Replicating the U.S. Shale Gas Revolution in Latin America

By Thomas Andrew O’Keefe*

Photo credit: Energy Information Administration / Foter.com / Public domain

World Shale Gas Map / Photo credit: Energy Information Administration / Foter.com / Public domain

The shale gas revolution in the United States promises not only to soon make the country energy self- sufficient but also serve as the catalyst for a major revival of manufacturing.  Similar high hopes have been raised for Latin America, where some of the planet’s largest reserves of shale gas are found.  According to U.S. Energy Information Administration estimates, Argentina is said to have the world’s second largest reserves of technically recoverable shale gas (China is first).  The United States is currently in fourth place, followed by Canada and Mexico.  Brazil is in tenth place, with Chile and Paraguay not far behind.  The possibility that Latin America can pursue a successful shale gas strategy, however, is tempered by a number of important legal and/or geological differences that can serve as important bottlenecks.  In addition, the region’s tumultuous politics often get in the way of implementing policies that boost investment and encourage a highly productive energy sector.

The most important legal difference is that subsoil rights belong to the above ground property owner in the United States, while everywhere else in the Western Hemisphere the government (national, state or provincial) is the owner.  Developers have had an easier time purchasing access to shale gas deposits from individual landowners throughout the United States.  This explains, in great measure, why Canada’s significant shale gas reserves have not been as extensively exploited as in the United States, despite a hydrocarbons regime receptive to private-sector investment.  In addition, environmental protection legislation that impacts the shale gas industry is fractured among Federal, state, and local government authorities in the U.S.  That has facilitated developers extracting waivers and more lenient treatment in the United States that would be harder to obtain in most Latin American nations, where environmental protection is the exclusive or predominant prerogative of the central government.  Furthermore, current technology for extracting natural gas from shale reserves demands huge amounts of water, a resource that is scarce in those regions of Mexico, for example, where most of its extensive shale gas reserves are located.

Political realities are the most crucial (and often overlooked) factor that can easily undermine any effort to develop Latin America’s extensive shale gas reserves.  On paper, Argentina should be a regional energy powerhouse, supplying not only its own energy needs but those of its neighbors. However, the country has for years pursued policies that have scared off private-sector investment, heightened Argentine dependence on foreign energy imports, and led to a steady hemorrhaging of hard currency reserves.  To outsiders these policies appear illogical, but they make perfect sense to Argentine political leaders trying to consolidate their power base.  Mexico is an example of a country constrained by its Constitution from developing its extensive off-shore hydrocarbon resources.  Any political party that tries to make major amendments to those constitutional provisions, however, risks annihilation at the polls.  Brazil’s recent adoption of nationalistic legislation to encourage the domestic manufacturing of hydrocarbon-related technology could well impede exploiting its shale gas reserves if similar mandates are created for the highly specialized and capital-intensive hydrofracking equipment the industry utilizes.  In fact the only Latin American country where the stars seem aligned to repeat the U.S. shale gas success story is investor-friendly, politically-stable, energy-starved, and free-market oriented Chile, whose shale gas reserves are concentrated in the remote, under populated (and very wet) far south of the country that desperately seeks new opportunities to promote local economic development.  

*Thomas Andrew O’Keefe is the President of San Francisco based Mercosur Consulting Group, Ltd. and teaches at Stanford University.

Venezuela: The True Scope of Chávez’s Legacy

By Andrés Serbin and Andrei Serbin Pont*

Hugo Chávez / Photo credit: ¡Que comunismo! / Foter / CC BY-NC-SA

Hugo Chávez / Photo credit: ¡Que comunismo! / Foter / CC BY-NC-SA

Chávez’s legacy for Venezuela goes well beyond the Bolivarian government he left in Nicolás Maduro’s hands.  Three conflicts overshadow the country’s future and contribute to many uncertainties:

  • The first, and most urgent, is the standoff between the two main factions of the ruling PSUV over how to overcome the current economic crisis, characterized by the IMF as “difficult and probably unsustainable.”  The pragmatists focus on making currency controls more flexible, and the ideologues are oriented toward increasing state control over the economy.
  • The internal party conflict between President Maduro and his supporters, committed to building the “socialismo del siglo XXI,” on the one hand, and the pragmatic sector of the governmental party (pragmatic in the sense of ensuring their businesses operate without interruption) led by the President of the General Assembly, former army officer Diosdado Cabello, with the support of high ranking military and businessmen who benefited from the “revolutionary” process through legal and illegal business.
  • The conflict between the PSUV, wielding the power of the government, and the opposition, which it accuses of being an “enemy of the revolution” linked to the “external enemies” (basically the United States) who want to derail the revolutionary process.

