Western Hemisphere 2021 Energy Landscape and Outlook

Perspectives from the Institute of the Americas Energy & Sustainability Non-Resident Fellows

Energy Landscape & Outlook western Hemisphere 2021

Perspectives from the Institute of the Americas Energy & Sustainability Non-Resident Fellows

the region. Our goal with this document is to provide a regional snapshot of key insights as we leave 2020 behind and head into what we all hope is a fresh new start and another important year for the Western Hemisphere’s energy sector.


The new year always brings a fresh start. Changing the calendars from 2020 to 2021 was even more monumental given the duress of last year. But the new year also provides an opportunity to consider what key trends and issues face the region’s energy sector in the coming twelve months. To that end, the Institute of the Americas invited our 2021 Non- Resident Fellows to prepare short essays with their views on the landscape and outlook for the sector. Our Fellows are based across the Western Hemisphere and thus provide a unique angle to better understand the contours and possibilities for the coming year. Their essays set forth a high-level overview and outlook based upon two principal questions: What is the key energy trend to watch this year? What is the general landscape and outlook this year for the energy sector in your country? Additionally, this January in the United States a new administration takes office. The implications for the hemisphere are important and are at the center of one of our essays in this outlook.

Argentina Outlook By Andres Chambouleyron

The key energy variables to watch this year will be both oil and natural gas prices. These will be the result of the interplay between demand

(GDP growth) and supply (production and proven reserves). GDP growth, however, will be tightly linked to the evolution of the COVID 19 pandemic, confinement measures and the vaccination processes throughout the world. According to the U.S. Information Energy Administration (EIA), during 2020 demand fell by 8%, 3% and 2% for oil, natural gas and electricity respectively. EIA estimates that pre-crisis demand levels will be not attained until 2023 or

What follows is a compilation of essays prepared by our distinguished group of experts from almost every corner of



2025 when we should also see commodity prices slowly converging to pre-crisis levels as demand recovers. The greater reduction rate in oil and gas demand vis à vis electricity is explained by the fact that during the pandemic liquid fuels demand for transportation collapsed, an impact that was not seen in electricity demand, especially in the residential sector that saw an increase in consumption due to lockdown measures. As prices of oil and natural gas converge to their pre-crisis levels and the prices of alternative renewable sources of energy and storage continue to fall, we should see countries vigorously resume their transition from conventional hydrocarbon based power sources to renewables consolidating their march towards full decarbonization, digitalization and decentralization. Oil and gas production in Argentina has been decreasing during 2020 due to both falling prices consequence of the collapse in demand following the pandemic and lockdown measures. The government has reacted by enacting stimulus measures for domestic oil and gas prices to prop up local production. It is unclear that the package will eventually work given the high uncertainty that investors face in Argentina and the reluctance of consumers to pay higher prices. The government subsequently announced that local new prices for natural gas will not be passed on to final consumers meaning that the wedge between the price collected by supply and that paid by demand will be covered by subsidies as end user tariffs for natural gas continue to

be frozen since 2019 without a clear path of future evolution. If local gas production does not respond to the stimulus package quickly enough for the winter months, then LNG imports will have to increase. This reliance on imports will in turn enlarge the subsidies bill. In the electricity sector, the outlook is essentially the same: end user tariffs remain frozen since 2019 without any proposed future adjusting mechanism. As in the natural gas sector, the average electricity price paid by end users covers around 50% of generation costs, the difference has to be covered by public funds. It is estimated that this year subsidies to CAMMESA (Argentina’s system operator and electricity market broker) plus the gas sector will amount to 2% of GDP or US$ 9 billion. Regarding the transition to clean energy, Argentina today counts 4 GW of renewable capacity installed which represents 10% of total installed capacity with around 9% of total power generated. Total awarded renewable projects amount to 5.2 GW that are scheduled to become operational in the next two years. At this time, no new bidding processes of renewable energy sources are scheduled to take place in the coming years.



AMLO’s victory

Mexico Energy Outlook and Scenarios By Francisco Xavier Salazar Diez de Sollano and Leonardo Beltran

2021 will be a crucial year for the energy sector in Mexico. Two key variables - economic performance and the results of midterm elections in June - will shape the future of the industry not only for 2021 but for the rest of the administration. One way to think about the outlook is to consider four different scenarios that depend on the evolution of these two variables:

Scenario I: Partial Reform

This scenario occurs if the economy does not do well but AMLO continues to hold a majority in the lower house similar to the one he currently has. Under these circumstances, reality, particularly in the economic field, and political restrictions would prevent him from doing constitutional changes, but he would still push legal amendments to support his decisions to strengthen PEMEX and CFE market position.



