Natural Gas in the Caribbean: Matching Opportunity and Reality

Natural Gas in the Caribbean: Matching Opportunity and Reality

SANTO DOMINGO – For over 10 years, the Dominican Republic has counted natural gas as an important fuel source for its energy matrix. Yet despite developments that have catapulted gas-fired power generation to almost 1/3 of installed capacity, 40% of the nation’s electricity is still generated from fuel oil. Dependence on oil is a familiar story across the Caribbean. According to a study by AES, fuel oil comprises 85% of power generation in the region.

And while the current high price oil environment presents a financial driver to pursue natural gas as an alternate power generation source in the Caribbean, its introduction would also lower the environmental costs of fuel oil consumption.

The natural gas boom in the United States has further piqued the interest of policy-makers and project developers across the Caribbean, raising hopes that cheaper natural gas supplies from the US will open a new chapter for the Caribbean’s energy outlook and an alternate to the status quo.

These were the issues over one hundred policy makers and industry experts debated at the Institute of the Americas’ Forum on the Outlook for Natural Gas in the Caribbean on February 13 in Santo Domingo.

That interest in natural gas for the region exists is not surprising. However, several nations of the Caribbean face a troika of impediments, ranging from scale to supply to credit.

The size of most Caribbean nations and, more importantly, their power generation demand do not reach the threshold for traditional LNG imports. Moreover, their small market size has kept traditional LNG suppliers from focusing on the region. Despite the increased discussion of smaller scale LNG or compressed natural gas (CNG) supply options, none have completely materialized in a commercial manner.

 

Further, when it comes to the LNG business, one industry member was quick to highlight that “credit is king”. When the costs of the LNG business are taken into account and the requirements for strict take or pay terms in contracts are considered, most off takers (utilities, really) in the Caribbean are unable to post the requisite guarantees.

Forum participants agreed upon four focal points that must be further addressed and considered by regional policy makers, multilateral development bank officials and the private sector to overcome these hurdles in the near term: 1) A Caribbean Basin Index; 2) Guarantees and credit enhancement; 3) Supply and the role of Trinidad & Tobago; and, 4) Clarification on US restrictions for re-export of LNG.

Perhaps most challenging, but important, is the need for a price index for natural gas in the Caribbean. Today’s focus on Henry Hub prices does not properly reflect the realistic options for landing natural gas in the Caribbean. A more accurate index as conceived by a “Caribbean Basin Index” would more appropriately inform policy makers and sector participants and allow for more transparency vis-à-vis project development.

Devising a way to address the lack of access to credit or reasonably priced credit options is also key for realizing LNG opportunities in the Caribbean. Moreover, as part of the equation, understanding options to burdensome “take or pay” contract language and clauses is essential.

Indeed, credit enhancement support is perhaps the linchpin to landing LNG in the broader Caribbean basin. It is a role that multilateral development banks such as the IDB and CAF could fill.

The long history of LNG exports from Trinidad & Tobago should be used as a way to further deployment of natural gas in its Caribbean neighborhood. Dealing with the issues of scale must be addressed but there are huge upsides including geopolitical, distance and, most notably, cost. Liquefaction infrastructure in Trinidad & Tobago has the huge benefit of being largely depreciated and thus not as costly in terms of the LNG value chain for new LNG contracts.

The Caribbean coast of Colombia also offers a potential regional supply source and fit in terms of scale, size and cost for the nations of the Caribbean basin.

Finally, there is great optimism that the boom in US natural gas production and potential for LNG exports from the Gulf Coast will provide increased supply options for the Caribbean.
But many of these opportunities rely on the concept of a “hub and spoke” system for delivering natural gas supplies to the broader Caribbean basin. That is, a main, larger scale receipt terminal that distributes smaller cargoes of LNG to forward destinations.

This raises a potential problem for US supplies. If LNG were exported from the US to a “hub” that had a Free Trade Agreement (FTA), such as the Dominican Republic, it is currently unclear whether LNG could then be delivered to a “spoke” location that was not party to an FTA with the US. The issue merits further review and clarification by officials at the US Department of Energy.

