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.

Chile Energy Sector Needs a “Rainmaker”

Chile Energy Sector Needs a “Rainmaker”

SANTIAGO – Over one hundred representatives from Chile and across the hemisphere gathered in Santiago to assess ways to advance the government’s energy road map at the Institute of the Americas’ Chile Energy Roundtable on June 24.

Energy Minister Maximo Pacheco, during his keynote address, underscored the difficulty in finding an element that had a greater impact on Chile’s productivity than energy, and particularly energy costs.

With a persistent drought and high electric prices as a backdrop, Chilean President Michelle Bachelet announced her administration’s energy agenda in mid-May, in advance of the 100 day deadline. While geographically distant, the US energy revolution and potential access to a new source of – hopefully cheaper – natural gas exists in close proximity to Chile’s energy policy dialogue.

The energy agenda set off intense debate over the role of the state in Chile’s energy market, how to reduce prices and finding the right approach and model to collectively overcome the challenges facing development of critical energy projects. Lost on no one was a strong emphasis on increasing Chile’s commitment to the global natural gas market through liquefied natural gas (LNG) imports, but also domestic exploration and production in the country’s south.

Indeed, there is no lack of optimism across many facets of the Chilean government and industry for tapping into the US energy boom and LNG exports. Noting the benefit of its free trade agreement with the United States, Chilean officials including the minister spoke highly of the option for not just increased expansion of Chile’s LNG import capacity but also from US Gulf of Mexico export projects soon to come online.

Recently appointed ENAP CEO, Marcelo Tokman, also underscored the role for natural gas as part of the energy agenda and the possibility for expanded import infrastructure but also a role for ENAP to leverage natural gas for power generation. More distant, but part of the mix he suggested, are efforts to boost exploration of unconventional natural gas resources in southern Chile.

Near consensus was evident among roundtable participants on the need for Chile to continue its efforts to develop a diversified and sustainable energy system.

Perhaps most importantly, there was almost no dissent as to the need for a paradigm shift in how the energy sector – government and industry together – develops projects and engages communities, not just in Santiago but across the diverse regions of the country. A more proactive government role and clearer rules and regulations vis-à-vis zoning figure prominently in the energy agenda and were reiterated by industry participants as critical. But, differences of opinion arose as to the best approach for increasing diversity of Chile’s energy matrix while also striving to reduce prices.

The importance of water for Chile’s energy outlook coursed through much of the discussion. Panelists called hydroelectricity a key piece of any sustainable energy system, and noted that water was Chile’s “fuel.”

One panelist remarked that what Chile really needed was a “rainmaker.” The reference to a need for a break in the drought hammering the country was obvious but also implicit in the comment is the need for an increase in energy investment in the country.

Renewable energy, or more specifically what in Chile is referred to as nonconventional renewable energy resources, or NCREs, has increasingly vocal and strong support in the country. As part of the energy agenda, the Bachelet administration highlighted its commitment to the previously established goal of 20% of electric generation from NCREs by 2020.

The importance of interconnecting Chile’s anachronistically unconnected northern and central electric systems (SIC and SING) was agreed to by most, but when pressed as to the timeline there was little optimism for completion of the effort during the current Bachelet administration. Some pointed to early 2020s as a realistic timeline.

Not to be discounted, some argued, are the increased regional interconnection efforts being embraced in Chile, most notably the Alliance of the Pacific framework but also regional energy markets and the opportunity to develop regional electric interconnection stretching from Colombia through Ecuador and Peru to Chile.

Mexico, Shale, and the U.S. Energy Boom Take Center Stage at La Jolla

Mexico, Shale, and the U.S. Energy Boom Take Center Stage at La Jolla

LA JOLLA – Energy reform in Mexico, the energy boom in the United States, the role of natural gas, and Latin America’s unconventional resource potential dominated the discussions over the two days of the XXIII annual La Jolla Conference on May 21-22.

Almost two hundred participants from across the Western Hemisphere participated in this year’s conference that featured addresses by senior officials from Pemex, the Panama Canal Authority, Mexico’s national hydrocarbons agency CNH, Argentina’s YPF, Mexico’s ministry of energy and Perupetro, as well as discussion panels with thought leaders from across industry, academia and the energy consulting world.

The optimism and hope for a new energy future in Mexico were evident throughout the course of the discussions, as was the interest in the continued march of the U.S.’s oil and natural gas production boom. Less clear was if and how Latin America would be able to replicate the U.S.’s model for its energy renaissance.

The sheer magnitude of the U.S. energy revolution began the conference discussions and set the stage for much of the following discourse. Panelists’ proffered figures that underscored today’s energy panorama: total growth in production has been equivalent to growth in all OPEC countries combined. Pennsylvania’s natural gas production alone was 1.5 times the size of Qatar’s, and may soon surpass that of Russia.

Latin America’s unconventional resource potential was not disputed, but among many optimistic outlooks several panelists cautioned that the regulatory environment, development costs, access to capital, local infrastructure and overall efficiency of shale projects must be improved. Indeed, the caveats all seemed to focus on the elements above ground facing the region’s incipient shale wave.

Though it might take longer than expected – many anticipate the revolution to take about a decade to spread across Latin America – there was near consensus that the resources would be developed and serve as important domestic sources of energy as well as boost economies from Mexico to Colombia to Argentina.

An important tangential discussion to the shale and U.S. energy boom was the revitalized interest and potential for natural gas and particularly the role for liquefied natural gas (LNG) in the hemisphere. Indeed, many panelists argued that the U.S. could become the largest LNG supplier in the world, with the US Gulf of Mexico an ideal place for a new hub. Some also foresaw an eventual convergence of global LNG prices as soon as 2018.

Institute of the Americas energy policy associate Alexis Arthur moderates a discussion of natural gas and LNG issues in the hemisphere with panelists Manuel Benitez of the Panama Canal Authority, Ricardo Iglesias of GDF Suez, and Jed Bailey of Energy Narrative

The Panama Canal’s long awaited expansion will play a vital role in making LNG exports competitive, and the Canal may be instrumental in making the region a new LNG hub.

The expanded waterway will reduce LNG transit time from Trinidad & Tobago to Chile by over 6 days and cut over 8 days off the time required to move LNG from Peru’s Camisea project to Spain.

Across Latin America demand for natural gas and LNG has boomed; growth in demand has outpaced GDP growth. Latin America’s appetite for gas will continue to grow because of economic expansion, increased power generation, and fuel switching.

But it was perhaps Mexico’s monumental energy reforms that truly animated many of the discussions. Updates on the reform process, with secondary legislation set for debate soon after the conference, were shared by representatives from all facets of the government and industry.

Presentations of Pemex’s evolution and the role of the revamped national hydrocarbons agency engendered a series of debates. When asked how the revamped national oil company would partner and develop projects, the head of the firm’s E&P company outlined the transition to a productive state enterprise and argued that partnerships could be announced by the end of the year.

Representatives from a wide range of international companies were eager to hear from and meet with Pemex officials on the sideline of the conference.

Similarly, the state power company CFE set forth plans to further evolve into a natural gas player, highlighting several midstream projects being developed that would also include new collaboration and partnering opportunities for private firms from across Mexico and the world.

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