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Home Archive July 2010 Issue Issue Content Latin America: A Blind Spot in US Energy Security Policy

Latin America: A Blind Spot in US Energy Security Policy

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For more than a decade, America’s relationship with Latin America could most accurately be described as unfocused engagement, driven by reactions to events or crises at best and benign neglect at worst.  Apart from intermittent efforts to secure free trade agreements (NAFTA and CAFTA), combat drugs (Plan Mérida and Plan Colombia), and weigh in—often too late and too sheepishly—to political events (Honduran Presidential crisis or President Hugo Chavez’s saber rattling), the US has failed to engage the nations of resource-wealthy Latin America in any strategic manner.

This lack of attention to our closest neighbors—and some of our strongest allies—is quite alarming given US dependence on Latin America to provide our energy.  Currently, more than one-fourth of imported oil comes from Latin America (and almost 50% from the Western Hemisphere).  In 2009, the top sources of US imported crude oil (and their percentages) were Canada (21%), Mexico (11%), Venezuela and Saudi Arabia (9% each), Nigeria (7%), Russia (5%), Iraq, Algeria and Angola (4% each), Brazil (3%), Colombia and Ecuador (roughly 2% total).  As is widely known, America imports more than 65-70 percent of its energy needs, which means that we are vulnerable to disruptions in the supply chain and to price volatility, which are affected by domestic political and economic conditions in oil-exporting countries upon whom we depend.

 

In 2007, speaking at  the General Assembly of the Organization of American States, US Secretary of State Condoleezza Rice said, ”[W]e are eager to expand our cooperation on energy with more [Latin American] countries […].  Our goal should be nothing less than to usher in a new era of inter-American security in energy.”  In June 2009, President Obama pledged to engage with Latin America on issues of energy, security and trade, and attended the Fifth Summit of the Americas in Trinidad & Tobago.  But very little has happened in the last fifteen months.  The Administration’s blind spot to the importance of Latin America in our energy security matrix is revealed by the disappointing fact that, during Secretary of State Clinton’s visit to Ecuador in June 2010, her almost 4,500 word policy address on ‘Opportunity in the Americas’ contained no mention of energy—not a single word. 

While our government takes for granted the oil wealth of Latin America, several domestic factors in the resource-rich countries in the region threaten US energy security.  Mexico, which replaced Saudi Arabia as our 2nd largest supplier in 2008, is by no means a stable supplier of fuel.  Years of inadequate investment in the national oil company Petróleos de Mexico (Pemex) have resulted in falling production rates; production output of crude oil fell 17.5 percent during the period 2004-2008.  Although the Mexican government approved a broad set of oil sector reforms in 2008, including the establishment of a new regulatory body (the National Commission on Hydrocarbons—CNH), actual implementation of the reforms—viewed by many as ‘timid’—is behind schedule, thus having no impact on reversing the downward trend in production output.

In addition, the violence in Mexico, which is still largely viewed as a border security issue, has the potential to impact Mexico’s oil sector and its ability to sustain its current level of exports.  According to Pemex, the number of illegal pipeline taps has quadrupled in the last five years, rising from 102 in 2004 to 462 in 2009.  In 2009, the Mexican drug cartels diverted and smuggled over 8,500 b/d of petroleum products, worth approximately $46 million.  While most of this illegally acquired oil was smuggled into the US, the act is a clear signal that the drug cartels are willing to use energy as a weapon in their battle against the Mexican government, which has in turn taken to using more aggressive tactics against the violent cartels.  If the escalation continues, the next stage in this game of hostile engagement may involve the Mexican drug cartels taking a page from the playbook used by the Colombian guerillas, Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army, that have caused millions of dollars in physical and environmental damage by attacking energy pipelines and infrastructure.  Either way, the falling production and violence in Mexico may affect the surety of oil imports from our closest ally. 

Over the course of the last 3-4 years, many of our oil-rich neighbors have nationalized some portion of their hydrocarbon sector, which has frequently entailed heavy-handed expropriation of assets from private companies.  Venezuela, our 3rd biggest supplier of oil, has been the most egregious violator.  Venezuelan President Hugo Chavez launched a major nationalization drive in 2007 and has since nationalized assets of several international energy firms, including ExxonMobil, British Petroleum (BP) and ConocoPhillips, in addition to forcing many other companies to pay higher royalties.  As recently as June of this year, state-owned oil company Petróleos de Venezuela (PDVSA) asked the Venezuelan National Assembly for approval to nationalize 11 oil drilling rigs currently owned and operated by a US company.

