Energy in the Dominican Republic: All Eyes on the Pacto Eléctrico

Energy in the Dominican Republic: All Eyes on the Pacto Eléctrico

The Dominican Republic is poised for an energy transformation. Proposed electric sector reforms, known as the Pacto Eléctrico promise to increase the nation’s competitiveness and improve Dominicans’ standard of living. The measures are part of the government’s broader, developing energy vision for the nation’s energy security. The proposal intends to complement diversification efforts that have seen a rise in prominence for natural gas and a larger role for renewables, biomass, and hopes for domestic hydrocarbon production. Overall, a sense of optimism surrounds the nation’s energy potential not just to meet needs at home but also as a potential regional energy hub. The Dominican Republic will need to increase both imported and domestic sources if it is to meet the National Energy Commission’s projected doubling of electricity demand by 2030.

All eyes are on the developments of the Pacto Eléctrico and it was no surprise that the topic cut through all of the discussions as government and business leaders came together at the Institute of the Americas’ Dominican Republic Energy Roundtable in Santo Domingo on February 12.

Across the board, experts agree that the reform proposals present a rare opportunity to catalyze and sustain economic development in the country, and to finally provide all Dominican consumers with consistent, high-quality power. Questions remain over tariffs and subsidies, and how to balance prices that promote private sector investment and competitiveness while guaranteeing affordability for consumers.

Public and private sectors recognize the necessity of change, but differences emerge when discussing its execution. In particular, an important debate has emerged around the role of the State as both implementer and regulator of the proposed reforms.

The latest pact is not the first effort in the Dominican Republic to reform the electric sector. Indeed, one of the ideas is to undo the fragmentation brought about by the reforms of the late 1990s and return to a vertically integrated model of generation, transmission, and distribution.

Not everyone in the private sector agrees. In discussing the Pacto eléctrico, the director of the Dominican Electric Industry Association (ADIE) channeled a famous sarcastic riposte from Ronald Reagan: “I’m from the government and I’m here to help.” The ADIE cautions that government intervention in the power sector in the past often caused greater problems.

The role of the State, the private sector, and public-private partnerships under this new model is one of the more controversial areas of the proposal, and will require deft management by all involved in order to bring the pact to fruition. Creating the conditions for operational efficiency while recovering costs incurred remains a significant hurdle for both the public and private sectors.

A broader issue is the need for unambiguous rules and transparency in both the reform proposals and implementation. There is a fear that the layers of bureaucracy and government entities overseeing the energy sector could complicate the policy’s application. Or at the very least, add a level of unnecessary confusion. A clear delineation of roles and responsibilities ascribed to the myriad governing bodies would help avoid this problem and eventually improve the efficiency and efficacy of the reforms in the long run.

Like many nations in the region, the Dominican Republic is attempting to reduce its reliance on imported petroleum products by switching to natural gas. As one of the early and most successful adopters, the Dominican case has become has become a model for the region. Since the inauguration of the AES Andres LNG Terminal in 2003, natural gas use has grown from virtually nothing to comprise over a 30 percent of the country’s electricity supply today.

On the back of its natural gas infrastructure, the Dominican government aspires to become a regional energy hub, distributing natural gas to the greater Caribbean and Central America. Proponents argue that by taking advantage of the AES LNG infrastructure, this hub-and-spoke model would overcome many of the hurdles of cost and scale that have made switching to natural gas difficult for nations in the region.

The political will has never been greater for the Dominican Republic to enact critical electric sector reforms. The government is garnering wide ranging input from private companies and consumers and should continue to seize the momentum it has created. The opportunity and optimism for meaningful — and possibly long lasting — reform should not be wasted.

On the Edge of Their Seat – Round One and Energy Reform in Mexico

On the Edge of Their Seat – Round One and Energy Reform in Mexico

It has been a momentous year for Mexico. In the year since the nation passed a historic Constitutional amendment, progress on the path to a major overhaul of the energy sector has been remarkable in both its speed and reach.

As Mexico approaches its first major test – the Round One oil and gas auction – the outcome will have a significant impact on determining the reform’s durability and eventual success. Moreover, how the nation defines success will help shape the future of the energy reforms.  But make no mistake, the imminent opportunity to review the first contracts and terms being employed by the Mexican government have most of the oil world on the edge of their seat.

These facts spurred intense debate and discussion at the Institute of the Americas’ annual Mexico Energy Roundtable, held on December 2 – 3 in Mexico City.