The Caribbean’s long-time dependence on oil-derived products for the bulk of its energy needs has increasingly come with deleterious effects. Despite increased attention on diversification and deployment of renewable energy, as well as cut-rate oil imports through the Petrocaribe agreement, the volatility of oil prices continues to impact economies of most Caribbean nations.

The potential and opportunity provided by incorporating (or in the case of the Dominican Republic, increasing) the potentially cheaper and cleaner-burning natural gas supplies has raised hopes for a new chapter for the Caribbean’s energy outlook.

But, as the foregoing analysis underscores, there are several key elements of the equation that demand attention and will determine exactly what role natural gas will play for the energy future of the Caribbean.

U.S., Canada and Mexico: A New Vision of Competitive Clout

U.S., Canada and Mexico: A New Vision of Competitive Clout

Wanted: Government leadership for the North American economy

By Malin Burnham & Charles Shapiro 5 P.M. NOV. 9, 2013

The integration of the economies of the United States, Canada, and Mexico through NAFTA gives us a global competitive edge, but the NAFTA agreement is outdated. If we are going to increase our ability to compete against China and India, government needs to lead, follow, or get out of the way.

The North American Competitiveness and Innovation Conference met in San Diego Oct. 27-29 Three cabinet secretaries — Canadian Trade Minister Ed Fast, Mexican Economy Secretary Ildefonso Guajardo and U.S. Commerce Secretary Penny Pritzker — met in San Diego for the first time that anyone can remember.

The theme of NACIC was “three countries, two borders, one economy.” Experts discussed a vision for North America and the range of issues that can make North America more competitive internationally.

Businesses in the San Diego–Tijuana region get it. They understand the importance of open markets, open borders, and building strength from complementary assets.

Governments, however, are slow learners.

Secretary Pritzker’s Oct. 31 op-ed in the U-T San Diego is encouraging, but needs to go much further if we are to achieve what North America can be. We are delighted that the secretary is interested in making North America more competitive. But after noting the benefits of NAFTA, she shifted her focus to completion of the 12-nation Trans-Pacific Partnership (TPP) trade negotiations.

The Asia pivot makes sense, but we need to pay attention to our integrated economic foundation. We share the same economic interests as Canada and Mexico. Together they represent 60 percent of our foreign trade. We export twice as much to Mexico and three times as much to Canada as we do to China. Mexican manufactured exports contain 40 percent U.S. content, Canadian exports contain 25 percent U.S. content, but exports from China contain only 4 percent.

Mexico, with its relatively young population and growing economy, will generate the lion’s share of the North American growth. Total North American GDP will rise from $19 trillion today to more than $50 trillion by 2050, when Mexico is projected to be one of the world’s five largest economies. Canada provides the key to energy self-sufficiency.

NAFTA was completed in 1994 before the smartphone, before maturation of the IT and biotech industries, before e-commerce or fracking entered our vernacular. North American businesses have developed interconnected, just-in-time supply chains. We manufacture together. We must deepen North American integration if we are to maximize our gains from potential trade agreements with Asia and the European Union.

The “San Diego Agenda” is the road map.

  • Common regulations. Our supply chains run across all three countries. Border and regulatory delays add up to 10 percent to the final product cost. We must adopt common regulations in all three countries so that we’re not making three different versions of the same product.
  • Harmonized North American trade policy. All three countries are part of TPP and the Asia Pacific Economic Cooperation (APEC). Mexico and Canada already have agreements with the European Union. We must leverage our impact by negotiating as a North American bloc with the Asians and the Europeans.
  • Border security and efficiency. The border is a mess. Security concerns trump the movement of legitimate cargoes and travelers. Inspection needs to be moved away from the borders, and processes automated. Make the border a point of data collection with additional inspection only as necessary. It’s time to give the Department of State and the Department of Commerce a larger role in planning so that trade and foreign policy become part of the border equation.
  • Infrastructure. Government investment in roads, bridges, ports both at the borders and in the interior of our countries is key for competitiveness.
  • Human capital. We must improve our education systems in all three countries and we need to make it easier for the citizens of any of the countries to work in the other two.
  • Energy. North America should meet substantially all of its domestic energy needs within the next two decades, providing us a competitive advantage. We need to develop technologies for lower carbon energy and energy efficiency; improve the security and reliability of cross-border infrastructure and offshore safety standards; align regulatory standards for smart grids and renewable energy; reduce regional and local barriers and facilitate cross-border sales of energy; and align clean energy incentive programs.