Unfortunately, the effects of Venezuela’s market-destabilizing actions are already evident.  Venezuela’s oil sector is collapsing under the weight of its own egocentric dictator and his political rhetoric, which has stressed PDVSA operations and scared away foreign investment, resulting in a decline in production and a strain on Venezuelan refining operations.  Recent estimates suggest that PDVSA has amassed more than $21.4 billion in debt to oil service companies.  In 2009, Venezuela’s import of fuel purchases increased 56 percent, while its exports of fuel products fell by 17 percent.  In both the near to long term, this fall in output, if prolonged, may significantly impact US energy security.  To illustrate this, consider that during a strike by Venezuelan oil workers in 2002-2003, Venezuelan output of heavy crude oil slowed dramatically, raising US gas prices by 24 percent during the 10 week strike. 

But Venezuela is not the lone culprit.  In 2006, Bolivian President Evo Morales moved to nationalize his country’s oil and gas reserves, the second largest proven reserves in South America, and to take control of the commercial and production chain.  He ordered the military to occupy Bolivia's gas fields and gave foreign investors a six-month deadline to comply (with higher royalties and taxes) or leave.  Bolivia’s Andean neighbor, Ecuador, has also been slowly encroaching upon private oil companies operating in its territory.  In 2006, Ecuadorian President Rafael Correa revoked the contract of US-based Occidental Petroleum, operating in some of its Amazon oilfields.  Soon after, he imposed a 99% windfall revenue tax on foreign energy.  Since then, Ecuador has expropriated two blocks belonging to Anglo-French oil firm Perenco over tax disputes, claiming that the company owed millions of dollars in ‘windfall’ taxes.  In a bold move, President Correa announced this past April that he was going to send a bill to the National Assembly that would give him the power to nationalize foreign companies that refuse to sign new state-proposed agreements. 

External alliances
Domestic political and economic turmoil—violence, falling production and nationalization—in Latin America are not the only factors increasing the risk to America’s long term energy security.  Sadly, while US engagement with Latin America has reflected muddled, short-term unilateral objectives, other countries—like China, Iran and Russia—recognize the strategic importance of Latin America and are building broad relationships in very systematic, aggressive ways.  These new alliances between our Latin American neighbors and several countries that are frequently hostile to American interests may also disrupt our stable and secure access to energy resources.

Russia is widely recognized as using its vast natural resources as a political weapon and holding countries hostage by manipulating access, control and distribution of the energy resources.  Russia has also been quite active in building strategic relationships with several resource-wealthy countries to enhance its own long term energy security.  When Russia’s reach was limited to Eastern Europe, it was easy for the US to stay on the sidelines of Western Europe’s diplomatic and political battles with Russia.  Now the situation is not as ambiguous.  In September 2009, Russia and Venezuela announced several cooperative agreements on energy, defense and trade, including a commitment to supply Venezuela with almost $4 billion in weapons.  PDVSA signed two agreements with a consortium of energy giants in Russia.  While production and investment are years away, a Russia-Venezuela joint venture has the potential to disrupt our supply lines.

As is well known, China’s grand strategy has been shaped by its desire to secure surety of energy supplies to fuel its continued industrialization.  In 2008, China spent $100 billion in Latin America, most of this on hydrocarbons, energy and mining.  China has had a growing presence in Venezuela since 2003 after helping PVDSA recover from a prolonged labor strike.  The China National Petroleum Corporation (CNPC) has been operating Venezuelan oil fields in the Zulia and Anzoategui provinces for years.  Reciprocally, PVDSA has maintained a representative office in China since 2005.  In April 2010, China announced a $900 million heavy crude production project with Venezuela.  To sweeten the pot, the China Development Bank signed a financing agreement to loan Venezuela $20 billion.

Just prior to that, in neighboring Brazil, a country that sits on vast pre-salt oil reserves, China’s Sinopec and the China Development Bank signed a strategic development pact with Petrobras, Brazil’s state-owned oil company, whereby China agreed to provide financing to the tune of $10 billion in Petrobras over the next five years.  Leaving no corner unturned, China also has operations in Ecuador.  In 2006, Andres Petroleum, a consortium of Chinese oil companies, purchased the Ecuadorian assets of the Canadian firm, EnCana for $1.42 billion.  In return, CNPC gets oil and control over the controversial Oleoducto de Crudos Pesados (OCP) pipeline. 

Iran has also been cozying up to Venezuela and Brazil, as well as a number of Andean countries.  In 2007, Venezuela and Iran signed three petroleum cooperation agreements which involved bilateral investment in Iranian gas and Venezuelan oil fields and Venezuelan gasoline exports to Iran.  Iranian President Mahmoud Ahmadinejad traveled to Brazil and met with President Lula last November.  Lula then traveled to Iran in May 2010 during which time the two countries discussed future trade in Brazilian ethanol.  It was also reported that Brazilian energy firms—including Petrobras—were exploring possible deals to provide training and technology to modernize the Iranian energy sector.  To support its strategic positioning in the region, Tehran has set up branches of its Export Development Bank in Brasilia as well as Caracas.  Bolivia and Ecuador also enjoy cozy relations with Iran.