This renewed strengthening of the state productive enterprises could entail amendments to limit the private sector from freely participating in areas like generation or distribution of fuels. Changes in the logic of electricity dispatch and restrictions to private imports of fuels would be part of the modifications to avoid the judicial challenges that the current decrees have faced.

Scenario II: Full Reform

This scenario will occur if MORENA and allies win the legislative elections to renew the lower house and most of the local congresses, at the same time that Mexico experiences a rapid economic recovery in the first half of the year. If tax revenue grows and investments start to occur, a political victory will back up a counter-reform that will tend to revert the current legal framework. The larger the victory and the better the economic performance the more comprehensive the reform we could expect. This is not only because of the political support AMLO would have but also because it could open the door for a constitutional reform. Of course, one should consider that even with a super- majority there are restrictions that could limit the extent of the reform such as the free trade agreements that Mexico has signed, opposition from the industrial sector and foreign political pressure. Yet, the risk of a full back track in the energy sector plus additional measures is high in this scenario. In the power sector, under a constitutional reform we could observe in addition to getting CENACE back to CFE, the reclassification in the constitution of “generation” as a strategic activity, banning effectively new private sector investment, and in all likelihood getting back to SENER the Energy Regulatory Commission (Comisión Reguladora de Energía or CRE).

It could also limit (more) the autonomy of the regulators and even go as far as to change the institutional architecture of the energy sector to have a full control despite the fact that some changes could be unconstitutional (like for instance reinserting the electricity and gas operators within CFE and PEMEX). All of this in turn would likely result in lower reliability and higher costs to the system while investment decisions would be at best delayed if not cancelled.



enterprise to retain the lion´s share of the national electric system.

In the hydrocarbons sector we could expect likewise the return of CENAGAS back to PEMEX, the reinstatement of regulation back to SENER on all activities regulated both by CRE and the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos or CNH), and the reversal of the possibility to carry exploration and extraction activities for the private sector as stated in the current text of the constitution.

In the hydrocarbons sector, PEMEX could start developing farm-outs most likely with up to 46% of participation from the private sector.

Scenario IV: Status Quo

Scenario III: Pragmatism

If AMLO does not win the elections but the economy recovers somewhat, then one could expect that the leadership of the existing institutions would continue to align with the vision stated in the energy sector program of the administration, with a de-facto counter-reform that hinders private investment and favors PEMEX and CFE. Only those areas where these two state-owned enterprises are not active will continue to be an opportunity for new private investments. In the power sector the most promising opportunities would continue to be in bilateral contracts between market participants and developing dedicated renewable energy projects for export of clean power to help meet the growing needs of industry and the targets set by several subnational governments in the United States.

If the economy continues to deteriorate, tax revenues fall, and MORENA and their allies lose the majority they currently have in the lower house, pragmatism could ensue for the rest of the administration. The level of pragmatism would depend on issues like the level of decrease in oil production, a deeper worsening of the financial situation of PEMEX, electric problems in the grid, and further deterioration of the credit rate of PEMEX, CFE and the government itself. Pragmatism would be the result of political calculations to win the 2024 elections. In this scenario, the power sector could witness a resumption of the electricity auctions where CFE would partner with the private sector retaining 54% of the majority of each of the projects and permitting would reopen adjusted to the conditions set by the state-productive



Final Remarks

Green Hydrogen: Latin America ranks second after Africa as the continent with the highest share of renewables as part of its total primary energy supply (traditionally reliant on hydroelectricity, the region created some of the most dynamic renewable energy markets of the last decade). This is a privileged position for the production of green hydrogen, where a key driver is competitive green power. It has become difficult keeping abreast of developments in green hydrogen given the many new initiatives launched every week, no doubt justified by the stimulus packages and development funds that have been created to help economic recovery, most notably the European green deal. these [projects], adding up to around 200 MW of electrolyzer capacity”. But most of these projects are happening in other continents, not Latin America. If this is indeed to be the decade of green hydrogen, regional policy makers and enterprises should commit to serious efforts to co-create a roadmap and claim a share of this new industry, as it might be a critical source of competitiveness in the emissions constrained world we are heading towards. Chile is the exception. Despite understandable constraints on governments’ budgets, one opportunity within reach is working collectively in the development of regulatory frameworks. According to IRENA in its report Green Hydrogen Cost Reduction “by September 2020, there were almost 320 of