This will not become a reality unless the United States takes the lead. U.S. leaders shy away from talking about North America, preferring the potential benefits of deals with Asia and Europe over the hard work and political challenges of making North America a single market.

We must recognize once and for all that Mexico and Canada are our partners and act on the San Diego Agenda. The first step is a new vision for North America competitiveness, an idea of what we want to become. Separately we are three very important countries. Together we are a powerhouse.

Lead, follow, or get out of the way.

Wanted: Government leadership for the North American economy

Burnham is co-chairman of Smart Border Coalition. Shapiro is president of the Institute of the Americas at UC San Diego.

© Copyright 2013 The San Diego Union-Tribune, LLC. An MLIM LLC Company. All rights reserved.

Let Small Businesses in Latin America Prosper

Let Small Businesses in Latin America Prosper

BY CHARLES SHAPIRO
This article was posted by the Miami Herald on October 27

At the business meetings around the recent Ibero-American Summit in Panama, almost every speaker — presidents and cabinet ministers, business leaders, and development bank presidents — spoke passionately about the need to help small and medium-sized enterprises in Latin America.

While macro-economic growth is the single most important factor for reducing poverty in a developing country, by itself it is insufficient. According to Costa Rican Minister of Economy Mayi Antillón, 99 percent of businesses in her country are small businesses. Leaving small businesses behind while large businesses thrive is a recipe for political instability.

Helping SMEs makes good economic and political sense. But no one explains how.

The World Bank’s Ease of Doing Business report provides a comprehensive work plan for facilitating SME growth. The first step is to make it possible for Latin American SMEs to get commercial loans from banks. Not subsidized loans. Not risky loans. But loans based on a business’s assets.

Compared to SMEs in Latin America and the Caribbean, U.S. businesses have it easy.

Article 9 of the U.S. Uniform Commercial Code enables businesses to use as collateral any kind of asset a bank will accept, such as inventory, warehouse receipts, equipment, intellectual property and accounts receivable.

Not so in Latin America and the Caribbean where banks will only accept real estate and vehicles as loan collateral. SMEs, like all businesses, need working capital, but 70 percent of SMEs in developing countries do not own the land under their stores, restaurants and repair shops and cannot obtain commercial loans.

Micro-loans are great for informal micro-businesses with few assets, but micro-loans are too small to help SMEs that want to compete in the formal economy.

When countries modernize their laws so that banks can extend loans secured with assets other than real estate, then small businesses will be able to get larger loans at lower rates of interest. This type of small business lending, called asset based lending, is currently impossible in most of Latin America.

The Organization of American States has a model law and model regulations that countries can modify to fit their own legal system. The Inter-American Development Bank (IDB), the World Bank’s International Finance Corporation (IFC), and U.S. Treasury’s Office of Technical Assistance can provide the expertise and funding to countries to help reform their laws and set up the supporting financial infrastructure.

Once laws are passed, electronic registries of pledged collateral must be established. Bankers, lawyers and judges have to learn how to use the new system. Credit bureaus must be established, and small business development centers need to mobilize to provide credit and business management advice.

On Sept. 18-19 in San José, Costa Rica, the Institute of the Americas and the IFC held their second annual conference on asset-based lending. Eighteen countries from Uruguay and Peru to Mexico and Haiti met with technical experts, bankers and political leaders to discuss how to build political consensus to support reforms, understand what other actions are necessary, and to learn from each other. A Spanish representative was there to see what Spain could learn from Latin America.

