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Institute of The Americas:
Analysis: Latin America’s 2016 Energy Outlook




What keeps you up at night?

As the year comes to a close, the Institute of the Americas
asked five energy experts what keeps them awake at night heading into 2016. Their responses covered the Western Hemisphere and issues varied from COP21 outcomes, to Brazil’s macroeconomic instability, to political shifts in Venezuela, to the changing geopolitics of oil, to renewed prospects for regional integration in the Southern
Cone. On the back of the Paris Agreement and unprecedented global political will to tackle climate change, renewable financing and the transition to clean energy is an area we will also be watching as we begin the new year.

Inaction

Jake Levine, Chief of Staff, Opower

I'm writing this en route back to the United States from the
COP21 negotiations in Paris, where I had the opportunity to
join Governor Brown, Tom Steyer, and other business leaders in
a California delegation to the talks. It was an inspiring experience
because our delegation was joined by many others in delivering -- and exemplifying -- the message that reducing carbon emissions can be done while investing in and growing our economy. And we were proud to stand with our partners in the electric and gas utility sector to show negotiators that the electric grid is the most valuable tool we have to transition our economies to a clean energy future.

In Latin America, however, we risk falling behind on low-cost
measures that represent the lowest hanging fruit in the fight
against climate change. While Brazil suffers from perennial
drought, it continues to weaken the kind of energy efficiency
regulation that could rebuild its hydro reservoirs. Mexico's
energy reform has been lauded for opening up its monopolistic
petroleum and electricity sectors to competitive markets,
yet its electric provider, CFE, remains largely unreformed and
without any incentive to help its 36 million customers reduce
energy waste. In Chile, excitement for an energy efficiency law
has lost the executive momentum it had as it seemed headed
for congressional approval.

Even if every nation in Paris commits to its strongest possible
domestic action, we will only have a 50% chance of meeting
the global imperative to halt warming below 2 degrees Celsius.
But imagine just how far we'll miss our target if we don't create
the policies needed to align our markets to effectively manage
this looming crisis. The good news is that the tools we need to
innovate and build a clean energy economy are already here.

Tech companies like Opower and utilities like PG&E in California
have shown that with clear, enforceable and expedient regulation, markets can thrive and economies can grow while we reduce our emissions and make our consumption more efficient. But now, without certainty and predictability from the largest governments in Latin America, we may be resigning ourselves to a futile race with the clock.


Venezuelan Transition

Francisco J. Monaldi, Fellow in Latin American
Energy Policy & Adjunct Professor of Energy
Economics, Baker Institute for Public Policy,
Rice University

Venezuela is the dormant energy giant of Latin America, but
a giant with feet of clay. Still, in the next couple of years it
might be the most relevant story to follow in the region. After
the partial expropriation of foreign companies in 2005-2007,
the country has been trying unsuccessfully to attract significant
investments to the oil sector. As production kept declining, two years ago the government became increasingly pragmatic (or desperate if you wish) and started offering the foreign partners more attractive fiscal conditions, higher operational and cash-flow control, and projects that involved less significant sunken investments. Things started slowly moving, with Chevron leading the way by negotiating
a new type of contract.

With the collapse in oil prices, pragmatism has increased.

Eulogio Del Pino, a Stanford graduate with significant expertise in the sector, was appointed as the new CEO of PDVSA and he is quietly leading a policy turnaround. However, his enthusiasm has been matched by the challenges of a low price environment combined with the poor reputation of the government and its terrible macroeconomic management.

Still, with the largest oil reserves outside of the Middle East,
and a total oil dependency, the sector offers the only hope of
recovery for this or any other administration. On December 6th
the opposition won the legislative elections by a landslide,
possibly initiating a transition to a new more attractive
institutional and policy setting. That transition could be messy,
but the giant with feet of clay might finally awake.


Macroeconomic & Political Instability

Lavinia Hollanda, Research Director, FGV Energia

For 2016, the subject that has most of my attention in the
energy sector is the challenging macroeconomic situation and
the political instability in Brazil and other countries in Latin
America. As frequently observed in the region, although these
issues are not directly related to energy, they should be pivotal
for defining how the necessary restructuring in the sector may
advance.

In the Brazilian oil and gas sector, Petrobras’ limitations for
financing capital intensive projects will likely persist, compelling
the company to further review its strategy and reposition
itself more clearly. In the electricity sector, the financial distress
faced by some companies, together with difficulties in attracting
investments and financing new projects, will point toward
the need of a deep reassessment of the current business model
and regulatory rules. Finally, environmental concerns will
continue to be increasingly important for defining the profile
of the future energy mix in the country – and this should more
and more impact the sustainability of some energy projects.