As with any scenario analysis, it is important to underscore that reality is more complex and that the final outcome – independently of the behavior of the considered variables– will only be an approximation. Also, it is important to note that in this case, the two variables used to characterize the potential scenarios are somewhat linked. Particularly, it is probable that economic performance could influence and impact election results. Additionally, it is likely that the economy will not perform very well. Given that reality, it is quite conceivable that the final outcome will be a mix of scenarios I and III.

Transitioning to a Sustainable Path By Marta Jara

As agendas remain hijacked by COVID-19, the future just kicks in - with perhaps not sufficient attention from humanity as to what can be done to effectively shape it in ways that are sustainable and prosperous for all. In this spirit, which are the opportunities to watch in 2021?



intermittent and volatile pattern of renewable power to secure a stable supply, reap the benefits of curtailed capacity and support sound consumer choices. Uruguay is frontrunner in managing a power system running at close to 100% renewable (just passing the first test of a heavy drought in a La Niña year). Lessons should be shared and further experimentation welcomed. Subsidies remain an obstacle for energy transition and distort markets. No doubt, the current economic hardship calls for support to vulnerable populations but subsidies which are not targeted miss the point and are very expensive. It takes technology solutions to keep track of subsidies reaching the intended targets. The sector remains subject to political capture across the region. This affects present performance but also investment, as prices stem from political decisions instead of market signals. As substitution replaces the traditional fossil commodities, as a society we have a choice: it can be a traumatic transition or one that is better planned and resourced, as funding will be required for remediation, re-skilling of the workforce and new infrastructure.

Infrastructure: The future energy matrix - electrical - is changing the paradigm of energy infrastructure towards a very distributed system. The dreams of cross-border integration that dominated the rhetoric for decades have not materialized. One only needs to see a map of cross- border natural gas infrastructure dated 2000 to concede that little was added. It is difficult to see how Vaca Muerta is ever going to anchor gas pipelines for export projects (perhaps, instead, its monetization will happen as a resource for blue hydrogen production with CCS). But integration of power transmission systems remains relevant and market design coupled with new technologies should help develop what is a very shallow market and pave the way for transparent transactions. At regional and local levels, grid investments are necessary to integrate the

In sum, 2021 is a year where the energy sector has a leading role to play in transitioning to a sustainable path.



of production, as well as by market trends and environmental requirements.

Brazil Outlook: Pre-Salt Layer Remains Immune to the Pandemic By Nelson Narciso Despite boasting one of the generated from renewable sources, Brazil maintains the Pre-Salt layer at the forefront of its energy trends for 2021, with the prolific oil and gas area accounting for 68% of domestic oil production, a figure that is expected to rise in the foreseeable future. In 2020, Brazil also registered record numbers for oil exports and the trend is expected to continue on this path this year, since around 60% of the exported volume is absorbed by the Chinese market to supply the Asian country's economic recovery. Despite the effects imposed by the global pandemic, the Pre-Salt oil remains highly valued in the international market, as it has benefitted from the new specifications for marine fuels with low sulfur content set by the International Maritime Organization (IMO), as well as displaying good acceptance by Asian refineries. Therefore, the Pre-Salt's competitiveness can be explained by the high productivity of its wells and its decreasing costs cleanest energy matrices on the planet, with over 46% of energy

The Brazilian government has already confirmed it will hold new bidding rounds for oil and gas exploration blocks in 2021, which continues the multiannual calendar of new offered areas that has been in place over the last three years. Another highlight promoted by the Brazilian government for this year’s oil and gas calendar is the enactment of the New Gas Law. The regulatory framework was approved at both houses of Congress – Chamber of Deputies and Senate – late last year, and it should be ratified as law by the Executive Power by the end of the first semester. The approval of the new regulatory framework for the natural gas market is essential to attract investments in the sector, thus creating competitive conditions for the monetization of gas reserves associated with pre-salt oil, as well as bringing new players, such as producing companies of different sizes and transport companies to a new market that needs to operate independently from the oil segment. With regards to Petrobras, the company's divestment program should remain successful for 2021, with an emphasis on the sale of assets in the natural gas and refining segments. After being sanctioned by regulators,



