Amauri Costa Offers Perspective On Latin America’s Energy Future

April 2009 Vol. 236 No. 4

A P&GJ Staff Report

A new survey of Latin American energy executives paints a vivid picture of the region’s energy future and its challenges. The study was conducted by Bracewell & Giuliani LLP and Business News America. A noteworthy finding is that 62% of the respondents believe oil output in Latin America will peak sometime in the next 10 years.

P&GJ recently examined the study’s country-by-country findings with Bracewell Partner Amauri G. Costa. His observations offer some good words for the wise in the industry.

P&GJ: What findings in your study were most surprising to you?

Costa: I was most surprised by the fact that almost 30% of the survey participants consider nuclear energy necessary in Latin America for the region to achieve sufficient power generation during the next 20 years. Considering the very low use of nuclear energy as a source of power in Latin America, and the region’s heavy reliance on hydroelectric and gas-fired thermal power plants, I was surprised by this acknowledgment of the role that nuclear energy may play in the overall energy mix.

This may be fueled by the recent announcements by Brazil to increase the country’s nuclear power generation in the future. Such findings demonstrate an increase in the community’s awareness that diversity in power generation will be a key factor in overcoming the region’s challenges. This reality was painfully experienced by Brazilians in 2001-2002, after droughts significantly reduced the output of that country’s hydroelectric plants, which, at the time, represented more than 90% of the country’s energy generation.

P&GJ: What is the overall outlook for the immediate and long-term future of Latin America’s oil and gas picture with today’s economic climate?

Costa: Recent developments have positioned Latin America with the rare opportunity to become a major player in the oil and gas industry. The recent oil discoveries in pre-salt fields in southern and southeastern Brazil are historical milestones for the country and, consequently, for the region. These discoveries, if proven, will add billions of barrels to Brazil’s reserves. As a consequence, Petrobras forecasts a significant increase in its current daily production over the next few years. Although the current economic climate may result in a reduction in oil and gas consumption in the near term, Brazil’s discoveries will take a few years to materialize into production, when the world’s economies may have resumed the growth rates seen before the financial crisis.

As a result of such recent discoveries, the energy equation in Brazil and in Latin America is likely to change dramatically in the coming years. Nonetheless, it will take time for the region to develop its full capacity, and success will depend on continuous coordination and focus of governments and their agencies.

P&GJ: What is the demand for new pipelines in Latin America? What major projects are being planned that will require pipeline development?

Costa: In general terms, Latin American countries need massive investment in infrastructure, including matching expected development of the oil and gas industry. This was especially true before the financial crisis, when the main economies of the Southern Cone – Argentina, Brazil and Chile – were growing at a rapid pace and enjoying a certain macroeconomic stability. Two major and ambitious pipeline projects currently under development are worth mentioning – the Energy Ring and the even more ambitious Southern Gas Pipeline Project.

The Energy Ring project’s main purpose is to distribute natural gas from Peru Camisea region to countries in South America. However, even with its large reserves of 187 billion cubic meters of gas, the Peruvian region of Camisea may not be able to supply gas to cover the demand of South America countries. The Southern Gas Pipeline is an initiative launched by Venezuela. It involves a main line of 6,600 km and branch lines that would add up to 8,000 km of pipeline, with the capacity to distribute 150 million cubic meters of gas daily.

A portion of this project, the Gasene gas pipeline, is the only pipeline currently under construction for distribution of gas from the south of Brazil to its northeastern states. Despite this initiative, there are some concerns with the feasibility of the Southern Gas Pipeline project.

In addition, Petrobras recently announced a plan to build several new refineries in Brazil – in the states of Rio de Janeiro, Pernambuco, Rio Grande do Norte, Ceará and Maranhão – in the next five years. Such new investments are likely to create demand for additional pipelines in the country.

It is also important to mention a potential demand for additional ethanol pipelines as a result of increased production of the product in Brazil. Petrobras had previously announced plans to build two ethanol pipelines: one of them involving 700 miles to connect the state of Goiás to the state of São Paulo, and the other with almost 200 miles in the state of São Paulo, to connect the municipality of Paulinia to São Sebastião Port. Other companies are also studying the feasibility of building ethanol pipelines in Brazil.

P&GJ: Do you see an effort to integrate energy production/transmission in Latin America? If so, how should this be carried out?

Costa: For more than three decades, countries in Latin American have been discussing regional energy integration. More recently, Brazil and Venezuela have advanced these efforts through collaborative planning on construction of the Southern Gas Pipeline. The project, however, faces many challenges. Its initial implementation cost was estimated to be approximately $20 billion.

