SANTIAGO – Simón Bolívar, the South American independence hero who hoped to weave the continent into a single nation, would shudder at the disintegration that prevails today in the continent’s energy sector. Surely he would understand that no community can be built on so fragmented a foundation.
Peru has gas, which it sells to Mexico. Bolivia also has gas, but it has been under-exploiting it ever since it nationalized the industry in 2006. Argentina used to have a gas industry, but it was decimated by years of misguided government policies. Brazil discovered hydrocarbons deep in the Atlantic Ocean a few years ago and has begun auctioning off rights, but actual production is still years away. Chile has no oil or gas, and no one in the neighborhood will sell it any, so it has to buy its supplies from as far away as Indonesia.
Moreover, South America’s electricity grids are seldom interconnected, and rates for power vary widely. Brazil and Chile have the region’s highest electricity prices (which are also among the highest in the world). The competitiveness of their industries, and consumers’ household budgets, suffer accordingly.
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Optimists imagine a scenario in which production is rationalized, pipelines are built, grids are interconnected, and gas from Bolivia, Argentina, or elsewhere fuels growth throughout the continent, benefiting everyone in the process.
But such dreams always hit a formidable obstacle: national rivalries that date back decades – in some cases centuries – and that repeatedly keep mutually profitable energy-integration agreements from being signed. Or, if they are signed, they are often broken when compelling short-term considerations intervene.
The impact of shale energy on South America is twofold. For starters, there is the potential for cheaper imports for those countries with no gas (Chile) or where local demand could exceed local supply (Brazil)
For example, a decade ago, contracts promising a steady supply of Argentine gas at pre-set prices led Chile to spend billions refitting its power stations. But, after a long period of price controls and massive underinvestment, domestic demand in Argentina was far outpacing supply. So then-President Néstor Kirchner’s government tore up the contracts and cut off exports to Chile, stunting its economic growth and leaving painful memories among its citizens.
But now a new and powerful factor could change this dismal political equation: shale gas, which is already having an important effect on the United States and its economy. With US natural gas prices down to just over $4 per million BTU (from $13 just a few years ago), even prudent analysts expect the shale-energy revolution to increase America’s potential economic growth and add as many as two million new jobs.
The impact of shale energy on South America is twofold. For starters, there is the potential for cheaper imports for those countries with no gas (Chile) or where local demand could exceed local supply (Brazil).
For a country like Chile, where large hydroelectric projects have been politically controversial, and where solar and wind power have been too slow in coming, gas imports from the US would be a tremendous boon. In 2013, the US Department of Energy authorized the first substantial gas-export facilities; while the trickle is not yet a steady flow, the gap between US and much-higher world prices implies tremendous potential benefits.
Then there is the shale gas to be exploited closer to home. Argentina reportedly has the world’s third-largest shale-gas reserves, after the US and China. The huge Vaca Muerta (Dead Cow) field, owned by the energy company YPF, is just now beginning to be explored. Argentina’s government expropriated YPF from Spain’s Repsol in 2012, with the resulting suits and countersuits delaying any potential investment in shale. But, with Argentina and Repsol recently reaching a settlement, interest has revived.
The shift in the regional balance of gas-based power could in turn cause nationalists in Bolivia, Peru, and elsewhere to rethink their policies. Integration in the oil, gas, and other energy industries, along with the interconnection of national power grids, could follow
Surely, the technical challenges of exploiting such shale-gas reserves are huge, and only a handful of firms in the world have the necessary knowhow. The financial challenges are even greater: analysts speak of tens or even hundreds of billions of dollars in required investment. But the potential for Argentina and the region is tremendous.
Federico Sturzenegger, an Argentine economist and President of Banco de la Ciudad de Buenos Aires, has estimated the value of Vaca Muerta gas (at the prices Argentina currently pays for gas imports) to be equal to nine times the country’s GDP. But, because world prices are likely to drop fast as the US steps up exports, Argentina has to act quickly in order to capture these potential gains. Sturzenegger has called the decision about shale gas “the most important” in Argentina’s economic history.
Argentina’s choices could matter not just for the region’s economy, but also for its politics. Because Vaca Muerta holds much more gas than Argentina could ever burn, exports are the inescapable way forward, and neighboring Brazil and Chile are among the natural customers.
The shift in the regional balance of gas-based power could in turn cause nationalists in Bolivia, Peru, and elsewhere to rethink their policies. Integration in the oil, gas, and other energy industries, along with the interconnection of national power grids, could follow. South America’s economic and political landscape would be changed forever.
Is this too optimistic? Perhaps. The political and legal safeguards needed to make energy flows safe and reliable would have to be built. As the region’s history shows, that is no easy task. Time and again, nationalism and shortsighted politics have trumped reason. But the stakes are so high, and the potential so great, that the least one must do is hope.
Andrés Velasco, a former presidential candidate and finance minister of Chile, is Professor of Professional Practice in International Development at Columbia University’s School of International and Public Affairs. This post originally appeared here.