Brazil, Economy, Energy, Environmental Conservation, Inter-American Relations, Mexico, Venezuela

State of Petro: National oil in the Americas

Energy is ever more becoming the piston driving Latin America to the contemporary world stage.

This reality arrives in lieu of major Chinese and Russian investments in Venezuela’s petroleum belt, Mexico’s intense debate over how to diversify foreign investment in its state-run energy powerhouse, and Brazil’s ever-expanding oil coffers that continue to propel its economy upward in the face of a global economic recession.

These three states lead energy production in Latin America and will increasingly become a lifeline for the world’s swelling consumer demand, and key to its sustainable growth. Petroleum and natural gas have for a time been assets sought heavily by the US and Europe, but now draw clientele from the surging populace of China, India, and wider Eurasia.

Amid this equation, guaranteed global supplies remain variable, tending to degrade in both refining ease and reserve accessibility. This, coupled with security concerns in the Middle East, marks a unique opportunity for the region to fund much needed domestic reform and present viable energy initiatives to the international community, beyond the distant third tier.

A fundamental challenge in scaling these energy companies to meet such global demand will be the state’s ability to balance its investment and revenue model. All three of these Latin American countries highlighted here have state-run energy sectors, though all are not created equal. For a more informative look, see the comparative breakdown below:

Country México Brazil Venezuela
Founded 1938 1953 1975
Petro Profile Heavy Crude (2/3, Maya), Light Crude (1/3, Isthmus & Olmeca) Predominantly Heavy Crude (Marlim), although newly discovered, subsalt fields are of Light grade and Sweet substance Almost entirely Extra-Heavy Crude, of Sour substance (high sulfur)
Proven Reserve Capacity 10-13.68 billion 12.35 billion 99 billion
Largest Reserve Cantarell Sugar Loaf Orinoco Belt
Onshore / Offshore % 20/80 40/60 Predominately onshore reserves, spread across 4 principal fields. Shallow water reserves in the Maracaibo Basin
Production Output 2.8 million bbl/d 2.72 million bbl/d 1.5 million bbl/d
Refining Capabilities 1.5 million bbl/d (6 refineries) 2.223 million bbl/d (16 refineries) 1.28 million bbl/d (Domestic & foreign refineries- Citgo USA)
Annual Revenue US $98 Billion (2008) US $118.3 billion (2008) US $120 billion (2008), est. US $50 billion  (2009)
Foreign Investors Sparse due to tight regulation by state apparatus, although the Calderón adminstration has opened doors for foreign investment on the deep sea exploration front Private sector energy (Shell, Cheveron), BP (biofuels), China Previous investors included major intl. petroleum giants, but after state reappropriation, Russia, Iran, China, & Brazil have agreed to looser terms under the Bolivarian regime
Principal Export Recipient(s) United States Largely utilized for growing domestic consumption, biofuels (ethanol) make up bulk of energy export United States & Europe, China fastest growing consumer

SOURCES: US Energy Information Administration, Oil & Gas Journal, Business Week, CIA World Factbook

These numbers are enlightening in the sense that they present a snapshot of current carrying capacity and orientation of each state’s petroleum sector. However, a deeper study of energy futures can prove to be a bit speculative.

In the case of México, PEMEX has long been the case study on state investment of natural resource and economic autonomy. It relies heavily on taxes from its rich output to fund an array of federal initiatives and deliver energy to the Mexican consumer at a subsidized price. But, wrought with declining output on its principal oil field, Cantarell, the company has a need to exploit deeper off-shore deposits that require sophisticated equipment and a niche expertise– tasks honed upon by transnational powerhouses such as ExxonMobil, BP, and other state companies such as PETROBRAS. Due to this shifting source dynamic, the Calderón administration has worked diligently to promote external investment. This however remains a major political hot button due to historic precedent, as the industry’s sovereignty is seen as a sacred right to the Mexican populace. PEMEX has more than the necessary resources to carry onward, but significant institutional reform will remain fundamental.

PETROBRAS has gained measurable authority in the international energy sector both for the diversification of its investments, and the expertise of its workforce. President Luiz Inácio Lula da Silva has worked diligently to build a state model that profit shares with private enterprise, while promoting a solid domestic refining infrastructure. Recent offshore discoveries in sub-salt reserves via the Tupi fields continue to grow the Brazilian lot, while Brazilian officials are aiming to funnel revenue to direct state initiatives and maintain energy independence. For the time being, Brazil appears to be playing its cards right to promote sizable production in means to maximize internal growth. It will be interesting to see when it goes net positive in its production, to which countries it will direct its resources.

