March 19, 2002


A Conference Presented by
THE CENTER FOR LATIN AMERICAN ISSUES
and the
OFFICE OF EXTERNAL RELATIONS OF THE
ORGANIZATION OF AMERICAN STATES

South America:
Promoting Integration and Development
Through Enhanced Energy Supply
 
 (Follow the hyperlinks to view the speaker presentations.)

 
Energy resources, particularly oil, natural gas and hydropower, are abundant in South America. Establishing the infrastructure to extract these energy resources and to distribute them throughout the hemisphere is an outstanding business opportunity and is a significant component of the hemispheric integration process. Perhaps most importantly, energy supply should be viewed as a measure of and a stimulus to economic and social development in Latin America. The conference presenters focused on these topics as they discussed the possibilities and challenges of developing energy resources in Latin America.
 

 
The energy sector holds great promise for Latin America. There is an enormous market for oil, natural gas and hydropower, both within Latin America and in the United States. The energy reserves available in Latin America will outpace the region’s demand for the next several decades, making it a net exporter of energy. At the same time, the energy needs of the United States (Latin America’s primary trading partner) are significantly greater than its reserves. The challenge is to develop the transportation infrastructure as quickly as possible. According to Ramon Espinasa, Latin America will require as much as $200 billion of investment over the next 20 years to reach its potential as an energy supplier. This scenario predicts 12-20% growth in the energy sector during that time.
 
Events of the last 20 years have not helped Latin America to develop this potential. During the macroeconomic crises and fiscal adjustments of the 1980s and 1990s, infrastructure and power generation suffered disproportionately, according to Luis Serven. As public financing of infrastructure development decreased dramatically during the financial crises, private financing increased. This increased private investment has led to a partial investment recovery, but it has not been sufficient to develop energy resources sufficiently. The result of the infrastructure compression has been slower growth, lower export competitiveness, and lower profitability than would be the case otherwise. The current 20% gap between Latin America and East Asia in energy production, a gap that has developed since 1980, is a direct result of the failure to develop the hemisphere’s energy infrastructure.
 
Until the 1980s, most energy investment was driven by the public sector. Market liberalization, led by Chile, has shifted this focus to business. While governments have an important role in establishing the regulatory framework for investment and development of energy resources, financing for new development will have to come primarily from the private sources. Attracting foreign investment, then, is critical to the development of the energy sector in Latin America. A key impediment to promoting this investment is institutional instability. According to Gary Ward, the political situation of the late 1990s had a dramatic impact on capital flows. Foreign direct investment in Latin America dropped 22% from 1999 to 2000, and dropped another 13% in 2001. What businesses are seeking, says Jaime Millan, is a business arena that is low risk and high profit. Strong, stable governing and judicial institutions will make nations much more appealing to foreign investors. Carlos Salinas-Estenssoro remarked that terrorism is yet another factor working against energy infrastructure development. This is especially true in Colombia, where terrorist attacks have resulted in the loss of 2.2 million barrels of oil.
 

The current energy crisis in Brazil indicates some of the shortcomings in the Latin American energy sector. In spite of its extensive hydroelectric power production, last year Brazil confronted a critical power shortage. Minister Pedro Parente noted that, in addition to the severe drought, structural factors contributed to the emergency.

For example, because of the electricity marketing model, prices in long-term purchasing contracts failed to adjust to the changing climatic conditions. In addition, the power distribution system, which was entirely publicly owned and operated until 1996, is suffering from a lack of management experience. Xisto Vieira described efforts to deal with the energy crisis, which emphasized reducing demand and diversifying energy resources by developing thermal power generation and alternative energy resources.
 

 
Brazil is not alone in its efforts to create more efficient and reliable energy systems. There are several partnerships underway that are moving Latin America towards more complete integration, including natural gas and electricity sharing between Brazil and Argentina; natural gas from Bolivia to Brazil; electricity from Venezuela to Brazil, etc. Bolivia even anticipates the construction of a network that will allow it to export significant quantities of natural gas to the United States. Several presenters envisioned efforts to link the entire continent with oil and natural gas supply lines. According to Luis Enrique Berrizbeitia, two key factors in promoting coherent regional development are homogeneous energy policies and harmonization of energy regulatory criteria. To continue and to expand these efforts so that Latin America can achieve its potential as an energy resource supplier, governments will have to promote dialogue between public and private sector officials.
 

A fully developed energy supply system would bring great benefits. A more stable energy supply throughout Latin America would be a catalyst for development. Increased exports would mean more earnings. Sergio Ugarte noted that efficient energy production is also an issue of regional security: a self-sufficient Latin America would be less susceptible to world energy market fluctuations.

We gratefully acknowledge our sponsors, without whose generous support this conference would not have been possible. To visit our sponsors’ Web sites, please click on their logos.