There are success stories. Honduras established a system of asset based lending in 2011, with the number of loans in 2013 running 30 percent ahead of 2012. Mexico has the gold standard of electronic asset registries and records 5,000 to 7,000 loans per month. Colombian President Santos signed a bill into law in mid-August of this year and the new system will be running by March 2014. El Salvador passed a bill that awaits President Flores’ signature. Costa Rica has a bill pending before its Legislative Assembly. Jamaica, Haiti, Trinidad, Guyana, Panama, Peru and Guatemala are drafting bills or reforming existing laws so the system will function better.

Asset-based lending is not dramatic or sexy or even expensive. It’s the equivalent of “small ball” baseball — the many small actions that add up to a winning game.

Latin American governments can help their own SMEs prosper by implementing the laws that will facilitate their access to credit. Helping small business borrow at lower rates of interest will allow them to compete, expand and hire more employees.

Natural Gas Imminent in Central America But Small Markets Require Small Solutions

Natural Gas Imminent in Central America But Small Markets Require Small Solutions

SAN JOSE, COSTA RICA — Natural gas’s time is near in Central America, and the cleaner burning fuel will be a driver of energy sector diversification with important economic and environmental upsides echoed a succession of speakers at the Institute of the Americas’ 2nd Annual Forum on the Prospects for LNG and Natural Gas in Central America.

But also clear is that the region must pursue appropriate solutions given its market size. Or as one speaker summed it up: “small markets require small solutions.”

The good news is that several solutions exist. From examples in Norway, Southeast Asia and closer to home in the Dominican Republic, a variety of small scale and hub-and-spoke concepts offer the capacity for landing natural gas in the region.

Indeed, with a strong anchor in the region’s booming power market and the benefits of breaking the financially and environmentally debilitating dependency on imported petroleum products, natural gas has Central America poised to diversify its dual energy matrix of hydropower and petroleum derived products.

Take Costa Rica, long one of the region’s if not the world’s most important proponents of renewable energy and “green development;” the country has a formal policy goal of carbon neutrality by 2021.

Due to the complexity of developing sufficient renewable resources, particularly large scale hydropower, state power company ICE has focused on natural gas as its “Plan B” for meeting the nation’s roughly 4% annual power demand growth and emission reduction targets of 6 million tons of CO2.

Costa Rica’s minister of energy and the president of ICE concurred that it is difficult to see the country meeting its carbon reduction targets and long-term power supply without natural gas.

Panama and El Salvador also underscore the urgency and desire of the region’s energy policy makers to seize the natural gas opportunity for their countries.

In Panama, policymakers have focused the first stage of natural gas use in the country’s power sector. Panama has advanced with plans to develop the nation’s first natural gas import project through a liquefied natural gas terminal located at Telfers Island. The project, auctioned in early 2013 and awarded to Empresa Panama NG Power, SA, counts a 400MW power plant set to initiate in 2017.

In El Salvador, a just-concluded power supply auction of 350MW organized by the government together with electric distribution companies actively pursued natural gas-fired power as part of the auction process and directly excluded bidders from submitting fuel oil or diesel projects.

Central America does not yet count any natural gas production. A lack of domestic resources means that the region will have to turn to the global marketplace in order to satisfy its desire to avail itself of natural gas’s upsides. The need to import natural gas most likely means LNG and supplies one day from Trinidad & Tobago, the next Peru, and the day after Colombia, North America or any of the 18 LNG exporting countries across the globe.

Not dissimilar from the potential of diversifying its energy matrix, many analyses favor the diversity of supply that LNG offers, with examples of Chile and Spain important to consider as Central America moves forward with the imminent inclusion of natural gas in its energy matrix.

Toward a New Energy Paradigm in Peru – Policymaking During an Economic Boom

Toward a New Energy Paradigm in Peru – Policymaking During an Economic Boom

LIMA – Peru is striving to develop a “new paradigm” for its energy sector, one focused on planning against the backdrop of an economic boom, according to Vice Minister of Energy Edwin Quintanilla in his remarks at the Institute of the Americas’ Peru Energy Roundtable.