On the bright side, I hope that the current challenging conditions
bring the required sense of urgency and determination
for the government and other players to make the difficult
choices that have to be made in order to support the
necessary reforms in the energy sector. At the same time, it is a
great opportunity for academics and researchers to take
advantage of the short term turbulence to provide structured
knowledge and support to policy makers, so that we can
quickly build a solid bridge for the future.


Global Commodities Markets

Jeremy Martin, Director, Energy Program,
Institute of the Americas

Beyond my mild insomnia, what most keeps me up at night as
the calendar turns to 2016 are global commodity prices, including oil, but also other products that countries of our hemisphere have at their economic core. But it’s not just merely the market trend that worries me. Rather it is how economies manage their evolution through a global commodity downturn that is bothersome.

So-called petrostates across the globe are increasingly losers
in the current outlook, but how other commodity dependent
economies such as Colombia, Chile, Ecuador, Bolivia, Brazil,
and Argentina manage, is equally concerning. The time is
now to innovate and leapfrog, that is clear. But, the aforementioned
countries cannot afford to make changes that undermine
their social structures and jeopardize inclusion gains.

Finding the recipe for striking inclusive and innovate
economic development in 2016 in much of Latin America
keeps me up.

Tangential to my fretting over global commodities, are the
roles of China and India, both in terms of their economic
growth but also role in the climate discussion.

In the not-toodistant future, these countries will be roughly one third of the world’s population and how they project globally, including
in Latin America, will hugely impact the region’s energy and
climate outlook.

With regards to climate change, we should applaud the
agreement reached at the COP21 meeting in Paris. The
agreement is historical and sets an ambitious goal. But there
remains a bit of a disconnect between science, public policy
and industry. The extent of government financial commitments
and industry investment are still not entirely clear.

Indeed, how decarbonizing is financed and the balance
needed to insure continued economic growth and employment
must be at the center of all policy decisions

I think we can do better to inform understandable metrics
and make the public policy and business case. The need for
certainty in policy to match the science and foster serious
investment is critical. The Paris agreement provides a framework
and target. Now the hard work begins.

As a final note on this theme, I should add that OPEC meetings
and decisions do not keep me up at night any longer nor
will they in 2016.


Energy Integration

Gabriela Vidjen, Director of Advisory & Strategy,
Energy Consulting Services (ECS)

From the mid 1990s up to the beginning of the 2000s, with
the development of significant gas and electricity crossborder
infrastructure, the region consolidated a process of energy integration that had begun with the development of mega bilateral hydro power plants in the 1970s.

However, since the mid 2000s energy priorities for the
region changed drastically when Argentina and Bolivia
altered the “rules of the game”, limiting natural gas supplies.

Since then, each country has been focused on assuring its
energy supply by diversifying energy sources, and LNG
imports appeared the best solution.

Today, the characteristics of the systems in the region allow
several optimization opportunities, which can be carried
out almost immediately and with minimum investments:
complementation of huge renewable and non renewable
energy sources (of different hydraulic and hydrocarbon
basins), developed pipeline and power transmission
infrastructure, and flexibility introduced by the regasification
terminals.

Moreover, in the medium/long term, energy integration
could be strengthened with the development of unconventional
resources in Argentina, the Brazilian pre-salt reservoir,
the Peruvian Camisea field, and renewable sources. Integration
in larger systems would allow bigger wind and solar
capacities thanks to an expanded capacity to manage the
increased intermittency of these sources.

The optimization of regional energy infrastructure will contribute to the security of supply, economic efficiency, and environmental sustainability of each energy market as well as better overall competitiveness.

With the recent political events in Argentina (i.e. a new
political administration encouraging an open and market
friendly environment, with solid institutionalism), there
seems to be a new momentum for energy integration.

The country has a great opportunity to recover the strategic
role that nature and geography has provided, allowing and
promoting the full interconnection of the Pacific and Atlantic
energy markets of South America.

The most important issue in order to ramp up this new
period of energy integration is to regain confidence among
the countries. The advantages of integration should serve to
overcome the lack of confidence created in the past and
governments should consider these factors when making
decisions. International support and sponsorship by each
of the governments involved is crucial to guarantee
institutionalism, coordination and economic feasibility.

Institute of The Americas - IOA a think tank on Western Hemisphere Affairs based in La Jolla, Calif. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by IOA on Dec. 2015. Petroleumworld reprint this article in the interest of our readers. Follow us in : twitter / Facebook

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Petroleumworld News 12/21/2015

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