Petrobras will sell its shares in the transport and trading of natural gas sectors. In the downstream area, the company expects to conclude the sale of eight refineries between the end of 2021 and the first semester of 2022. In the pre-salt environment, Petrobras places high hopes in the development of the Buzios field in 2021, which is the largest deepwater field in the world. Expectations for the electric power sector in Brazil in 2021 are primarily around the privatization of Eletrobras, which at this point looks implausible this year. Eletrobras is the largest electricity company in Latin America, responsible for 30% of generation capacity, 44.7% of transmission and 7% of electricity distribution in Brazil. After successive crises and poor management in the electricity sector by the government, the company has absorbed huge losses and needs to pursue private capital to remain afloat. The privatization process, however, faces strong political resistance, particularly from sectors of the Senate, as a large government corporation carries distinct interests for different parties. There are four electricity generation bidding rounds and two rounds for power transmission already confirmed for 2021, as well as the ongoing gradual replacement of fuel oil thermal plants by natural gas plants, renewable or hybrid units. In the renewable energy segment, Brazil remains one of the most promising investment frontiers in the world. The

installed capacity for wind energy in the country is at 16 GW and is expected to reach 18 GW in 2021. There are wind farms parks contracted in the last bidding rounds whose construction have not started, thus bringing the perspective that wind energy capacity should reach 23.5 GW by 2025. The solar energy park is expanding too, exceeding 7.2 GW of installed power. The forecast for 2021 is to reach 10 GW. The high incidence of wind, solar radiation and hydro potential enhances Brazil’s quest to boost the generation of clean and renewable energy in the next decades, which decisively contributes to a low carbon economy. While the oil and gas sector explores the vast Pre-Salt resources, the country maintains a relatively high 46% of green energy generation.



The Vancouver Olympics was a successful public relations campaign for Ballard but less so for the municipalities that had to keep operating the buses after the games were finished. By 2013, all of the buses were converted to diesel due to high operating costs and complaints of poor performance in cold weather (Ziedler 2013). Environmental groups also questioned the green impact of the buses since hydrogen had to be brought from Quebec. Not long after, the aspirations for a hydrogen economy lost some of its shine as electric vehicles (EVs) started to take off and the fracking revolution reduced gas prices and the fear of fossil fuel shortages. But by 2018 the hydrogen story came back in full force again. A growing number of countries were publishing visions, roadmaps and/or strategies for the deployment of a hydrogen economy. (IRENA 2020).

Canada’s Hydrogen Strategy: Is this Time Different? By Roger Tissot Like La Bamba, Canadian hydrogen becomes popular every twenty years or so. After GE abandoned the concept, and thanks to funding from the Canadian Department of Defense, the hydrogen story in Canada became almost synonymous with Ballard Power System, a Vancouver corporation. The resurgence of hydrogen is derived from its unique number of advantages as a climate solution, particularly in sectors that are the most difficult to decarbonize and where alternatives are limited. Back to the Canadian hydrogen tale. In the 1980’s Ballard made a major technological breakthrough coinciding with California’s new zero emission mandate (McDowall 2010 ). More than a decade later Ballard, with support of the Federal and Provincial governments was ready to showcase its technology in buses to be used at the Vancouver Winter Olympics: Ballard provided the fuel cells, New Flyer, a bus manufacturer from Winnipeg, the buses, while Air Liquide from France and HTEC from Vancouver provided the hydrogen.

In December 2020, the Government of Canada published its Hydrogen Strategy, following a similar document published by the Province of Alberta.

Politically, hydrogen is one of those rare technical options that could help bring together the new political solitudes of Canada: The west – mostly Alberta – and its strong dependency on fossil fuels, has been increasingly alienated



