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Remarks from Ivan R. Sandrea Silva

Published onJun 27, 2022
Remarks from Ivan R. Sandrea Silva

Could Latin America show that it is possible to combine strategic partnerships with both China and the US based on cooperation (a win-win approach) in the transition to a low carbon economy? Could the energy transition to an energy mix led by low-carbon sources be a window of opportunity for a new phase of economic development in Latin America?

The world has been experiencing rapid and significant change: a pandemic, a deep recession and recovery, polarized elections, a growing inflationary environment, a very sad and problematic war (in Ukraine), climate-related challenges and rising energy prices among others, and Latin America is part of this change. In Latin America, the evolving energy sector, together with health, democracy, and the economy, is center stage for many countries. The development and production of hydrocarbons has been affected by oil price swings, underinvestment, and COVID-19, but Brazil and Guyana have led the region and the world in terms of new discoveries and production growth. After decades of supplying energy and other products, primarily to the US market, in the last decade Latin American countries have had to reduce exports of various commodities and agricultural products and re-direct these to other markets such as China and re-define relations with international markets. Recent regional cooperation in energy has remained limited to few new examples, and plagued with unfulfilled promises. The production of critical precious metals and minerals remains strong, whilst the development of renewable energy sources such as wind and solar has taken off in several countries and holds significant promise. Across the region, energy prices have been liberalized, domestic demand has been increasing, but energy poverty remains a growing issue.

In Latin America, climate change and the energy transition have received a lot of attention and support, but has also caused dislocations for both global and regional leaders, industry, investors, and policymakers. The environment itself is also being affected, and ironically, the level of confidence for the net zero path is being affected as rising energy prices hit the region’s economies. This is because the energy transition ‘movement’ is happening in a very disorganized and uncoordinated manner, and that's where I see both the major problem unfolding and an opportunity for the leading economies and leaders in the region. I always note with facts that the world (in particular the growing populations of Latin America, Asia, and Africa) need all the energy that it can take; we've been growing energy demand for at least a millennium and particularly since the industrial revolution, and we have never stopped using any of the forms of energy that have been invented and scaled up. Windmills or electric cars are not new. But we are now eight billion people (670 million in Latin America), soon to be nine billion people, and we need a lot of energy and will need even more in the future. Many countries, especially in the Latin American region, are growing, have young populations and have not even achieved the minimum level of consumption associated with the standards of living of many wealthier countries.

The global oil, gas, and coal and mining sectors, which are important sectors for Latin American economies, and provide 80% of the world's energy needs, are being penalized from all angles by Western countries, some financial institutions, whilst young generations are being led to believe that they don't need this energy source in the medium term. This, should it continue, is likely to affect negatively Latin American countries that depend on hydrocarbons and need investment.

We've gone from high energy prices to low prices very rapidly several times, and we have had very serious events such as the COVID-19 pandemic, which disrupted economies, society, and supply chains. In addition, declining returns and rising debt loads have disappointed many investors and capital markets have been less willing to support the petroleum sector and its companies. Some of the most indebted energy companies in the world are in Latin America.

Energy prices have risen rapidly post-COVID and that is both good and bad for the region. The events that have led to a higher global price environment are very clear and do not revolve around the invasion of Ukraine. We have had several years, particularly since 2014, where investments across the entire petroleum sector have been declining and as a result the sector is suffering from structural under investment; an extreme focus by industry and capital markets on USA shale and geopolitical risks took away a lot of capital from conventional and offshore resources and, even low risk reserves and low risk infrastructure developments. This has led to excessive concentration and dependency on a single resource for growth which has turned out not to be very profitable on a sustained basis and who’s future is now questioned. The boom in USA shale oil and gas production made the USA less depended on Latin American exports in the last few years. But is this about to change?

Oil price bullish policies and other ideas being promoted by the International Energy Agency (IEA), such as no new investment in oil and gas exploration and a false believe that the world will not require additional supplies of oil and gas in the medium term, are driving up energy prices, increasing energy poverty, which in turn threaten public support for the energy transition. A simple fact is that even in the best-case scenario of reaching net zero, over 1.5 trillion barrels of oil and gas will be needed until 2070. It should therefore not be about condemning or shutting down the hydrocarbon industry, which many Latin American economies (globally, there are over 1 billion people in hydrocarbon exporting countries) depend on for fiscal stability. In the short- and medium-term energy prices will remain high which will also harm income growth in the economies of energy importing countries in the region and consumers.

On a positive note, we are riding a new technological revolution, and Latin America can be a clear beneficiary and possibly some countries can become regional and even global leaders. Over 60 percent of global lithium reserves are in Chile and Argentina. We have a new opportunity to scale up new industries such as renewables, leverage supply chains, expand infrastructure, increase the production of strategic minerals and rare earth metals but that will cost a lot and will take time. Latin American can also lead the way by developing engineering structures that are needed for the energy transition in a sustainable way, developing key equipment domestically benefiting from the latest technological developments for both domestic use and expanding exports to the growing markets of USA and Europe. Some argue that the energy transition to renewables is unlikely to improve productivity as the transition from coal to oil had but there are still clear benefits. We should also be conscious that scaling up renewables and mining of essential minerals will also have an impact on the environment even if done in the most sustainable way. In absolute terms nothing is net zero.

