States Energy Department shows that unconventional fuel reserves in the world are distributed as follows: 30 percent in the United States, Canada and Mexico; 20 percent in the Asia-Pacific region, particularly China; 15 percent in Argentina, Brazil and Colombia; and 15 percent in South Africa and others.

The more traditional big players, such as the Middle East and Venezuela--which still have the world's largest reserves--will now have to compete against the unconventional fuel team.


Since then, the global market has stepped up demand for energy. "The world economy increasingly needs more energy in order to maintain economic growth, improve living standards and tackle poverty," says the World Bank.

"Even with improvements in energy efficiency; we are expecting global energy demand to double by 2050. This comes as an inevitable consequence of an increasing global population, economic growth, urbanization and all other related population movement and energy-dependent services," the World Energy Council said in its January 2013 report.

The council mentions two more challenges: Climate change and poverty. In the case of the former, it is crucial that we reduce greenhouse gas emissions by half in order to keep the rise in the world's temperature by less than two degrees Celsius. For the later, one fact strikes a dissonant note--1.3 billion people in the world today live in poverty, with no access to electricity.

"Something that was unimaginable 20 years ago has become reality today: Energy is at the top of the fist of world governments' priorities," said Christopher Frei, head of the WEC.

The BP Energy Outlook 2030 states that global energy demand will rise by 36 percent between 2011 and 2030, boosted by emerging economies. "Without continuous improvement to energy efficiency, demand would shoot up at a faster rate simply to keep pace with economic growth," the report says.

"The BP analysis points out that supply patterns are changing, and that oil and unconventional gas are playing a larger role in satisfying global demand: "By 2030, the United States will be self-sufficient in terms of energy, while China and India will become increasingly dependent on imports."

There are three key messages this year in BP'S report. First, the power of competition and market forces will boost efficiency and innovation. "These two aspects are particularly relevant "not only in unblocking new supply sources, such as oil and unconventional gas, but also in improving energy efficiency. As a result, the rise of carbon emissions is being curbed."

Second, technology and efficiency are key elements. BP predicts: "The development of unconventional energy resources will improve the efficiency of power generation and economical vehicle fuels."

Third, BP highlights how new resources are finding their way into the industry. "The United States and Canada both stand out in energy innovation, as proven by their use of technology to extract oil and unconventional gas.

The world population is expected to reach some 8.3 billion by 2030, which implies an increase in energy demand of 36 percent compared to 2011.

Demand for all types of energy is expected to go up by 93 percent in countries that don't belong to the Organization for Economic Cooperation and Development. "Outside the OECD, energy use by 2030 will be 61 percent more compared to 2011, with year-on-year growth of 2.5 percent--or 1.5 percent per capita--a figure that represents 65 percent of the world's energy consumption, compared to the 53 percent in 2011," the report shows.

Electrical power generation will rise 49 percent by 2030 (2.1 percent year-on-year), according to BP estimates. The figure shows a global rise in primary energy of 57 percent. Primary energy used directly for industrial purposes will grow 31 percent (1.4 percent year-on-year), a figure that points to a 25 percent growth in consumption.

Renewable fuels, including bio-fuels, are expected to show the quickest growth rates, with an average of 7.6 percent year-on-year from 2011 to 2030. Nuclear and hydraulic energy (2.6 and 2 percent year-on-year respectively) are estimated to be the types of energy to grow the most. Lastly, in the fossil fuel category, gas will be the quickest growing, with 2 percent per year, followed by coal, 1.2 percent per year and oil, 0.8 percent per year.


With this as the background, the Western Hemisphere is set to become the leader in the energy industry. While the United States, Canada and Mexico are the most promising in terms of unconventional fuels, Argentina, Brazil and Colombia's reserves are not far behind.

The United States, as a world leader, will no doubt be a case to study and perhaps from which to learn. Its success lies in four factors, according to BP and the WEC. The first is its access to hundreds of drilling rigs. Secondly, it has a highly competitive industry and, as a consequence, stimulates production and investment. Thirdly; under US laws, the subsoil is property of the landowner, which makes exploration easy because it is in private hands. Lastly, and perhaps most importantly, regulation is in favor of investment. This alone can explain how the Bakken field in North Carolina matched Colombia's production in just five years.

The non-conventional fuel revolution and the new energy order naturally meant that Latin America would have major players. Paradoxically, Venezuela has to import gasoline, despite having 17.9 percent of the world's crude reserves. Political uncertainty and an economic crisis have restrained this energy monster from unleashing its tree potential as an oil power, despite its huge reserves. It is worth highlighting that it was not even mentioned in the reports of BP or the WEC.