Turning to the more volatile petroleum sector, Venezuela has seen its share of production ebbs and waves in the past decade. President Hugo Chávez has too tapped into the ‘petro vein’ to fund large swaths of state initiatives, however often with a playbook at odds with much of its professional workforce. Lack of international investment (due to restrictive reappropriation efforts) and flight of expertise have reduced export capacity and bogged down exploratory projects in the Llanos sector and Orinoco Basin. The state energy company, PDVSA, however sits upon perhaps the world’s largest crude reserves in the Orinoco Belt, rivaling fields in Saudi Arabia. Due to its heavy tar-like viscosity though, special refining capabilities are needed to extract petroleum from sand and sludge– a role the United States currently fulfills. This is where large investment by China and Russia will float PDVSA initiatives in the near future despite waste from within. This, while the Venezuelan state maintains institutional direction and pads its GDP.

Overall, with the exception of Brazilian offshore reserves, it appears that most new petroleum pools are of heavier grade crude. This will require a more expensive refining process and specialized facilities, promoting favorable conditions for foreign direct investment (FDI) and transnational partnerships.

The manner in which each of these companies respond to its new role in the world energy sector will be developments watched closely by all, but seems to present favorable prospects to a long-forgotten region.

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Elections, Mexico

PRI greases electoral machine in Mexican midterms

A number of weeks ago I happened to be visiting some friends in the Coahuila state of northern Mexico, just in the run-up to yesterday’s midterm, regional elections. Let’s just say you’d have to be living in a very deep hole to forgo the propaganda for its PRI governor candidate, Rodrigo Medina de la Cruz. In fact, between PRI’s luminous billboards and the beehive of Oxxo convenience stores, I had little trouble directing a taxi driver to distant locations in the city of Saltillo by pure landmark (psss, GPS, for what?). Well, it paid off.

After quite unsettling results in 2006, PRI yesterday gained critical traction nationwide, but specifically in Mexico’s federal congress, pulling rank among a divided legislature. It now carries 36% of its seats, allowing them to slingshot president Calderón’s party, PAN (27%), with the working consent of the minority party, PRD (12%). The result is a rather uncharacteristic power share in a traditionally unilateral Mexican government.

For a concise and introspective brief on the shifts implications for the Calderon’s administration, check out Alberto Saracho’s analysis on America’s Quarterly blog, reporting from Mexico City. One particular point that drew my eye came in lieu of the national budget:

Government efforts to improve the level of tax collection—one of the lowest such rates in Latin America—will also be affected by yesterday’s vote. Although it was not widely publicized, the PAN has been working with the executive to approve changes in the fiscal law that would improve public money collection. This was on target to go through after the elections, but its future may now be in doubt since one of the PRI’s main campaign promises was to not raise taxes. Either way, a solution must be found to find new revenue streams for the federal government—recent reductions in oil prices and the worldwide recession have hampered the government’s ability to obtain resources for to pay for basic functions.

Yea, a faltering tax base might pose a bit of a challenge to match cartel revenue in the billions of dollars and reign in a throbbing economy– amid shrinking remittances from abroad, a reeling tourist industry, and oh yea, the lack of technical investment in Pemex. Ouch.

While some analysts pinpoint PRI’s electoral gain to reactionary voter vengeance, maybe the old party cowboy can turn things around for Mexico. Certainly never hurts to be an optimist.

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Colombia, Economy, Inter-American Relations, Mexico, U.S. Foreign Policy, War on Drugs

10 lessons the ‘Drug War’ should have taught us


Photo via Andy Zeigert, Flickr.
Medellín boss Pablo Escobar moments after being gunned down in Dec. 1993, after a joint Colombian-U.S. manhunt operation.

A telling article featured this past Wednesday in the Washington Post underlines a flux of coca cultivation in the Andean region over the past five years– not that this should come as some inherent revelation to us all. With the United States Government spending nearly $4 billion on drug eradication and interdiction programs during this period and the crop yield flowing rather unabated, the aims of U.S. security initiatives in Latin America can be labeled a bit, shall we dare say, out of touch?

The irony of course is that these five years stretch back to another three decades of almost stagnant policy, littered with short-lived tactical successes and exhausted rhetoric. Indeed, the nature of narcotics trafficking and its actors have morphed over time, however the bottom line for U.S. drug policy has not. It continues to emphasize the destroying of the product rather than addressing the conditions under which its trade flourishes.

Recently, I debated the merits of the multifaceted Plan Colombia, detailing how American efforts in counternarcotics have challenged traditional political paradigms and have been blurred by the lofty aims of several administrations. As I note, there has been a fair measure of success in Colombia via a restoring of state legitimacy and relative sovereignty over major territory. This, however, remains a secondary objective to U.S. eradication efforts in the region.

With drug related violence spilling across greater Mexico and the United States moving to counteract its influence in much the same manner via its Plan Merida, history can offer us some choice wisdom. Here follow ten lessons Uncle Sam can hash from his fabled ‘War on Drugs’:

1.
Understand the changing nature of the beast: Narcotics trafficking in Latin America has continually evolved in both organizational structure and operational orientation in recent decades, moving away from hierarchical vulnerabilities toward flexible, “snap-in” nodes. These operate among a viral network of transnational organized crime and fringe political groups now utilizing established routes to North America via Mexico and through western Africa onward to the European theatre.

