Energy integration is once again all the rage in Latin America. Venezuela in particular is involved
in numerous projects, including a proposed gas pipeline that would stretch for 8,000 kilometers to link its natural gas reserves in the Caribbean with consumers in Brazil and Argentina. Peru, Chile, Argentina, Uruguay and Brazil are discussing a coordinated series of cross-border gas pipelines, the so-called Southern Cone Gas Ring, which would bring Peruvian supply to the same market. Meanwhile, Bolivia is at the centre of the proposed major new pipeline to Argentina and the potential expansion of Gasbol South Americas largest natural gas pipeline to date that can carry as much as a billion cubic feet per day to Brazil.
At first glance, the heyday of energy integration would appear to be returning. However, there is an important
difference from the last wave of integration that hit the region a decade ago: the latest wave is driven more by politics and geopolitics than economics.
The previous impulse to integrate Latin Americas energy markets came from private investors seeking to join growing energy demand with the regions inexpensive and abundant resources no matter that the two were often in different countries. This led to multiple natural gas pipelines linking Argentina with Chile and Bolivia with Brazil; power interconnections that joined Argentinas thermal power generators with Brazils hydro capacity; and the interconnection of Brazils southern and northern power grids.
The political dimension this time around is stark. Argentina capped energy prices following the 2002 economic crisis, leading to plummeting investment, soaring demand, and, ultimately, gas and power shortages. The Argentine government responded by severely curtailing gas exports to Chile, Uruguay and Brazil, while looking to Bolivia and Peru for new gas supply.
In this sense, the Southern Cone Gas Ring is a direct result of Argentinas misguided domestic energy policies and not any intrinsic competitive advantage of Peruvian gas supply.
The desire to increase regional political influence is behind other projects, especially those supported by Venezuelas president Hugo Chavez who sees energy integration as a means to his vision of a greater Bolivarian alliance across the continent. His regionally-focused foreign policy is supporting not only the proposed gas pipeline to Argentina, but also investment in a refinery in Brazil, upstream exploration in Argentina, and energy infrastructure in Bolivia.
This emphasis on politically motivated projects is intricately linked with Latin Americas political drift to the left. The swing toward greater populism that began at the start of the decade in Venezuela, Argentina and Bolivia is likely to be strengthened in the ongoing round of elections more than a dozen countries in the region will go to the polls between late 2005 and the end of 2006.
Most outside observers look to Bolivias newly elected president Evo Morales as a gauge of the continental political winds. His campaign promises and initial decisions indicate he could push for significant changes to the countrys energy sector by implementing more populist and nationalist policies.
Such a view is simplistic in the face of the many complexities across the region as well as within each country. Although tending toward the left, there is no single definition of what this left will mean, and each country is interpreting its own path toward a rebalancing of market and social forces within their economies. Indeed, there is a wide difference among the private-sector oriented policies of Colombia and Chile, the pragmatic socialist policies of Brazil and Peru, and the more populist trend in Bolivia and Venezuela although virtually all may be considered left of centre.
Initial signs suggest that the region is heading more towards a consolidation of these current political trends than towards radical change. In Argentina, Venezuela and Colombia the current policies are likely to be continued because the current president is running for reelection and leads strongly in the polls. Similarly, in Chile the government-backed candidate won in the January run-off election. In several other countries the outcome of the elections remains unclear, but the candidates are unlikely to change the current climate of pragmatic socialism dramatically.
Notable exceptions are Peru, Brazil and Mexico all recently characterized by a mix of significant state presence in the economy, blended with a strong commitment to international trade relations and fairly orthodox economic policies where the outcome of the elections is still uncertain. In spite of some variation among the candidates over tax and public spending issues, this hybrid governance model is generally expected to be maintained in those countries after the elections.
Problems, however, are inevitable: different approaches to energy policy will result in dislocations as the energy policies, regulations and institutional structures in each country clash. Worryingly, each of the proposed energy projects described above will cross one or more of these political friction zones. As a result, virtually all of the major integration projects that are being discussed today will likely face significant delays, and many will never reach completion.
This juxtaposition of a consolidating patchwork of economic and political models with growing concerns for energy security is changing Latin Americas map of regional influence. Indeed, preferential energy trade agreements, subsidized energy supply and social investment are moving forward more rapidly than direct physical linkages.
In particular, Venezuelas broader South American ambitions are prompting a pro-regional agenda in an effort to reduce North American influence and build a stronger regional identity. For example, the PetroCaribe initiative that was launched late last year offers preferential oil prices and financing to a number of Central American and Caribbean nations. While PetroCaribe still faces many physical and institutional challenges, the political impact within the Organization of American States and the Caribbean Community & Common Market (Caricom), and for Mexicos interests in the region, may be significant.
Indeed, the Mexican government has begun efforts to revive the Plan Pueblo-Panama that would support extensive infrastructure development in Central America and southern Mexico, including a new refinery in Central America that could process Mexican crude for sale within the region and Mexico itself.
The trend to use petrodollars to increase regional influence is therefore increasing energy cooperation among specific groups of countries, while also creating new frictions where diverging interests meet. Venezuelas diplomatic spat with Mexico last November is one recent example.
Broad promises, backed by funding from the oil industry, are also making Venezuela a new partner of choice throughout South America. Argentina and Brazil, the two other natural candidates to exert influence, are letting Venezuela spread its wings in the region: Argentina continues to focus on internal issues, and Brazil has so far failed to increase its regional influence, owing to political scandals that have weakened its government and the extra-regional focus of many of its diplomatic initiatives. Latin Americas map of influence will no doubt continue to shift as a consequence of this petroleum-fuelled geopolitical dynamic, with Bolivia as an important test case of how far Venezuelas influence may reach.
An important, but often overlooked, energy integration trend is Latin Americas growing links with the rest of the world. Mexicos first LNG receiving terminal will be completed this year, and more are in the works in Mexico and Chile. In addition, LNG liquefaction terminals the supply side of the equation are being expanded in Trinidad and a new one is moving forward in Peru. This LNG infrastructure will link the region to the global gas market and global gas prices for the first time in history.
This global market linkage will exert growing pressure on Latin Americas regional natural gas market fundamentals and prices as suppliers and consumers having an increasing number of options to meet their needs. As a result, Latin America will increasingly become a part of the global web of energy inter-dependence, much as growing oil exports did two and three decades ago. These small steps toward greater exposure to global market influences and similar projects that will follow are likely to have a more profound influence on Latin Americas energy markets than the visions of massive pipelines crossing the continent that are grabbing headlines today.
Jed Bailey is senior director of research for Latin America at Cambridge Energy Research Associates