The International Energy Agency (IEA) report, released last week, features Brazil as both a world leader in renewable energy and soon to be a major exporter of oil. The Inter-American Development Bank’s June report claims that Latin America and the Caribbean’s endowment of renewable energy resources is enough to cover 100% of its electricity needs, depending on adequate investment.
New discoveries of shale gas and deep-sea reserves also draw attention to the region’s opportunities in the traditional energy sector. The pertinent question is the same for investors and regional policy-makers: how will these countries’ energy mixes develop over the next 5 to 10 years, and what are the opportunities and risks for investment?
Brazil holds the most promise for investors in both the traditional and the renewable energy industries. Discoveries of pre-salt deep-sea oil reserves, estimated between 50 and 80 billion barrels, are expected to make Brazil a net exporter and top-ten producer by 2015. However, this expansion is dependent on capital-intensive investments and complex technology, which the country cannot satisfy without foreign investment.
Despite Brazil’s attempts to attract foreign investment through tax-incentives and feed-in tariffs, only a single consortium bid for the rights to its Libra deep-sea field. Other major oil companies doubted the opportunity for profit given the majority role of state-controlled Petrobras, as well as the burdensome bureaucracy that contributes to Brazil’s ranking of 118 out of 189 countries for Ease of Doing Business. Clashes between security forces and environmental protestors pose an additional risk.
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Brazil’s renewable energy sector offers more opportunity for private investment, though profits may be more distant, as the alternative energy market is still nascent, compared to that of oil and natural gas. However, the already significant public and private investment in wind, solar, hydro, and biofuel projects suggests that Brazil’s green energy industry will be able to take advantage of Latin America’s growing economy and the accompanying increased demand for electricity.
Last August, President Enrique Peña Nieto proposed reforms that sought to reverse more than 50 years of nationalized oil production and “return the country to its early-1980’s heyday of energetic oil drilling.” Despite the maturation and declining output of Mexico’s shallow-water fields, Mexico is estimated to have 29 billion barrels in deep-sea deposits and up to 13 billion in shale reserves. Mexico lacks the capital and expertise to exploit these reserves, but ExxonMobil, BP, and Royal Dutch Shell have already voiced their willingness to invest should congress pass the reforms.
Some experts are less enthusiastic and warn that even if the proposed reforms are passed within a year, it could take up to 10 years for production to begin in the deep-sea reserves, although enhanced recovery from older wells and shale drilling could begin sooner. Others warn that the profit-sharing contracts may not be as profitable as anticipated, as the terms under the proposal stipulate that foreign companies would receive a share of the revenues from the fields, rather than the oil and gas to sell themselves. In addition, Mexico’s security situation in the northern and western region has long been unstable due to civil unrest and gang-related activity.
Like Brazil, Mexico has significant renewable energy potential (solar, wind, hydro, geothermal, and biomass) and has already met its ambitious target to generate 25% of electricity from renewables in 2012. Mexico’s renewable sector is certain to expand, driven by growing electricity demand and a stable investment climate. Private clean energy investment increased by 273% in 2010 and will likely continue to expand.
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Both Brazil and Mexico’s traditional and renewable energy sectors are expected to grow, if they can continue to make positive policy reforms and attract the necessary investment. In 2012, Latin America and the Caribbean claimed only 6% of the world’s investment in renewable energy – the majority of which went to Brazil and increasingly Chile – but analysts at the Inter-American Development Bank claim that the region is the “new frontier“ for clean energy investment.
If the region is to live up to these high expectations, its energy-rich countries must raise capital to the tune of $430 billion to fully develop its clean energy resources. They must continue to pass reforms that will make private investment more lucrative, and thus more attractive, to hesitant energy companies – who have the capital and the expertise the region needed to develop their shale and deep-sea reserves, as well as their green energy.
However, regional trends of privatization and commitment to clean energy suggest that should Latin America attract the necessary investment, it is likely to develop a profitable and sustainable energy mix.
By. Evan Abrams