It also is worth noting that some of the countries that have made significant progress in renewables such as Germany, Spain, and Costa Rica, are experiencing higher energy bills and this is something that could also happen in Latin America as higher cost intermittent energy sources such as wind and solar and associated infrastructure are developed. Higher energy costs would make Latin America’s population poorer, the industry less competitive and represents a significant risk long term.

From an energy perspective, the relationship of Latin America with large economies such as China, Europe and the USA, would be best served by continuing to promote investment in a responsible and sustainable manner, and continue to pursue long term alliances and cooperation. Many people argue that we are experiencing an energy transition, but that's only one way of looking at the story. The other way is to say well, to meet population growth, rising standards of living, manufacturing needs, food production, we need more energy sources which now includes wind and solar at scale among others. It’s unlikely that the Latin American region (like the Asian region) is going to experience any decline in energy consumption in absolute terms. Therefore, Latin America needs to continue to invest to meet its domestic demand for energy and at the same time provide surplus to global markets. The opportunity to make reforms, reduce debt, and invest in new infrastructure should not be lost.

Global energy security is today at a critical point, and Latin America me be called up upon to play a new role in the North American region and beyond. The Russia-Ukraine conflict is unfolding right now. Nobody knows how it's likely to play out, but the early signals are that energy security and the relationship that Russia had created over the years with the world and in particularly Europe, has been dented. All buyers of Russian oil and gas and minerals should be worried in the short and long term. Can this very sad event particularly for the people of Ukraine, in turn present an opportunity for Latin America? On the other hand, the recent approach of the US government to Venezuelan government will likely extend the regime of President Maduro which should not be a welcome event for the Venezuelan population and the region.

In Europe, energy security has been compromised, but if barrels and minerals continue flowing despite the conflict, despite everything, then one could argue everything it’s OK, but overtime as these fundamental changes play out the energy security associated with Russian energy products and strategic minerals is going to change. As always, we might choose to live with some contradictions. If Russia choses to continue to export to “non-friendly” western countries, then you could argue energy security has not been damaged now, but what has been damaged it's really the perception on the buyers and consumers side to trust that the Russians will be a reliable partner in the future, which in turns affects global energy security. It is likely that Russia will likely continue to send in the short-term energy and mineral products to western markets, but it is also likely it will also shift flows eastward as much as possible in a gradual manner. It is also very likely that with the withdrawals of western companies from the Russian energy space, less access to critical technologies and equipment, sanctions and more complications, the traditional strength of the Russian energy platform will deteriorate in the future. Russia has no choice but to redefine its relationship with its traditional buyers. Could this be both a complication and an opportunity for Latin America?

There is a strong argument for Latin American governments to implement policies that help increase global energy security and strengthen energy cooperation with both the USA and China. In this context, Latin American governments must promote energy diversification, expansion of supply and repair of the supply chain. This is an essential step, and it must involve all forms of energy. Governments need to promote energy and related infrastructure investments, not inhibit investments, or scare investors away. The global and domestic financial sectors should reward risk taking by entrepreneurs and corporations, promote investments along the entire supply chain on cleaner legacy fuels and not focus just on renewable fuels. Governments and relevant institutions should also have policies that support decarbonization of both supply and demand of all of energy sources and the production and supply of essential minerals and materials. Policies attempting to accelerate the transition to the fuels of the future must address much more than storing materials CO2 from a favored sector or producing hydrogen. It’s about technological development, through research and development and targeted incentives. The fourth thing government can do is to promote efficiency more aggressively using regulations and appropriate incentives. And in everything we do, we must promote cooperation. Many projects require cross-border investment. Cooperative efforts in energy and infrastructure development are going to be essential, especially in a world in which globalization is under threat. And finally, number one policy for all of this is that energy should be available, but it should be affordable, because 5 billion people live on $10 or less a day, and this is also truer in Latin America where over 50% of the population lives in poverty, the level of education is low compared to other regions, and there is a lot of energy poverty, in every country.

Regional and international cooperation in areas that are critical to the environment and climate repair efforts are needed. We should also focus on regional efforts to fund and cooperate in areas such as ocean and river clean up, protection of marine species, protection of the major rivers such as the Amazon, Orinoco, and its tributaries, and rebuilding the region’s biodiversity. All of this will take a long time, as it is a generational strategy which requires more education, but it does represent a new opportunity for regional cooperation and global leadership made here in Latin America.

As Clint Eastwood recently said, instead of leaving a cleaner planet for our children, we should leave better children for the planet.

Ivan Sandrea

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