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68 | DAVID MARES ENERGY, DEVELOPMENT, AND REGIONAL INTEGRATION | 69 CHALLENGES TO CONTINUED COOPERATION AND GREATER INTEGRATION The chief challenges to expanded regional energy cooperation arise in the areas of investment, the distribution of economic rents, the relationship between the export and domestic markets, regulatory regimes, and the use of energy as a for- eign policy tool. Investment capital today, both public and private, is available and interested in the region’s natural resources, but that availability and interest are unlikely to persist in the medium to long term. As the U.S. economy begins to decline, it will have a negative impact on the global economy, which in turn will have a negative impact on the availability of capital for developing countries. A U.S. recession will also drive down energy prices, thereby reducing the ability of ener- gy producing countries to invest at home, including in their own energy sectors. In the short term, there is a window of opportunity in terms of the availabil- ity of capital for expanding energy resources. The question concerns the mobi- lization of that capital for the sustainable long term development of the region’s resources and development. What is the fair distribution of the economic rents associated with the production of energy? Analysts, governments, and citizens in the region used to ask whether those rents would go to a Latin American government or to an international com- pany. In the current context of increased regional trade, the distribution question affects not only IOCs and privately owned Latin American companies but also internationally active NOCs, that is, Latin American governments buying and sell- ing to each other. The issue of rent distribution also affects the vulnerability of sup- ply: if a country is demanding a distribution of rents that is out of sync with what the markets suggest is an appropriate distribution, then that country is not going to attract the investment necessary for exploration, production, and transportation of that energy. If a country is not able to attract investment, it ends up not being able to supply its contracts (e.g., Argentina and Bolivia). A related export issue is whether natural gas rich countries will export the raw material (the gas itself ) or value-added products. This is an important question in Bolivia. For decades, Bolivians have been talking about “industrializing” the gas (turning it into petrochemicals, electricity, etc). The problem is that other Latin American countries do not want to pay Bolivia the price of value-added products. They would rather add that value in their own countries. In addition and as high- lighted earlier, the vulnerabilities are greater if a country imports a value-added product such as electricity rather than the resource, such as gas, itself. The relationship between the export and domestic markets is another key issue for regional integration. Energy exporters seek to use their energy to generate revenues in order to develop their economies. However, energy exporting coun- tries frequently find themselves debating whether it is better to export the resource and then use the resulting income, or to guarantee a particular level of supply for domestic use and only export the surplus. Giving the domestic mar- ket priority over exports creates a situation in which Latin American importers become vulnerable to the domestic energy policy decisions of Latin American exporters. Price can be the driver of giving priority to domestic supply. In Argentina, low domestic prices have decreased exploration and production, pro- ducing supply shortages. The Argentine government has thus cut supplies to Chile in order to mitigate the impact of shortages at home. An undeveloped market at home can also be a factor behind giving priori- ty to domestic consumption. Bolivia’s altiplano, where the majority of the indigenous population lives, receives little natural gas. To remedy this situa- tion, the government has sought to build a gas infrastructure, offsetting costs by guaranteeing a flow of gas supplies. But in the current context of inade- quate exploration and production investment, political decisions to develop the domestic market clash with Bolivia’s commitments to supply energy to its Latin American neighbors. As noted above, Bolivia is behind in meeting its contractual obligations to Argentina, even though Argentina pays the highest prices for gas. Emphasizing domestic priorities over regional markets is rooted in an histori- cal sense of exploitation. For example, Venezuela was an energy giant in the 1970s and ’80s, but most of the Venezuelan population failed to benefit. Whether due to the “resource curse” or not, the reality is that there are enormous numbers of very poor people in Bolivia, Ecuador, and Venezuela. It is thus understandable that in new periods of democracy, citizens say that they want these resources to be used for domestic development first. That, then, raises a challenge: how can resource nationalism be harnessed in support of regional energy cooperation? A key issue for regional integration and cooperation concerns the reliability of supply. If a supplier decides to emphasize and give priority to the domestic market, the importing country loses control over how much energy will be avail- able for purchase. Suddenly, the importing country is faced with a situation in which it gets what is leftover. If nothing is leftover, the importer gets nothing, regardless of any contract that might exist. Regulatory regimes affect investment; therefore they affect the security and vol- ume of supply. Appropriate regulatory regimes give the regulator a degree of auton-PDF Image | Energy and Development in South America
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