Economy: Oil Woes
Central America faces yet another oil crisis

By Ricardo Castillo Argüello
Managua

Oil prices reached $100 a barrel on the first day of trading of 2008. But after a few weeks, it became increasingly clear that the current oil hike is unlike any of its predecessors, which were primarily caused by political conflicts. Now, industry executives, oil geologists, investors, and economists all warn that the difference is based on oil production that looks to be nearing its peak. With dwindling supply coupled with growing demand, energy price hikes seem inevitable throughout 2008. In March alone, prices soared to an unprecedented $114 per barrel.

Ironically, says Tam Hunt, an energy policy professor at the University of California in Santa Barbara, the only numbers likely to come down in this crisis are the volumes of oil the oil-producing nations make available for export. And these are precisely the numbers that should not come down. Oil-producing countries such as Mexico, Russia, Saudi Arabia and Iran are using more and more of their own oil for local consumption. They would likely ration it if it becomes a national security issue, says Hunt, referring to the term “political peak oil” to describe this trend of cutting production in order to raise prices artificially.

Industry analysts suggest that Iran´s oil production is falling to levels that could force the country to stop its exports entirely by 2013. And Mexico, which together with Venezuela export the largest volumes of oil to Central America, will decrease total production by 30 percent over the next ten years after a 25 percent decline in 2006 at its Cantarell oil field, the largest in the country. For Central America, that means whether or not the cost of oil is high, they may not be able to get it regardless. “It could be about whether we are able to buy it at all,” warned César Zamora, Nicaragua´s manager for AEI Energy.

To add to this uncertainty, Central America now finds itself in the middle of a tough decision: how to choose the right energy partners. For example, Venezuelan President Hugo Chávez is pushing economic and political links with neighboring countries to strengthen his “south-south” Bolivarian alliance. His PetroCaribe initiative offers preferential prices on crude, sets up a distribution system to eliminate intermediaries, and extends long-term, low-interest credits to countries in order to buffer the kind of shocks that caused severe blackouts in all countries of the region last year, even in Costa Rica, which uses oil for only 20 percent of its total energy needs. Nicaragua, Honduras, and possibly Guatemala plan to participate in Chavez´s initiative, despite the controversy this is likely to create among the countries´ various constituencies.

Beyond oil

Today, Central American economies require more energy for every dollar of economic output than ever before. In the years prior to DR-CAFTA´s implementation, the region began diversifying its economy toward manufacturing and tourism, two sectors particularly vulnerable to rising energy costs.

But there are other options besides oil. There are several proposals now on the table that would diversify the region´s energy grid and revamp its outdated electro-mechanical distribution network. The main challenge, though, is how quickly Central America can turn around its underutilized geothermal and hydroelectric potential, move to newer generation technologies, such as El Salvador´s Cutuco natural gas project, and add to the twenty or so wind-powered parks now under construction across the region.

Last year´s daily electricity rations in Nicaragua and service interruptions in Costa Rica were caused by overworking old generators at full capacity after extended periods of droughts. New sources of alternative energy would allow the administrators of national grid systems to relax each country´s dependency on old equipment and expensive oil consumption.

El Salvador´s Cutuco, slated for completion in 2011, will be the first natural gas power plant in the region. The plant´s potential 525 megawatts (MW) would create a significant surplus that could be sold in regional energy exchange systems to other countries.

Last year, Nicaragua and Venezuela began the $4 billion construction of Sandino-Bolívar refinery, where Venezuela and Nicaragua plan to refine crude derivatives and distribute them in Central America. In addition to processing up to 150 thousand barrels per day, the plant will also import and distribute Venezuela´s natural gas, which has one of the largest reserves in the world. Central America could also obtain it at competitive Venezuelan prices as part of PetroCaribe.

A Qatar-based investment consortium is also considering building a refinery in Panama, and Chinese investors are looking into another refinery plant in Costa Rica.

“If you want to seize the investment opportunity, you have to do it before the problem is out of hand,” says Alvaro Ríos Roca, the former executive director of the Latin American Energy Organization (OLADE). “Natural gas has many advantages, especially if you can mitigate its transportation costs.”

Untangling the web

In the past, political squabbles and a confusing patchwork of overlapping regional, state, and private networks hampered efforts to modernize Central American energy systems. As a result, investors often refrained from building new power plants or spending more of their cash flow on energy efficiency or grid automation. This environment has changed rapidly in the last several months as a result of PetroCaribe and new legislation to create attractive incentives for investors. The governments in the region are now updating their energy laws, providing greater incentives for an industry that is neither completely regulated nor fully deregulated, but somewhere uncomfortably in the middle.

As energy demands in the region are expected to climb by six percent in the next six years, new investment opportunities for multinational power companies as well as local investors are expected to open up. In a recent study, the Inter-American Development Bank (IDB) suggested that this increased demand represents an investment potential of approximately $7 billion. By 2014, the Central American Commission on Environment and Development (Comisión Centroamericana de Ambiente y Desarrollo, whose acronym is CCAD) estimates that due to the projected growth in demand for energy, between 5,000 to 5,700 MW (58,600 gigawatt hours) generated from wind, hydro or geothermal power will be added at an estimated cost of $1,500 per installed kW, or the total equivalent of $89.6 billion—a significant investment opportunity.

The region currently boasts the Sistema de Interconexión Eléctrica de los Países America Central (SIEPAC), a soon-to-be completed 1,770-kilometer (1,100-mile) energy network linking Panama, Costa Rica, Honduras, Nicaragua, El Salvador and Guatemala. SIEPAC connects Guatemala, Mexico and Belize in the North and Panama and Colombia in the South. This will enable Central America to purchase or sell energy to nearby countries in the network, such as Colombia or Mexico.

When in place by the end of the year, SIEPAC will integrate all of the region´s electricity markets and transmission grids as a wholesale market, possibly even including the Mercado Eléctrico Regional (MER), a trade exchange market for El Salvador´s surplus energy. Ideally, SIEPAC will strengthen the security of the region´s energy stores, reduce the cost of electricity and attract foreign investment in energy transportation. Ríos Roca said it could serve as a model not only for the efficient transport of energy throughout the region, but also for the kind of effective legal and operational structures needed to secure energy stability in Central America, a reality that is now possible as a result of the improving political, cultural and economic conditions in the region.

The future of renewables

What role will renewable energy play in Central America´s future? It depends on who you ask. According to the UN´s Solar and Wind Energy Resource Assessment (SWERA), Central America has some of the best wind power potential in Latin America, and more should be invested in the technology. But according to OLADE, it might not make a difference considering that fossil fuels are expected to comprise 75 percent of the world energy grid through 2030. “Central America won´t escape that reality,” said Ríos Roca.

Costa Rica could prove him wrong. The country comes closest in the region to being almost fully dependent on renewable energy as its primary energy source. In February this year, the government announced a $1.85 million hydroelectric dam complex comprised of several energy plants. According to the Costa Rican Institute of Electricity (Instituto Costarricense de Electricidad, or ICE), the hydroelectric project will provide Costa Rica with an added 630-MW capacity.

Whether it´s wind, gas, or oil, whatever technology Central America chooses to avert an energy catastrophe will need to be coupled with greater efficiency, much higher generation capacity, and significant amounts of distributed local generation from renewable sources. “The fear shouldn´t be focused simply on price increases or getting rid of the old inefficient, expensive [energy] sources. The [real danger] that should stay on the minds of governments and policymakers is the scarier scenario of real shortages, and how to prepare against them,” said Hunt.

 

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