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70 | DAVID MARES ENERGY, DEVELOPMENT, AND REGIONAL INTEGRATION | 71 omy from the demands of vested interests and governments. That independence provides confidence to all parties that the basic supply and price terms of the ener- gy contracts will be respected. Unfortunately, in many producing countries of the region the regulatory function is underdeveloped and often in the hands of Ministries of Energy or Finance and thus subject to political pressures and manip- ulation. The consequent uncertainty discourages investors, thereby slowing the development of a regional market. Regulatory regimes also affect contracts directly, often by unilaterally alter- ing the terms under which private investments were permitted. The concern for investors is not whether the contracts will be subject to renegotiation: when there is a dramatic fluctuation—either an increase or a decline—in price, com- panies (whether they are NOCs, international oil companies, or local private companies) know that the old contracts are not sustainable. What NOCs and international oil companies do not want is to renegotiate a contract and then thirty days later have to renegotiate it again, and six months later have to rene- gotiate yet again. That is simply too much uncertainty around investments that are, after all, enormous. It is also too much uncertainty for governments, whether they are exporters depending on the generation of income, or importers needing to generate power. Massive uncertainty is deeply corrosive to the energy trade. Regional energy integration thus requires the development of better and stronger regulatory regimes. Using energy as a foreign policy tool constitutes another obstacle to regional ener- gy integration. This issue relates not only to the non-market terms on which ener- gy may be sold, but also to the non-market terms for gaining access to supply an energy market. When access to energy exports and energy markets are linked to specific behavior by governments, governments are forced to consider not only the cost of that specific energy resource but also the cost of changing the country’s for- eign policy. If we assume that governments adopt foreign policies that best meet the needs of the political coalitions supporting the government, then any changes to those policies will require costly political adjustments at home. This added politi- cal cost could make imported energy less competitive with alternative sources and thus slow regional integration. CONCLUSION Whither energy cooperation and integration in Latin America? Security of supply is not an issue only affecting the United States. Latin American countries also have concerns about the security of their imported supply, and have turned increasingly to domestic exploration, extra-regional LNG imports, and potentially, nuclear energy. Assuring energy security in Latin America means that energy integration will be global, not just regional in scope. Latin American energy importers are unlikely to pay more for energy imports simply because they come from a poor neighbor. It is desirable to make concession- ary sales an element of the regional dynamic, but an energy integration scheme can- not be built around the idea that through energy, governments and consumers will be providing aid. A central question concerns whether or not Latin American ener- gy exporters will be competitive in an increasingly globally integrated energy mar- ket. Bolivia, for example, may actually lose some of the great advantages it had five years ago in the region. The global integration of energy markets also raises challenges to countries like Ecuador and Venezuela. They will be competing for regional energy markets with international suppliers who offer more stability. When energy security is a concern, stability is something for which consumers are willing to pay. The fundamental energy question confronting the region today is whether regional energy integration in Latin America will be driven primarily by political agreements or by market relationships. Each of these drivers generates its own prob- lems. If energy integration is driven by political agreement, then the challenge for both investors and importing countries is the credibility of those political agree- ments in a context of economic or political volatility. For example, in 2001–2002, the problem in Argentina regarding the security of exports was not initially one of political will, but rather the collapse of the Argentine economy. That set into motion a number of political and economic reactions that neither Chile nor Argentina had foreseen when they signed the treaties in the 1990s that ostensibly provided Chile with guaranteed access to Argentine gas. In cases such as Ecuador and Bolivia, where over the last decade multiple presidents have been forced out of office by demonstrations in the streets, the credibility of political agreements will be low. How can an importing country confidently develop its energy policies based on the promised future behavior of the Bolivian and Ecuadoran govern- ments? Energy integration affects the entire energy matrix and energy infrastruc- ture, all of which entail large investments and big gambles. The reliability of polit- ical agreements is thus crucial. Market relationships generate their own challenges. If energy integration is based on a regional market, the implication is that countries will not give priority to their domestic market. The market of a neighboring country will have the same priority as the domestic market because both countries are part of a regional mar- ket and energy flows across national borders.PDF Image | Energy and Development in South America
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