The Mexican government will auction 169 blocks for exploration and exploitation across a range of oil and gas prospects, from mature fields to shale to deepwater. Round One is itself a series of smaller bids, set to span most of 2015. Having been unanimously approved by the National Hydrocarbons Commission, the terms of the first tender – for fourteen shallow water exploration blocks – are expected to be formally announced soon, with contracts to be awarded by July 2015.

These will be followed by bidding in areas containing extra-heavy crude, unconventional resources and Chicontepec, onshore, and finally deepwater blocks by mid-2015.

The metrics for success are subjective, but they surely include the number of companies involved, the profile of participating companies, and total investment dollars. Mexico’s Energy Secretariat (SENER) expects Round One to raise $50.5 billion for the 169 blocks plus farm-outs between 2015 and 2018.

How Mexico performs on each of these indicators will be influenced by both internal and external factors, at least some of which are beyond the control of the government.

Chief among concerns is the impact of lower oil prices globally and insecurity in Mexico. Within the reform structure itself, observers have also raised concerns around the precise details of fiscal terms for the contracts, particularly government take, and restrictions on partnering opportunities for companies. Some have been quick to ascribe the delay in release of the shallow water tender to hesitation by the government due to plummeting oil prices.

At the same time, Mexico is wise to acknowledge the importance of environmental protection and community relations as it moves forward, a challenge that has become a headache for operators in South America.

In the nation’s electricity sector, investors remain cautiously optimistic that the reforms will bring about a transition from a power market controlled by the Federal Electricity Commission (CFE) to one dominated by private generators.

However, uncertainty around the impact on competition – particularly in the renewables sector – pricing, and infrastructure remains unresolved.

Expanding Mexico’s pipeline infrastructure is an important piece of the energy reforms. A national strategy of ‘gasification’ purports to increase natural gas imports from the United States to take advantage of high supplies and low costs. President Enrique Peña Nieto inaugurated the first phase of the Los Ramones pipeline in early December with promises to increase US natural gas imports by 40%. Several more projects are due to come online in by 2018.

Renewable energy has been perceived as somewhat of an afterthought in Mexico’s energy reform agenda.  The measures have largely focused on promoting oil and gas production, as well as increasing competition in the power sector. Renewables players, who are mostly seeking greater participation in power generation, have been a bit critical of the reforms, which they believe fall short of the country’s obligations to promote clean energy and make progress towards both national and international targets.

Overall, Mexico’s swift progress is worthy of praise and participants at the Roundtable were nearly unanimous in their recognition of the political will exerted to date.  Moreover, many participants acknowledged the pace of reform implementation in Mexico, particularly when compared to similar processes in Colombia and Brazil.

However, it is also fairly clear that new investors should be prepared for bumps along the road and potential setbacks for the government, energy industry, and civil society. The most important metric of success will be its endurance. Patience on behalf of all parties is necessary to get it there.

The Round One bidding opportunity in Mexico was likened by one panelist to the launch of the IPhone 6. But whether companies line up for the new IPhone 6 that is Round One or wait for the bugs to be worked out in the coming months remains to be seen. Indeed, the next several months could very well speak volumes about the long-term viability and potential for success of Mexico’s energy reform beyond the Peña Nieto sexenio.

Debating Energy Diversification in El Salvador

Debating Energy Diversification in El Salvador

El Salvador, much like its neighbors across Central America, has sought for years to find a solution to its energy woes, and more importantly, deal with the impact of its dependency on imported oil products for its energy matrix. The status quo has long been unsustainable in terms of economic competitiveness and boosting investment.

On November 13, the Institute of the Americas convened a one-day policy roundtable in San Salvador to assess the outlook for El Salvador’s energy sector as well as share insights and ideas on how to foster diversification and, most importantly, increase competitiveness for the energy sector and the nation’s economy.

Understanding the challenges facing the energy sector, the Salvadoran government created the national energy commission (CNE) to develop an energy policy strategy and vision for the country.

The CNE is tasked with creating a short, medium and long-term expansion plan for the country’s energy sector. Indeed, CNE’s diagnosis of the sector performed in 2012 foresaw supply challenges and pricing issues in 2017 for the country’s electric sector. In an effort to confront the challenges highlighted in the analysis, power bidding was developed based largely upon the policy directive of diversifying the country’s energy matrix.