2. Counternarcotics and counterinsurgency are not mutually exclusive:
Illicit actors capitalize on bureaucratic rules of engagement. Seen early on in Plan Colombia, U.S. policy under the Clinton administration held the prerequisite that action taken with its material support, active or implicit, should strictly target narcotics strongholds. This essentially fractured a unified strategy toward combating armed actors that threatened state legitimacy before the Colombian populace. U.S. counternarcotics operations must be conducted within the lens of bolstering domestic state security and fortifying of judicial apparatuses against corruption.

3. The prevalence of narco affairs in Latin America, in part, results from U.S. neglect to engage the region on larger issues: Let’s face it, Latin America has until very recently been the forgotten theatre in U.S. foreign policy endeavors and its national security agenda. Sure, the usually banter of Hugo Chávez and his Bolivarian revolution stir the Washington pot every now and then, but the more illusive reality remains that the tide of illicit commerce and migration found in the region, be it human smuggling, gun-running, or narcotics trafficking, is testament to sparse economic opportunity and rabid corruption of state institutions by powerful mafia actors. Measures by the U.S. to promote transparent governance, state responsibility, and economic incentives for fulfilling such have been sorely lacking to bear much resemblance of Good Neighbor policy.

4. While narcotics trade may not always be politically oriented, fighting it is: Ardent diplomacy and political negotiation among American states remains crucial in combating the transnational threat posed by cartels and sub-state insurgents. Unless a level of cooperation and a unified initiative are adopted to promote inter-state security, subversive organizations will aim to exploit these state quarrels, whether they are politically oriented in orientation or not– it’s in their own self interest to pit the region’s regimes against themselves and the lever of U.S. strategy.

5. Targeting narcos draws strange bedfellows: Aka. “blowback”. As one can readily see in the unfolding parapolitcal scandal on the contemporary Colombian stage, and through much of U.S. cold war policy in the region, crushing insurgencies forges some ugly alliances with vigil ante groups. Remember Los Pepes stalking drug kingpin Pablo Escobar amid U.S. support?…those same leaders subsequently led paramilitary death squads in record disappearances of Colombian campesinos.

6. This is a domestic battle as much as a transnational plague: There is a fundamental reason the narcotics industry draws billions of dollars annually from its sales and arms itself with military grade weapons– yep you guessed it, U.S. supply and demand. Until this issue is addressed from both sides of the aisle, its going to take a lot of Hail Mary‘s and super-duper border walls to combat American demand for blow and ganja.

7. It is a campaign that can never be won, but can be properly managed: No way to kill all the cannabis and coca plants south of the border, even with the magic touch of Round-up. No way to blockade every one of those superfluous routes to the U.S. or Europe, or even to hunt down the industry’s school of big flounders. This is not a war that can be won by numbers or decisive blows, it is a campaign that should aim to manage state authority, exercise territorial control, and provide attractive alternatives to the struggling populace.

8. States should be rewarded for complicity, not shunned and isolated for alternative agendas: U.S. policy of disengagement has not proven to be very fruitful in terms of national security or furthering of inter-American cooperation. Shunning Venezuela, Bolivia, and Ecuador as pariahs for their “alternative” approach to collective nationalism has only worked against efforts at diminishing supply and financing of fringe opposition. While these states work to build opposition to American influence, they dangle carrots to smaller nations prone to sway by incentive (petroleum, mining, natural gas, medical aid, etc.). U.S. apathy imparts a political vacuum in the region.

9. Foreign aid should be distributed based on fulfilled benchmarks: Instead of penalizing and sanctioning American states for not complying directly with U.S. strategy, reward their demonstrated efforts to achieve compromised objectives. Demonizing regimes such as that of Morales, Chávez, and Correa only plays into their domestic cards. Hasn’t the United States had a fair measure of success in other regions of the world following this very same premise?

10. The United States Government is more than capable of leading a regional security initiative and promoting a level of stability to the Americas: The United States with its regional partners has had more than its fair share of known tactical successes against cartels and insurgent groups in Latin America. Look to the training of Colombian special forces in recent years to curtail the FARC, the capture and extradition of major mafiosos, the fall of the Medellín and Cali cartels in the 1990s, the disruption of international cells operating in the southern cone, among thousands of major seizures and raids from actionable intelligence. The problem has never been one of capability or even sheer logistics when cooperation is forged…it has been a matter of political vision and overarching strategy. That shift needs to be made to the larger picture, foregoing the eternal quest to burn the mother of all drug caches, toward the understanding that security interests are served by promoting strong governance of the American states.

Among these few, I’m quite sure there are many more valuable lessons that can be gleaned from the counternarcotic campaigns of Latin America, amid other international bouts of transnational crime. Feel free to weigh in and let us know, what do you see as cornerstone to pan-American security?

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