Just under 100 participants from across the government of Peru, private sector and civil society attended the August 27th Roundtable in Lima. The program, convened two years into the term of President Ollanta Humala, examined the government’s outlook for energy policy, as well as its efforts to balance energy demand and economic growth.

During his keynote address, Vice Minister Quintanilla underscored the tremendous economic success the country has enjoyed, growth that will catapult the Andean nation’s GDP per capita past the global average by 2020. However, economic success presents several energy challenges, including the estimated 10% annual growth in electric demand between today and 2016 and expanding access to energy. Peru currently holds last place in South America in terms of providing access to energy for its citizens and without significant investment, the country could face electricity shortages by 2017.

Discussions and subsequent panels highlighted other challenges, particularly with regards to consummating the enormous success of the Camisea natural gas project as it nears its tenth anniversary. Since Camisea’s launch, the country has created from scratch an important domestic natural gas market. Indeed, Peru has seen over 117,000 residential natural gas users come on line and natural gas-fired generation accounts for over 20% of the nation’s electric portfolio. Government estimates point to over one million residential natural gas users by 2020 and over 400 natural gas vehicle filling stations by that same year.

But some contend that a simmering undercurrent of social unrest in Peru threatens major investment and thus economic development if not properly managed. Rural, and in many cases indigenous, populations in the Amazon and Andean highlands have become increasingly vocal in their opposition to natural resource development projects.

Vice Minister of Energy Edwin Quintanilla responds to audience questions during a roundtable session moderated by Institute of the Americas’ president Charles Shapiro.

Rural residents claim that the windfalls from energy projects have not reached them and, worse, they are left to bear the environmental damage associated with what are largely extractive industries. The Humala administration has focused its efforts to redress these issues through a prior consultation law for indigenous or native peoples (Ley de Consulta Previa a los Pueblos Indígenas u Originarios).  The government is confident that these measures, intended to improve project and local community interaction and consultation, will greatly alleviate the delays and the much-criticized permitting process for major energy and infrastructure projects today in Peru.

Several speakers at the roundtable pointed to the diversity of lessons from the development of the Camisea project as important tools to overcome the current challenges facing energy development in Peru, from the social to the environmental to the multiplier effect of exploiting domestic resources. Moreover, most agreed that as taxing as the energy investment climate is today, the possibility of a “new” Camisea project is within reason. There was much optimism surrounding the country’s energy potential and many participants felt that Peru’s significant traditional energy resources can be developed with the right policy framework and support of the government.

But delays to projects such as the Gasoducto del Sur — viewed almost unanimously as the lynchpin to meeting Peru’s energy demand growth and social inclusion efforts – as well as a downturn in exploratory drilling permitted by the government have made many key players in the sector uneasy.

Panelists from the mining sector also emphasized the link between energy, and sustainable economic growth in Peru. Mining contributes 10% of Peru’s GDP and 60% of exports yet inadequate transmission infrastructure threatens mining projects and, in turn, the country’s economic growth. The speakers agreed that expansion of natural gas supplies in the south, including the completion of the “Southern Energy Hub” will be critical.

As Vice Minister Quintanilla underscored, the key challenge and thus the core of the “new paradigm” is for the government to develop a regulatory and investment framework that makes feasible universal access and energy security without distorting market signals.

Beijing the Matchmaker

Beijing the Matchmaker

As China increases its investment in Brazil, Mexico, Peru and Colombia, Shearman & Sterling partner Michael McGuinness and senior associate Vanina de Verneuil write in International Financial Law Review that China and Latin America are “on the crest of a new wave of strategic investment and development.” The authors note that “this is due to Beijing’s continuing role as a matchmaker — driving outbound investment through its Going Out Policy and encouragement of international financing by China’s state policy banks — the natural maturing of cross-border transactions between the two regions, and the strategic demand for resources and technology.” 
Read complete article.

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