At the heart of the diversification strategy lies a concerted effort to boost renewable energy deployment and incorporate natural gas into the country’s energy matrix. Concrete steps have been taken over the last year on both fronts.

Bidding was launched in July 2014 to attract 100MW of renewable electricity supply for delivery in 2016 for a twenty year period. There were 32 offers and contracts have been signed totaling 94MW of photovoltaic power generation.

But it is the effort to land natural gas in El Salvador that has received the greatest attention. Indeed, during his opening remarks, CNE Executive Secretary, Luis Reyes underscored that the broader effort to create a natural gas market in Central America has the backing of both the US government and the Inter-American Development Bank.

Central America’s leaders met with President Obama in Costa Rica in April 2013 and again in Washington DC in June 2013, with an agreement signed to analyze options for the commercialization and transport of natural gas to the region.

With this backdrop in mind, the government of El Salvador, together with electric distribution companies, organized a public bidding process in 2013 for electricity supply aimed at bringing on line 355 MW of new power generation. The bidding sought a twenty year supply of electricity and prohibited oil-derived fuel sources for generation. Two bids were received; one a coal-fired project and the other a natural gas power solution.

In late 2103, the contract was awarded to Energía del Pacífico on the basis of their proposal to build an approximately 380MW installed capacity natural gas-fired power station and LNG receiving terminal at the Port of Acajutla.  Power supplies are slated for delivery beginning in January 2018.

As the project continues on the path to development, questions remain. Most relevant are with regards to the source of the project’s natural gas and the financing and credit needed for what could turn out to be the largest infrastructure project in El Salvador’s history. On both, the project developers point to important agreements with international financial institutions such as the International Finance Corporation (IFC) of the World Bank Group, and promise details soon on their agreement for natural gas supplies with a “major international LNG player.”

During discussions at the Roundtable, the postponement of a similar project in Panama was cited by many as reasons to question the potential for natural gas in El Salvador and to ask the government what the Plan B is for such a large percentage of power supplies – 32% according to CNE estimates – beginning in 2018. Government officials were quick to underscore the significant advances of the project and assured their complete support for avoiding what many called a dissimilar example from Panama.

With the topic of natural gas dominating much of the energy analysis, it bears mention that El Salvador’s participation in the continued development of the regional electric market in Central America on the back of the SIEPAC transmission infrastructure will also increasingly evolve as firm transmission right contracts and terms are developed by regional authorities.

In the short term, El Salvador will export more power into the regional system than it imports but the regional system will be a key part of El Salvador’s more long-term energy outlook.

Energy and Education in the Western Hemisphere

Energy and Education in the Western Hemisphere

WASHINGTON, DC – Energy and education in the Western Hemisphere were linked at Institute of the Americas programs in Washington, DC on September 30 and October 1.

During a cocktail reception at the Mexican Cultural Institute on September 30, Roberta Jacobson, Assistant Secretary for Western Hemisphere Affairs at the State Department, highlighted the intersection between energy and education as she praised the Obama Administration’s 100,000 Strong in the Americas initiative aimed at increasing educational exchanges in our hemisphere as well as the advances in energy cooperation spurred in part by the US energy revolution.

Mexican Ambassador to the United States, Eduardo Medina Mora, spoke of Mexico’s interest in the 100,000 Strong initiative and celebrated the corresponding cross-border leadership as well as opportunities for Mexico and the United States in a 21st century economy, particularly as Mexico continues to implement major economic reforms including what he called the mother of all reforms – energy.

The reception coincided with a program on the Geopolitics of Natural Gas in the Western Hemisphere, on October 1 co-hosted by the Institute of the Americas and the University of Texas at Austin. The session opened with a keynote address by Christopher Smith, Principal Deputy Assistant Secretary of Fossil Fuels at the US Department of Energy, followed by a panel that featured Trinidad & Tobago’s ambassador to the US Neil Parsan, State Department Energy Bureau Director for Policy Analysis and Public Diplomacy Richard Westerdale, as well as Cheniere Energy’s Albert Nahas and independent analyst David Goldwyn.

PDAS Smith reviewed the US energy revolution and cited two National Petroleum Council studies to highlight how quickly the outlook has changed on the back of the United States’ resurgence as a major oil and gas producer. Smith also noted the importance of natural gas for energy security and lower emissions. Smith emphasized President Obama’s unambiguous stance on the importance of natural gas in the United States, remarking that it had been raised  in the last three State of the Union addresses. Smith also argued that environmental issues remain critical. And while he called them manageable, he underscored the difference between manageable and managed. When it came to the question of lifting the oil export ban, he was less definitive and did not make any predictions.

