Prospects for Energy in Latin America

Falling commodity prices and the global liquidity crisis have resulted in a challenge for Latin America’s energy sector. The Americas Society and Council of the Americas convened four leading experts to analyze how the current situation affects the investment climate for energy in the region.

Brazilian Energy and Latin American Integration

In the past decade, Brazil has surged to the forefront of energy production and innovation in the global market. To kick off the panel, Brazilian Vice Minister of Mines and Energy Márcio Zimmerman outlined the recent energy developments in Brazil. He highlighted Brazil’s interest in increasing capacity for nuclear power to keep pace with the country’s 23-year projection of a 4.7 to 5 percent per capita increase in energy consumption. Zimmerman expressed optimism that this new form of energy could supplement the already booming Brazilian energy industry. The vice minister also signaled the need for further energy integration in the Western Hemisphere, cautioning that strict regulations and conventions must be agreed upon before any multilateral treaties can be ratified.

While Brazil is exploring many forms of renewable energy, oil production and investment continue to rise, Petrobras’ Theodore Helms explained. He highlighted his firm’s recent pre-salt oil discoveries in the Tupi oil fields—the largest oil reserve discovery in over 30 years. These reservoirs are estimated to be capable of producing over 100,000 barrels of oil a day. Petrobras is in the midst of developing a pilot program to begin tests on the pre-salt fields, including five producing wells and three injection wells. Even with the logistical issues of reaching the oil, which sits deeper than most reservoirs, “logistical issues will be offset by what we believe will be the productivity of the reservoir,” said Helms. If all goes as expected, the pre-salt oil fields could produce oil cheaply, he added, even with gas prices hovering near $40 per barrel. Helms emphasized that with 40 percent of Petrobras’ liabilities coming from bilateral and multilateral sources, the company will have adequate cash flow to continue to fund its growing program.

Alternative Energy in Latin America

In a discussion about a shift toward alternative energy taking place in Latin America, UNICA’s Joel Velasco stated that biofuels offer a realistic alternative now rather than in the future. With ethanol selling at half the price of gasoline in Brazil, flex-fuel cars that run on gas or ethanol are becoming the norm. With ethanol produced at competitive prices, the fuel is replacing other forms of alternative energy in the South American country. Zimmerman agreed, explaining that wind and solar power remain more expensive to develop because of higher associated costs—120 megawatts per hour for wind and 400 to 550 megawatts per hour for solar compared with the 40 megawatts per hour needed for ethanol. Given that those prices do not change, the consensus is that ethanol will continue to serve as the alternative energy of choice.

Energy and the Global Economic Crisis

On the impact of the global economic crisis on Latin America’s energy sector, JPMorgan’s Allan Kessler discussed the prospects of funding and risk management activities in the region. For Kessler, the credit capacity for energy projects in Latin America and elsewhere has been driven by the value of the resource base, which is affected by volatility of the commodity’s price. But due to the global economic slowdown, the credit crunch has resulted in a dramatic reduction of investment programs throughout the region. As examples, he mentioned the announcement of production shut-ins from producers and plant closings from petrochemical makers such as Petrobras, Dow Chemical, and BASF. For instance Braskem will suspend about $127 million (300 million reais) worth of investments planned for 2009 until the market recovers; BASF plans to temporarily close 80 plants worldwide and cut production at another 100.

Panelists agree, however, that while many challenges lie ahead, the energy sector has the necessary regulatory framework and demand to spur growth and attract investment. AEI Energy’s Emilio Vicens explained that while the commodities markets have grown at a fast pace in recent years, such a high level of growth was unsustainable. He assured that more moderate price levels would help stabilize the market. Zimmerman explained that development in Brazil, along with other developing countries worldwide, would ensure an increase in demand for energy in the years to come. He detailed infrastructure improvements within Brazil over the last year, including an increase of 2 million lines of electricity to remote areas, that signal a continued expansion of demand.

Conclusion

Across the board, the panelists expressed their confidence in the sector’s capacity for success, despite a recent decrease in growth. Zimmerman explained that, as the middle class grows in the region and wealth is more evenly distributed, it is not hard to imagine that the energy sector will grow in the next 20 years due to an increase in consumption per capita. The possibility for market integration in the hemisphere can also boost the amount of exports. 30 years ago, when Brazil went through a difficult economic period, the government looked to energy alternatives, which gave rise to ethanol production. Now, he believes, is the time to expand and develop energy initiatives in the region.