The dire state of the economy is aggravating each of these conflicts.  By the end of September, according to government data, inflation rates hit 4.4 percent per month, and rose to 38.7 percent in 2013 so far.  The opposition estimates an annual inflation rate of 49.4 percent—the highest since 1997.  According to the 2012 UN Economic Commission for Latin America and the Caribbean (ECLAC) report, an increasing number of Venezuelans are living under the poverty line – with a 29.9 percent increase in the poverty rate last year – with income no longer enough to fulfill basic needs.  Shortages of food and other necessities are severe; the depreciation of the Bolívar has accelerated in the currency black market, and the Central Bank is printing paper currency in an attempt to cope with the financial deficit.  Within this context, the struggle between the pragmatic and the ideological fronts of the PSUV only contributes to the chaos.

Caracas’s international relations are also a factor in the internal tensions and are fueling concerns within the armed forces, according to NGOs and others with good contacts in the military.  The economic crisis has affected the government’s ability to continue its “petro diplomacy” – diminishing its influence – and the opposition has continued persistent accusations of inadequate management of the relationship with Guyana and the claim over the Essequibo, contested territory along their common border.  In addition, a recent incident involving a maritime exploration ship of Panamanian flag with a U.S. crew detained by the Venezuelan Navy in waters under dispute with Guyana aggravated the current national and international political scenario.  The government usually resorts to nationalist appeals, but criticism of its handling of these problems is likely to grow.

The core issue in all of these situations continues to be the potential scenario of a social outbreak driven by the shortages, rising inflation, the broad sense of insecurity, and perceptions of blatant corruption in government.  These frustrations appear to cut across all sectors of Venezuelan society regardless of ideological identity.  Given the historical reluctance of the armed forces to intervene (particularly since the experience of the “Caracazo” of 1989), most observers still wonder when and if a social explosion will move them to action.  The economic and social crises, the internal tensions in the government, and the polarization with the opposition, along with the possibilities of an international incident, may add up to enough to move the military, perhaps with the support of several state governors, to act, but determining that breaking point – the Venezuela analyst’s greatest challenge – remains elusive.

* Andrés Serbin and Andrei Serbin Pontare members of the analysis team of the Coordinadora Regional de Investigaciones Económicas y Sociales (CRIES), a Latin-American think tank.

Haiti: Not Back, Not Better

Photo by: Gonmi | Flickr | Creative Commons License

Photo by: Gonmi | Flickr | Creative Commons License

The third anniversary of the devastating earthquake in Haiti has passed with no sign of either serious reconstruction or progress toward improving democratic institutions.About three-quarters of the earthquake rubble has been removed, and several hundred thousand individuals have been moved to temporary shelters and some back into permanent housing. A light-industrial park in northern Haiti is providing jobs to some 1,300 workers. The U.S. Government alone has committed over $3.6 billion toward relief, recovery, and reconstruction, of which $2.5 billion has been disbursed as of September 30, 2012. Despite these billions, the infrastructure remains a shambles; the economy is weak; unemployment is around 40 percent; and the World Food Program estimates that 6.7 million people (out of a population of 10 million) are “food insecure.”

Progress in political affairs has also been slow, and incumbent leaders remain reluctant to commit to elections. The head of MINUSTAH, Chilean diplomat Mariano Fernández, last week reiterated calls for the Haitian government to hold legislative and local elections that were supposed to have been held a year ago. He said an agreement reached last month by President Michel Martelly and members of parliament to form a semi-permanent electoral council to stage elections for one-third of the 30-seat senate and local mayors was “an important first step.” The U.S. Assistant Secretary of State for Democracy, Human Rights and Labor, Michael Posner, also tried to emphasize the positive during a recent visit to Port-au-Prince, but noted “there is a lack of faith in the system, the sense that the rule of law is not respected, that institutions like the judiciary and the police and the prisons and the prosecutors are not doing the job adequately, and that the government isn’t living up to expectations.”

The Obama Administration’s pledge to “build back better” may have been slightly bold from the start, but one of the objectives – to use the crisis to drive some reforms in both the Haitian government and how international programs are implemented – was indeed within reach. The business-as-usual approach since the earthquake has led to the loss of a historic opportunity to move the country forward. While the Haitian political class continues to focus on its internecine struggles, the international community has funneled its vast funds to its own NGOs, most of which operate outside a master strategy and far from the political and bureaucratic authorities nominally in charge of overseeing and coordinating their programs. Real progress is unlikely until both local and outside players develop a shared vision for the future – hopefully before another natural disaster pushes the reset button again.