The panel discussion focused on how to utilize the US’ energy boom to further diplomacy but, more importantly, economic development in the Western Hemisphere. Amb. Parsan assessed the energy dilemma in the Caribbean and argued that the current energy model is unsustainable. To wit, 35% of Caribbean debt is attributed to Petrocaribe. Trinidad and Tobago is committed to supporting the energy needs of its neighbors, he noted, including through development of smaller scale liquefied natural gas (LNG) technology, such as the Gasfin project in Trinidad & Tobago.

Richard Westerdale discussed the recent diplomatic efforts the Energy Bureau is undertaking, from the Connecting the Americas 2020 initiative launched at the Summit of the Americas in Cartagena in 2012 to the more recent Caribbean Energy Security Initiative, and the hallmark agreement signed in September with the island nation of Grenada to create a pilot program intended to bring a “cleaner energy future.”

Albert Nahas and David Goldwyn asserted that given the US natural gas boom and progress on exports, the US government could and should do more, particularly when one considers the economic impact of electric prices in Latin America that are still at least 25 percent higher than the United States. Goldywn further observed that his calculations based upon an IDB study pointed to a ballpark figure of $2-3 billion for the Caribbean to convert from fuel oil and diesel generation to cleaner burning gas-fired power systems. Nahas argued for progress and action to develop US-government backed export financing structures to enable LNG exports to markets that have credit ratings below investment grade, particularly those in Central America and the Caribbean.

The Other Side of the River – Energy, Environment, and Communities in Colombia

The Other Side of the River – Energy, Environment, and Communities in Colombia

BOGOTA – In the decade since opening its energy sector, Colombia has earned a reputation for stability and success. The country has won plaudits across the hemisphere from its neighbors and investors; Colombia’s energy reforms were studied closely by Mexican authorities as they rewrote their energy laws. However, as oil and gas production has dipped below targets and exploration has fallen short of expectations, the country is battling not only to meet its own energy needs but also attract the investment necessary to sustain the energy sector into the future. Moreover, Colombia has realized that deliberate community engagement and environmental stewardship is critical to achieving that goal.

These issues and efforts to redress them figured prominently across presentations and discussions at the Institute of the Americas Colombia Energy Roundtable in Bogotá on September 9.

Colombia’s challenges are not unique. Indeed, social responsibility in the energy sector has become a key element of policies – and conflicts – across Latin America. Colombia’s Ministry of Mines and Energy notes that oil production is an estimated 40,000 barrels per day (bpd) under its 1 million bpd target; around half of the production shortfall can be attributed to social conflicts and security challenges. The government is expected to make up the financial loss by raising taxes, an increasingly polemic topic and one that many argue will still fall short of the covering the nation’s budget gap.

Beyond the economic impact, Colombia has an obligation to protect both its biodiversity and indigenous heritage. Issues of community engagement and environmental protection have arisen at all stages of the project cycle and across the value chain, from exploration and production to infrastructure to power generation and transmission projects.

The Colombian government is taking these concerns seriously. As the Ministry of Mines and Energy focuses its efforts on increasing exploration and production, particularly in the offshore and unconventional areas, the accompanying regulatory framework aims to incorporate best practices in social responsibility. Colombia is looking closely at the experience of other nations, such as the United States for approaches to a host of concerns, from water usage to “consulta previa” or prior consultation.

The struggle to balance investment and economic growth with social responsibility is not a new concern. Colombia’s indigenous peoples are recognized in the 1991 constitution but in many ways government and private sector engagement with local communities has had mixed results. For indigenous communities, the government must correct the imbalance between economic development and social and environmental goals. International sustainability efforts and the international human rights framework, they argue, should inform these efforts.

Instruments to guide indigenous participation, however patchy, are already in place in Colombia, including prior consultation and planning processes. Panelists argued that these efforts must go further to ensure the participation of indigenous people in the design and implementation of development plans, in particular zoning regulations in Colombia.  These plans should also be aligned with local indigenous initiatives such as “planes de vida” or life plans – efforts carried out by several indigenous communities as a way to articulate local development goals – and prior consultation processes.

In terms of environmental concerns, one panelist argued that companies were recycling older impact studies as a way to cut corners in light of rising costs and long permitting delays. The Colombian government has frequently stated its intention to reduce permitting times to six months, an improvement but still quite distant from Canada where environmental permits are routinely turned around in a matter of weeks.