Even India, whose appetite for hydrocarbons is almost as voracious as China’s, recognizes the strategic importance of Latin America.  For example, hydrocarbons dominate trade relations between India and Mexico: oil accounts for 90 percent of Mexico’s exports to India.  The Indian government recently proposed establishing a sovereign wealth fund for the sole purpose of purchasing hydrocarbon reserves around the world.  India’s state-owned Oil and Natural Gas Corporation (ONGC) has exploration and production stakes in projects in Brazil and Colombia and is exploring opportunities in Venezuela.  In 2006, ONGC Videsh Ltd.  (the overseas investment arm of ONGC) joined with the Chinese firm Sinopec to acquire a 50 percent stake (for a combined $850 million) in the Colombian oil firm Omimex de Colombia. 

Moving forward
In many ways, the fate of Latin America and the US are strongly linked.  This is no less true with our energy security interests.  At this time, the US needs to move past the rhetoric and take concrete measures to direct resources, capabilities and even some creativity into building a stronger, strategic relationship with our neighbors in Latin America in order to address our long term security needs.  How do we do this?

First, the United States should commit sufficient financial, human and technological resources to making the Energy Climate Partnerships of the Americas (ECPA), formed in April 2009 at the Fifth Summit of the Americas, a viable, strong enterprise.  The ECPA supports initiatives that focus on energy efficiency, renewable energy, cleaner fossil fuels, critical infrastructure and energy poverty alleviation.  However, regional experts note that there has been little progress.  While energy security can be strengthened by making progress in these areas, the US needs to broaden the scope of the ECPA to explicitly discuss issues of energy security (including physical security of energy infrastructure), market-enhancing regulatory frameworks, as well as energy integration—one of the region’s greatest challenges—which affects price stability and supply networks.

Latin America has frequently launched regional entities with the objective of improving energy integration and collaboration.  Among these are the Regional Electrical Integration Commission (1964), the Latin American Reciprocal State Oil Assistance Association (1965), the Latin American Energy Organization (1973), and Initiative for Regional Infrastructure South American integration (2000).  As recently as 2007, the South American Energy Council was established.  However, the overwhelming consensus is that energy integration and coordination among Latin American nations remains limited and that these institutions have been ineffective, largely because they could not overcome the challenges associated with asymmetrical regulatory frameworks, policy coordination and implementation of rules and procedures. 

In their recent piece in Foreign Affairs, David G.  Victor and Linda Yueh conclude that (global) energy governance requires “a mechanism for coordinating hard-nosed initiatives focused on delivering energy security and environmental protection."  The US, a country with strong institutions and regulatory bodies, must take a leadership role to ensure that ECPA avoid the fate of previous regional energy initiatives by articulating clear mechanisms for making decisions and resolving conflicts, establishing performance metrics, coordinating policies across countries, and monitoring and evaluating outcomes.  In other words, the US, as author of the ECPA initiative, has the added responsibility of guaranteeing its success.  The energy security of the US and of our Latin American partners cannot afford another failed effort to manage the region’s energy problems.  If successful, the ECPA could serve as a model of regional, and possibly global, energy governance, replacing the international and national institutions that are “struggling to remain relevant.” 

Second, the US must leverage the opportunity presented by the creation of the ECPA to strengthen and expand strategic, bilateral energy arrangements with our resource-wealthy neighbors, just as China, Iran, Russia and India are doing.  America should not view ECPA as a substitute for bilateral arrangements, but as a long-overdue occasion to jump start relations and create bold, new partnerships.  To this end, the US should remove the $.58 tariff on imported Brazilian ethanol, a policy measure which has paralyzed efforts to move forward on the Memorandum of Understanding (MoU) on biofuels, signed by Brazil and the US in 2007, in which the two countries expressed an intention to cooperate in research and the production and export of ethanol, with the goal of developing a global biofuels’ market.

The current landscape is ripe for technological partnerships which should provide the cornerstone of strategic, bilateral energy partnerships.  According to EIA’s World Energy Outlook of 2007, Latin America needs to invest approximately $1.3 trillion in overall investment in its energy sector by 2030.  Moreover, the potential for renewable energy production “has remained unexplored due to engineering difficulties, environmental concerns and lack of investment.”  America’s technological expertise—wielded by our private sector companies, research institutions and unique configuration of national laboratories—could assist and support strategic partnerships between the US and our Latin American neighbors.  These sorts of strategic collaborations could enable the Western Hemisphere to become the global behemoth in renewable energy and biofuels, an area in which we are quickly losing ground to China.  America stands at a crossroads.  On the one hand, we can continue our muddled, reactive engagement with Latin America.  Or, we can forge a bold new vision of collaborative engagement to strengthen our energy security and manage the region’s energy problems.  Our global counterparts recognize that the countries south of the border are critical to their energy security interests.  Will America?

Dr. Nancy E. Brune works on energy security and national security issues at Sandia National Laboratories. She is a Truman National Security Fellow, as well as a member of Women in International Security and the Pacific Council on International Policy

 

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