According to Venezuelan analysts at Ecoanalitica, "We are expecting an 8 percent drop in domestic demand by 2013. This would mean that economic sectors closely linked to the oil industry would be affected by cuts to public spending and the expected changes in currency rates; as a result, sectors such as trade and transport could fall by 2.3 and 3.6 percent respectively."

The Latin American oil giant today is Brazil. Conventional oil discoveries there could double its output compared to Venezuela by 2020. According to a report issued last February by the Organization of Petroleum Exporting Countries, Brazil is one of the six countries contributing to the growth of the world's oil supply this year, along with the United States, Canada, Sudan, Australia and Kazakhstan.

Nature has blessed Brazil to such an extent that it is estimated to have even larger reserves of unconventional fuels than the United States. However, it has shown little interest in developing those resources for now and is instead concentrating on conventional crude oil discoveries.

Argentina looks promising in the unconventional fuel sector, especially with shale gas reserves of about 774.5 trillion cubic feet. Not only does Argentina have the reserves, but it is also willing to develop them. That would explain last year's nationalization of YPF and other movements taking place, all of which led to the conclusion that the country is betting heavily on this sector to boost its economy.

YPF announced investments of $37.2 billion from 2013 to 2017, mainly in search of new reserves, exploiting both conventional and unconventional fuels and improving its refineries.

According to The Economist, Argentine President Cristina Fernandez "found a scapegoat for the country's problems in the form of Spain's Repsol, which owned 75 percent of YPE Repsol announced large deposits of shale gas in Vaca Muerta, Patagonia. However, the government accused Repsol of cashing in on the discovery rather than using the dividends for exploration and development". In May of last year, the government

nationalized 51 percent of YPE

However, The Economist suggests that YPF's nationalization has not had the desired effect the government was expecting. "In the third quarter of 2012,YPF's oil output hardly grew at all, while its natural gas production dropped 2 percent and profits fell by 3 percent, compared to the same period in 2011 (when the company was affected by strikes)."

                   Shale Gas Reserves
Country           [Trillion cubic feet]

France                     180
Poland                     187
Brazil                     226
Algeria                    231
Libya                      290
Canada                     388
Australia                  396
South Africa               485
Mexico                     681
Argentina                  774
US                         862
China                    1,275
Others                     647

Source: World Shale Gas Resources: An Initial Assessment of 14
Regions Outside the United States, EIA, April 5, 2011

Consequently, energy costs are expected to shoot up by more than 70 percent. The Argentine economy's hopes rely on the Vaca Muerta discovery and such recently opened projects as El Trebol.

Meanwhile, Colombia, one of the five countries chosen by the WEC for its 2013 analysis and report, is moving forward in its exploration and has been one of the main investment centers.

For the WEC, Colombia's critical agenda for energy stems from reviewing subsidies and taking advantage of the country's vast hydroelectric potential. The biggest challenge is in terms of regulations that would allow the development of more energy sources.

From the point of view of hydrocarbons, Colombia reached crude production of 1 million barrels per day. This milestone "meant a 3 percent increase compared to the year before," said Alejando Martinez, president of the Colombian Oil Association.

In addition, the country attracted new foreign direct investment in oil. "In September 2012, it reached $4.35 billion, and was expected to reach $5.8 billion by December in the same year, a 14 percent increase compared to 2011. These figures represent 37 percent of the total foreign direct investment in Colombia for 2012," said Martinez.

Expectations in Colombia's new reserves, in terms of opportunities for growth and sustainability, are running high, according to the hydrocarbon industry's union. The expectations are focused on the "exploration of heavy crudes, offshore activities and unconventional deposits. The challenge is to stay above the one million barrel per day mark and raise the ratio of reserves to production in 2013,"Martinez stated.

Colombia, however, is the exception. Uncertainty seems to be the common factor among all the Latin American countries. The Panorama Petrolero website says: "The relationship between economic policy and hydrocarbon development in a country or region is always close." Clear roles, stable regulations and favorable political conditions for investment are some of the challenges the region is facing."

Since last year, the WEC has been reminding us that energy prices, unconventional hydrocarbons and large-scale development of hydroelectric projects should be among the top priorities for Latin America. But it seems not. A worrying sign is that, while all the reports early each year from international energy organizations focus on analyzing perspectives and challenges for the following decades, the Latin American Energy Organization's January bulletin is about gender equality in the industry across the region.

Angela Maria Riano reported from Washington, D.C.
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Author:Riano, Angela Maria
Publication:Latin Trade
Geographic Code:0LATI
Date:Mar 1, 2013
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