Institute of the Americas: XXVII La Jolla Energy Conference – Comments by Steve Scheibe at www.allabroadconsulting.wordpress.com

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Author’s photo of conference panel

 

In 1991, a barrel of oil sold for an average of US$36.00.  Last year, the average was around $42.00 as the following chart shows.  Today, oil is in the mid $60s.

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There was a lot of talk in the 1990s about peak oil and running out of it one day.  It is amazing how the world changes but still things stay the same.  Oil is now relatively abundant, more complicated to extract, more is known and feared about environmental impact and consequently alternative and more sustainable sources of energy are increasingly important.  Thus climate change, sustainability and the future of energy production have become increasingly important parts of our energy network and its future.

The Institute’s Energy Conference has shown great value and staying power.  Its organization and execution is a formidable task and the Institute of the Americas and Jeremy Martin and staff deserve kudos for another year of success.  A cursory overview of the program (https://www.iamericas.org/lajolla/) attests to the Conference reputation and prestige.

This year’s Conference drew speakers from Mexico, Brazil, Argentina, the USA and numerous organizations such as Brazil’s ANP, Mexico’s energy regulator and the CFE as well as Argentina’s producers and control sectors.  The oil giants were also present with high-ranking executives from Exxon Mobil, BP, other majors as well as companies in consulting, construction and distribution.  Non-Government Organizations (NGO’s), representing civil society and environmental interest participated on equal footing with market driven business organization.  Finally, the Conference always attracts academics and journalists who specialize in energy and related policies.

Oil, gas and other energies intertwine with politics and this is certainly the case in Latin America.  Of course, Maduro’s reelection in Venezuela, the race in Colombia and the upcoming races in Mexico and Brazil were frequently discussed both on and off the record.  The main concern for the industry and investors has been to divine the future.  Investments run in the billions of dollars and while time lines and linkages can be established, the future prices of oil and the future national policies cannot be predicted with much accuracy.  The ongoing business challenge for the industry is to find predictability in unstable and weak institutional structures and rapidly changing markets.

Here is a brief summary of the main points by the major energy producing countries highlighted at the conference in alphabetical order:

Argentina:  President Macri replaced the populist Peronists Nestor and Christina Kirchner.  The Kircheners governed between 2003 and 2015 with a mixed record of growth and stability and a pronounced animosity to too much foreign participation in the energy sector.  Their price control policies hampered investments and nearly broke the power generation and distribution sector.  President Macri’s challenge has been to try to revive the sector while at the same time controlling inflation and soften the hit on people’s pocket books with the rise of energy prices.  With Cristina Kirchner, electricity and other energies were subsidized at around 50% of production costs.  This led to unreliability and frequent outages.  Under Macri, the government has installed a new regulatory authority and is attempting to make the sector attractive to both foreign and domestic investors.  Natural gas plays an important role and has brought Chile and Argentina closer in a symbiotic with the former at times supplying natural gas or being a market as Argentina opens up offshore and onshore resources.

Brazil: The international oil sector perked up on Brazil with the 2016 impeachment and Brazil’s ongoing offshore auctions have been widely seen as successful.  Exxon Mobil, a major investor, has returned, as have other foreign oil companies (???).  The black cloud on the horizon is the lack and increasing loss of legitimacy of the Temer government.  Normally, Decio Oddone, the head of the ANP (Brazil’s oil/gas regulator), has attended the La Jolla Conference.  But Decio did not come this year and I suspect that was due to the current truck-drivers’ strike over the cost of diesel fuel. This strike started on the eve of the conference and caught the government by surprise although informed parties such as Mr. Oddone knew that the crisis was brewing.  The consequence of the strike, which still has not been settled after 10 days, has led to wide productive paralysis and a half point loss in 2018’s estimated GDP, plus the further weakening of the government.  So again, the lack of stability and weak institutions has come to the fore.  Overall, presenters on Brazil such as Raphael Moura of the ANP, Nelson Narciso, of NNF Consulting a former ANP director and Thiago Aragao of Arko Consulting were all optimistic about potential and excellence at Petrobras after the Lava Jato clean up. But they were sober about the current political moment and the October elections.  Aragao tweeted: “The positioning of candidates endorsing political interventions at Petrobras is not a positive sign for 2019.”

Mexico: Like Brazil and Colombia, the our next-door neighbor is also in the final months of a presidential campaign with the results likely impacting the energy sector.  Under the current unpopular administration of the PRI’s Pena Nieto, energy reform in Mexico advanced in an unprecedented fashion with important openings, especially in the natural gas market.  US and other foreign companies have already invested billions in Mexico’s pipeline logistics and gas distribution.  The likely victory of Andres Manuel Lopez Obrador (AMLO) is sometimes perceived as threatening this change due to AMLO’s leftist and populist programs as a presidential candidate in two previous elections.  However, the speakers and panelists were uniform in emphasizing that these changes had been written not only into law but also into the Mexican Constitution.  So it is unlikely that these changes can be reversed.  Although AMLO leads in all polls, it is unlikely that he will have a 2/3rds majority in Congress to reverse the changes that reduced PEMEX’s monopoly position in production and distribution.

Venezuela: Before the conference, the Institute retweeted a prediction of Maduro’s fall before the end of the year.  However, the Chavistas have been notoriously resillient and the consensus among Congress participants was that the regime would likely remain in power through 2018.  Still all speakers agreed that the Maduro administration has been a disaster for the oil based economy and Venezuelan society.  Hyperinflation runs at 11000% per year, thievery riddles the national oil company PDVSA, there is an accelerating decline in oil production on a month to month basis at above 4% and oil revenues will fall to less than $10 billion in 2108 or about half the revenue generated in 2017.  Venezuela’s government has stopped paying bills, is bankrupt and only survives due to grudging support from Russia and China, which still see the country as an anecdote to US presence and power in Latin America.   Although President Trump and his administration have mentioned military intervention and have imposed further sanctions, it is unlikely that the US actions will have any positive impact.  So from an energy perspective, Venezuela continues its dive to irrelevancy.

Renewable and sustainable energy have a growing presence at the La Jolla Conference and, in this context, Chile, Argentina and Bolivia gain further relevance as major sources of the raw material for lithium batteries for electric vehicles.  Personally, I found it interesting that speakers at the Conference included natural gas in the discussion of renewables alongside wind and solar.  Gas has a role in the cleantech revolution. The variability inherent in wind and solar energy plus the storage issues continue to present challenges.  It was noted that fossil fuel energy has a history dating back more than 120 years and, by comparison, the alternative clean energy sector is still in its infancy.

Once again the La Jolla Conference provided insider insights and a great opportunity for meeting and greeting in a professional but very cordial atmosphere.  Everyone is looking forward to the next conference.

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