Institute of the Americas: XXVI La Jolla Energy Conference

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Since the early nineties, the Institute of the Americas at the University of California, San Diego campus has promoted an energy dialog bringing together top level executives, academics, consultants, hands on practitioners and journalists.  The exchange of information is always enlightening and the President and the staff of the Institute, especially Jeremy Martin, deserve kudos for promoting and organizing this important two-day meeting.

Here is the link to the event with the list of topics and of the distinguished speakers and panelists: https://www.iamericas.org/lajolla/

This year’s meeting could hardly have taken place at a better time.  The political economic crisis in Venezuela is ongoing, Brazil is in the midst of its second impeachment or presidential change in less than a year, Argentina’s new administration is seeking a more open and market oriented path for the use of its extensive oil/gas resources and suddenly, the small and often neglected Guyana is facing a surfeit of riches with the recent discovery of major offshore reserves.

The picture at the beginning of this text is of the panel: Brazil’s Energy Reset. On the left is Paulo Sotero, a journalist by trade and the Director of the Brazil Institute at the Woodrow Wilson International Center in Washington, D.C.  Seated with him are Rafael Ferreira of the state sponsored Energy Research Office and Andre Regra of Brazil’s regulatory ANP (Agencia Nacional do Petroleo).  Jay Thorseth, a Latin American Director for British Petroleum is between Andre and Rafael.

The perspectives from Brazil panel were quite representative of the other discussion at the Conference.  While each country has its particularities, representatives of the public sector, the private sector and academia or journalists showed unique perspectives.  Both Andre and Ricardo, for example, emphasized the reset of Brazil’s energy sector and hued pretty much to the government narrative.  Implicit in their presentations was the shift from a nationalistic PT (Brazilian Labor Party) perspective to greater market openness.  Both noted Brazil’s resumption of oil field auctions and the reduction of local content requirement that had previously put off many international investors and oil companies.  Jay Thorseth of BP, while polite and diplomatic, presented the private sector’s perspective, emphasizing the need for market realism.  Thorseth said governments need to favor foreign companies to be competitive and to access to capital, technology, knowledge and skills.  Auction and participation terms need to take into account Brazil’s need to be an attractive destination world-wide in terms of cost, profit and royalty payments.  If there are better deals elsewhere, then it is likely that the big oil companies or the so-called majors will favor these over a restricted Brazilian market.

Paulo Sotero started by remembering his previous writing on the major crisis and downfall of Brazil’s economic and political system.  This reminder, while obvious, became something of the elephant in the room.  Presenters with government ties were loath to recognize that their initiatives toward opening the energy sector depend not only on technocratic criteria but also on politics.  Thus, when Brazil’s President Temer departs, his replacement will reorder the chairs in the oil sector and in public companies like Petrobras and others in energy production and distribution.  Likewise in Mexico, President Pena Neto is in the last year of his term and essentially a lame duck.  If AMLO (Andres Manuel Lopez Obrador), a popular figure on Mexico’s left, is elected, Mexico’s energy reset will also certainly have a different orientation.   Representatives from Mexico’s public companies emphasized change in legislation in the hope of ongoing modernization and expansion of both oil and gas exploration and distribution in partnership with the private sector.  Optimistically speaking, resource nationalism is seemingly buried, but in Latin America it often rises phoenix like.  Private sector players must always be worried about institutional weakness as regulations and norms or the lack thereof thwart intentions.  Governments and businesses want to mobilize Latin America’s ample energy resources but this depends on the modernization, increased transparency, and durability of the rules of the game.  And these rules, in spite of promised advances, are still being negotiated.

The Conference provided a lot of detail on resources, processes, government action and private company plans.  The major discovery of oil in Guyana certainly will impact markets and already directly affects Venezuela and Brazil.

Finally, the presenters noted that even for traditional oil and gas players, alternative energy is now mainstream and has great significance and unlimited potential for development.  Nevertheless, petroleum and its derivatives will be the major source of energy for their economies for at least another generation.

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Brazil and Mexico: Back and Forth but Still the Same

Brazil and Mexico have traded places over the years as the main topic of interest and dynamism in Latin America.  As recently as 2001, Mexico’s economy had passed Brazil’s in terms of overall economic production (GDP).  Brazil regained its leadership again in 2005.  But recent reports state that Mexico will overtake Brazil again by 2022 or in less than a decade.

Mexico’s advance over the next years is supposedly due to its close association with the USA through NAFTA (North American Free Trade Agreement) and because of favorable developments in Mexico’s manufacturing and service sectors.  Industry in Mexico stands to benefit as production, shipping and labor costs rise in China and certain types of manufacturing move to Mexico as it offers more efficient use of the factors of production.  Brazil’s secondary sector, on the other hand, is seen as slipping in the absence of a coherent industrial strategy.  Protectionism in Brazil only favors certain cosseted companies and not manufacturing as a whole. A closed nature of the economy inhibits competition, further dragging down industries that cannot penetrate international markets and wind up making goods of secondary quality for the domestic market.  State interventionism, mainly through selective tax incentives and the picking of so called “champions” by the national development bank (BNDES), has not delivered as overall industrial production is shrinking in its contribution to national wealth.

Brazil is now hosting the World Soccer Cup and the Olympics two years later. These events have drawn severe criticism both inside Brazil and abroad for the associated cost overruns and perceived corruption.   However, they are driving major investments and give the country a new visibility.

Mexico, with President Pena Nieto, has passed major reforms in the energy sector which are also expected to attract major domestic and foreign investment.  Brazil, in turn, has reversed its opening of the energy sector making it less attractive to foreign investors.  As the US becomes a net exporter of energy (oil and gas), it is feared that Brazil may have lost it best opportunity to take advantage of the much publicized pre-salt oil discoveries off the coast of Rio de Janeiro.

Brazil and Mexico are a generation past free trade agreements.  NAFTA (Canada, Mexico and the USA) is just completing 20 years while Mercosul is approaching its 24th anniversary.  While the benefits of free trade have been lauded mainly by multinational corporations and their allies in government, as the agreements have been successful in advancing trade and investments – NAFTA much more so than Mercosul.  But it is clear after 20 years, that trade policy is just trade policy and does solve the larger institutional problems related to underdevelopment. The promises by some in the 90’s that trade would solve many of these problems have not been fulfilled.  Job creation in Mexico and Brazil remains a problem and migration continues to be a major issue for Mexico and the USA.

My conclusion is that economic growth alone is important, it is insufficient.  The big problem of Mexico and Brazil is the precarious nature of basic institutions; i.e. the educational system, the justice system, the political system.  Without predictability and institutional confidence, economic growth is stunted.  A gradual reordering of societal priorities is taking place but until people are better educated, better informed and more capable of holding their local, state and national institutions accountable, change will take place only slowly and in an incremental fashion.