by what they see as Eastern liberal elitism and anti-oil industry policies. The East – mostly Ontario and Quebec liberals - with a more diverse economy and energy sources tend to favor strong government action to combat the risk caused by climate change. The proposed strategy sees a strong role for “blue hydrogen”, which is hydrogen produced from natural gas and other fossil fuels but requires carbon capture. Alberta is well-positioned due to its large low-cost natural gas reserves, plenty of carbon storage capacity, a large pipeline infrastructure and a well-developed oil and gas industry that can pivot to a hydrogen industry. From the East, Canada vast hydroelectric infrastructure makes an optimal supplier for “Green hydrogen”, hydrogen produced using electricity from renewable sources. The strategy sees strong opportunities for hydrogen fuel cell trucks, buses, pitchfork, and other transportation means in which EV batteries are not optimal. In short, the hydrogen strategy can be read more as an “industrialization strategy” with something for everybody. The economic potential is significant: expected annual revenue from domestic demand of C$50 billion by 2050, 350,000 new jobs created, and an abatement of up to 190 Mt of Co2 among others (Natural Resources Canada 2020). The strategy includes a C$1.5 bn of seed funding to help attract private investment (Bennett 2021).

There are still numerous challenges ahead, many recognized in the document. The main issue is cost. To make hydrogen viable in addition to carbon pricing mechanisms regulations such as a Clean Fuel Standard are required. Politically the strategy can also be victim of buyers’ remorse in a post-COVID world. Having reached record high fiscal deficits because of the COVID-19 pandemic response, pressure could mount to rein on fiscal spending, reducing resources available for the deployment of strategy. Finally, the strategy requires global coordination to ensure there are no carbon leakages in foreign trade. The Canadian administration may be hopeful from the political changes that could be expected from the Biden administration.



As for his administration’s prospective Latin American energy engagement, recalling Obama era policies, there appears to be a strong inclination to support increased investments in renewables, and, of course, the primacy of combatting climate change. Although yet to be fully defined, the new Biden administration’s policies will likely revert in many ways to what may be best described as the status quo under President Obama, which stressed policies of multilateralism and enhanced trade. This conventional wisdom is supported by the number of foreign policy and national security team members appointed to-date who previously served under President Obama. Again, in line with the idea of reverting to an Obama-era- based status quo, the Biden administration’s hemispheric plan will center around the expansion of foreign aid, mobilization/facilitation of private investment, anti- corruption and poverty reduction. Given his experience and as detailed in his campaign platform, the Biden Administration will prioritize aid to areas such as Honduras, Guatemala and El Salvador – the Northern Triangle – in an effort to ease the poverty and violence that encourages migration, but with the important context of anti-corruption parameters to fully tap the aid in question.

The Biden Administration and Implications for Latin America’s Energy and Climate Landscape By Jeremy M. Martin

On January 20, the incoming Biden administration assumes office. He and his team tasked with Western Hemisphere engagement face a region devastated by COVID-19, with most countries facing record- breaking economic downturns.

But, President-elect Biden is no stranger to the region. Yes, the region has changed, particularly in the wake of COVID- 19. However, he and his team’s depth of understanding of the historical, economic and cultural elements surrounding much of the policy discourse should not be underestimated. During his eight years as Vice President, Biden was the Obama administration’s de facto Special Envoy for Latin America and the Caribbean. He traveled to the region more than a dozen times and paid particular attention to issues in Central America and the Caribbean.



President-elect Biden has signaled that his administration will re-enter the Paris Agreement on day one and likely convene a global climate summit in the first 100 days. His administration will re-commit the United States to the climate change battle as underscored by his cabinet appointments, particularly that of John Kerry, as the first- ever special presidential envoy for climate. The climate focus could translate into a direct and specific engagement with Brazil about deforestation in the Amazon. But, here again, the challenge with Brazil will be more effectively addressed through expanded multilateralism and greater regional cooperation with neighboring countries and extra- regional partners such as the EU and even China. Yet, it is not just about multilateralism and dialogue. President-elect Biden proposes an investment strategy as part of his current climate plan. The proposed blueprint emphasizes “clean energy and resilient and sustainable infrastructure” that will subsequently “drive an innovation boom that helps us achieve the vision of a hemisphere that is secure, middle class, and democratic from Canada to Chile.”

Engaging in this strategy includes supporting well-integrated power grids from Mexico through Central America to Colombia. Furthermore, the Biden team will encourage clean energy transitions and climate change adaptations for regions that experience severe weather conditions and patterns, such as the Caribbean and the Northern Triangle. The Biden administration will also use the Clean Energy Export and Climate Investment Initiative, which provides low- cost financing to small island nations in the Pacific and Caribbean that are prospective leaders in combating the climate crisis.

These plans, while ambitious, are attainable by helping to spur greater U.S. private sector investment in the region.




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