However, experts believe that the cost will prove to be even higher, jeopardizing the economic feasibility of the project. The pipeline is projected to pass through certain vulnerable regions in the Amazon, which is likely to be controversial considering the potential adverse environmental impact on the forest.

In addition, there is widespread sentiment, reflected in the survey, that energy integration would be highly beneficial to the region. Unfortunately, different political agendas among the different countries in Latin America have hampered some of those initiatives.

P&GJ: What role do you see Petrobras playing in the years to come in regards to international projects, within Brazil, and on a regional basis?

Costa: Petrobras will continue to be a major player in the industry. In addition, it may become a leader in the alternative energy sources and the biofuels industry.

The original discovery of oil reserves in the Tupi field, located in the Santos Basin, operated by Petrobras (in partnership with British Gas and Petrogal-Galp Energia), suggested the existence of 5-8 billion barrels of light oil and considerable volumes of associated gas. This has the potential to significantly increase Petrobras’ oil production.

Petrobras has developed valuable expertise in deepwater exploration which is likely to cause the company to look for opportunities not only in Latin America, but also in other regions where its expertise may give it a competitive edge. Petrobras has also announced plans to implement a very aggressive program to build and upgrade refineries in the country.

Since 2007, through its subsidiary, Petrobras Biocombustivel, Petrobras is also engaged in the production of ethanol from sugar cane. Petrobras Biocombustivel’s goal is to produce and export the equivalent of $4.75 billion of ethanol and $938 million of biodiesel per year by 2012.

P&GJ: How are developments in Bolivia and Venezuela affecting potential pipeline projects?

Costa: Political instability and diplomatic and trade conflicts involving Venezuela and Bolivia have discouraged many investors from developing projects in those two countries. Survey results show that the regulatory and legislative landscape in these countries has deteriorated in the past five years, in addition to an increased perception of risk to the investor. This scenario clearly has a negative impact on potential projects in those countries.

P&GJ: What challenges should pipeline companies and contractors be aware of before committing themselves to working in Latin America?

Costa: Over 70% of the survey respondents agree that “Latin America is a great place to be doing energy sector business in 2008.” This result, however, does not eliminate the multiple challenges associated with doing business in the region. In addition to the variable nature of the regulatory framework in the different countries, political instability and lack of infrastructure are the most difficult challenges for private foreign companies investing in the region.

Also, Latin America in general suffers from a lack of strong institutions. In general, foreign investors typically express concern regarding the independence and quality of courts in the region, experience levels among the workers in government bureaus that are not as high as found in other segments, and, at times, the lack of qualified manpower for their projects.

P&GJ: What is the picture in Latin America as far as nuclear power and other alternative fuel sources?

Costa: In Brazil, nuclear power represents only 3% of Brazil’s energy matrix and is concentrated in the state of Rio de Janeiro. In that state, half of its power is generated from two nuclear power plants. Recently, the Brazilian government authorized the construction of a third nuclear power plant in Rio de Janeiro and has announced its intention to increase nuclear power generation in the country by more than 60 GW in the next 50 years. Contributing to this policy is the fact that Brazil has the sixth-largest uranium reserves in the world. Studies suggest that Brazil may have additional uranium reserves that, if confirmed, will make Brazil the holder of the second-largest reserves in the world.

As the world moves to increase the use of ethanol, either as a fuel or as a supplement to be mixed with gasoline, Brazil and consequently Latin America are likely to be major producers and exporters of ethanol from sugar cane. Currently, Brazil exports only 10% of its ethanol production.

Argentina has also invested in the production of biodiesel, which may prove a feasible alternative to oil, to the extent oil prices reach higher levels.

P&GJ: How did you come up with the information that peak oil is about 10 years off in Latin America? How about natural gas reserves?

Costa: According to the survey, approximately 25% of respondents think that peak oil in South America will happen in less than five years, while approximately 35% think that it is between six and 10 years off. The survey did not include gas reserves.

P&GJ: What is your background and how did you get involved in the energy industry?

Costa: I am an attorney with Bracewell & Giuliani, in Washington, DC and devote most of my practice to representing U.S.-based companies seeking to invest in Latin America as well as Latin American companies interested in doing business in North America. I worked for 10 years in Brazil and moved to the United States at the time Brazil was opening up its energy industry to private investment. After joining Bracewell, a firm with a strong emphasis on energy work, I became involved in multiple projects in the energy sector in Latin America. Our firm has partnered with BNAmericas to conduct the survey, showing our continued commitment to the region and the industry.

Amauri Costa is a partner with Bracewell & Giuliani LLP and can be reached at (202) 828-5832 or amauri.costa@bgllp.com.