On the industry side, although several companies are now incorporating best practices and engaging with the immediate community the full implications of the broader project area are often not taken into account. One panelist cited an example in Peru. The project bordered a river and while the company had worked closely with the community most immediately affected, they had failed to engage with those on the other side. Conflict later arose, halting the project for several weeks.

That there is a significant financial cost to inadequate community engagement and environmental responsibility is clear, even though few companies have calculated these figures. According to one panelist, stoppage at an oil production site could easily run to $20 million; halting operations at the exploration stage could cost up to $70,000 per day.

With President Santos now entering the second month of his second term, there is hope for stability on which to expand exploration and production activities. The National Hydrocarbons Agency (ANH) has set forth a two-part strategy for boosting reserves and production: 1) unconventionals; and, 2) offshore. And the government’s decision to forego any further bid rounds for the next 2 years and instead focus on bringing to fruition the long list of pending projects and investments is important.

Energy Security in Peru: Camisea and Beyond

Energy Security in Peru: Camisea and Beyond

LIMA – Government officials, NGO representatives, and energy executives from Peru, Chile, Argentina, the United States and Colombia joined the Institute of the Americas and Peru’s Ministry of Energy and Mines in Lima on August 26 for a half-day roundtable.

The program was a celebration of the tenth anniversary of the Camisea natural gas project but also a frank assessment of what must be done to consolidate the lessons and upside of the historic energy project in Peru.

The last ten years have been transformative for Peru’s energy sector. The Camisea natural gas project, inaugurated in 2004, now provides all the natural gas consumed in Lima and accounts for 50 percent of the nation’s power generation.

In many ways, Camisea has exceeded expectations. Natural gas production has kept pace with strong economic growth, while best practices developed for environmental protection and community relations have become a model for the region. And the project’s impact on Peru’s economic development is undeniable.

For the Ollanta Humala administration, Camisea has become the cornerstone of efforts to ensure energy access for all Peruvians – so-called ‘massification’ – and plays an important role in the government’s strategy to achieve economic growth with social inclusion.

But as Peru celebrates Camisea’s tenth anniversary, it has become clear that the project alone will be insufficient to meet the country’s rising energy needs.

Instead the project must be recognized as just one contributor to the much larger goal to foster energy security in Peru. In practice this requires investment along the energy value chain. Not just a rejuvenation of the country’s oil and gas exploration efforts but investment in infrastructure and championing the role of renewables in the power sector.

The question for the Humala government and Peru’s energy actors is how to sustain the economic benefits generated by Camisea. More importantly, government, industry and civil society must develop an approach that incorporates the valuable lessons learned in the last decade into energy projects across the country without undermining the competitiveness of Peru’s energy sector.

The Camisea project was launched at a time when Peru was emerging from a period of economic and political instability, providing a much needed injection of foreign capital and laying the foundation for public-private partnerships in the nation’s hydrocarbons sector.

The contribution to both the national energy sector and the broader economy has been significant. Hydrocarbons production in Peru grew an estimated 260 percent in the last decade, due in large part to the exploration and production at Camisea. Since 2004, the project has brought in over $13 billion in investment and boosted the nation’s GDP by approximately $16 billion. Natural gas liquids in particular have made an important contribution to the hydrocarbons trade balance; according to the Peruvian Hydrocarbons Society, Camisea has reduced the trade deficit by $9 billion.

The opportunities for natural gas extend beyond the power sector, with the potential to transform industry and transportation in Peru. The Ministry of Energy and Mines is exploring options for natural gas to replace diesel in fleets of trucks, for example. The government also advocates for the greater use of liquefied petroleum gas or LPG and associated natural gas.

Peru is hopeful that ongoing exploration and production in the Camisea fields will lead to new discoveries and increased reserves. For the Inter-American Development Bank, the lead financier of the Camisea project, the next step is the expansion and development of natural gas markets – both domestic and international – in order to sustain momentum and ensure adequate demand.

Natural gas also has the potential to support greater renewable deployment in Peru. Despite concerns that competition between cheap natural gas and hydropower in Peru’s electric market could cause a decline in hydropower’s contribution, panelists emphasized the importance of both energy sources in a diversified energy matrix. Over time, they argued, natural gas will play a supporting role as the electric sector makes the transition to greater renewable sources.

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