Coments to Energy Integration in South America: Driving Force for Regional Integration Process? By Maria Mendes da Fonseca and Luis Eduardo Duque Dutra

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Coments toEnergy Integration in South America
Driving Force for Regional Integration
Process?By Maria Mendes da Fonseca and Luis
Eduardo Duque Dutra

• Fernando Navajas
• FIEL University of La Plata, Argentina
• ELSNIT 5th Annual Conference
• Barcelona, 27 October 2007

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Index

1. The paper
2. Integration in energy and the security of supply
   issue
3. Why is natural gas different? Infrastructure,
   public goods and contracting.
4. Natural gas integration in the southern cone
   from success to crisis
5. Issues and lessons for regional cooperation

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Papers contribution

• Describes the rise and fall of energy integration
  in the 80s and 90s wave.
• Explains underlying political process that shape
  views and policies
• Analyses problems ahead. Lack of incentives to
  cooperate, asymmetries, etc.
• Gives details in some particular relevant energy
  segment, such as natural gas.
• Issues to discuss
• Security of supply
• Oil, natural gas, electricity conclusions that
  apply to one may not apply to all
• Rol of market reforms and performance,
  particularly in Argentina
• Lessons from Integration attempts in NG.

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Integration and security of supply issues

• Oil is a commodity, liked or not. Price is set in
  world markets and risks of supply disruptions are
  manageable with many instruments.
• Integration to world markets is defined by your
  border prices.
• Oil security is sometimes mixed with energy
  independence, with the objective of insulating
  consumers from world prices.
• Its a trap that small-open net-oil-importing
  economies cannot afford and, in practice, do not
  (Bacon and Kojima, 2006).
• Should large economies relatively well endowed
  with energy follow that? Answer is better dont
  try.
• Natural gas is another story. Why? Costs of
  supply disruptions are less easy to deal with.
  Lock-in effects and short run costs are high.
• So regional integration is more about natural
  gas (and electricity, to complement each other)
  than about oil. Evidence shows exactly this, both
  in Latam and in Europe.

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Infrastructure, public goods and contractual
issues

• Regional infrastructure is seen as a platform to
  support exchange in an expanded economic area.
• The regional public goods perspective looks at
  coordination failures related to multidimensional
  externalities (Ruffin, 2004).
• Experience in the 90s suggest active private
  sector participation under the umbrella of good
  legal and regulatory frameworks.
• Absence of or insufficient supply of
  infrastructure projects has not been a problem in
  southern cone natural gas integration.
• But exchange supported by infrastructure comes in
  long term contracting format required to recover
  sunk investments, in bilateral idiosincratic
  exchanges.
• Its the energy component . Evidence show
  failures in exchanges of energy.

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Natural gas integration in the southern cone
from success to crisis

• Important discoveries of natural gas in Argentina
  along with changes in regulatory regime and
  business climate prompted several exports
  projects to Chile, Brazil and Uruguay.
• Several protocols under the ALADI framework were
  signed and authorizations were granted.
• Pipelines were built with capacity to deliver up
  to 42 MMm3day, with initial investments of about
  2 billion USD.
• Exports to Chile increased substantially in the
  second half of the 90s as projects were
  completed. Price Convergence
• In 2002 Argentina had a severe contractual
  problem at a macro level and in infrastructure
  regulation.
• From 2004 natural gas shortages were followed by
  important cuts in exports.

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Competing Views of Broken Exchanges

• Hypothesis 1 Structural fatigue in supply not
  properly anticipated by suppliers and government.
• May render contracts become incomplete if
  unforeseen, or lead to arguments of negligence of
  participants concerning investment provisions
  given that it could have been foreseen.
• Hypothesis 2 Imbalance in domestic markets due
  to policy interventions, particularly on prices,
  and its effects on domestic demand.
• May suggest unforeseen contingency to private
  sector participants. Exports constraints need not
  be direct, but bite anyway through induced
  imbalances and mandatory supply to domestic
  markets

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Sluggish Production or Exploration Efforts?
Since when? How Much?
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Natural Gas Reserves Depletion is a post 2001
phenomena It points to demand
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NG Shortage in Argentina Supply or Demand?
atenuantes
agravantes
Navajas and Cont (2005)
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Issues and Lessons for Regional Cooperation

• Beyond regional coordination on
  regulation-cum-competition design for
  infrastructure (Beato and Benavidez, 2004).
  Conditions to support exchanges needed.
• Energy planning as policy coordination.
• Weak form exchange of information. Introduced
  too late (2002) in the Argentine-Chilean
  exchange.
• Hard forms difficult to implement due to
  sovereign decisions and ex-post repudiation.
• Contract design Why is so difficult?
• Study and include provisions related to energy
  imbalances on both sides, but particularly on
  suppliers
• Ex ante clauses to govern contingencies.
• Lesson (not learned) for current
  Bolivia-Argentina pipeline.
• Contract exposed to same problems.
• Poor treatment of non-deliverability
  contingency.

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References

• Bacon, R. and Kojima, (2006) M. Coping with
  Higher Oil Prices. ESMAP Report 323/06. The
  World Bank, August..
• Beato P. and J. Benavides (2004) (eds.), Gas
  market Integration in the Southern Cone, IADB,
  Washington.
• Navajas F. (2006), The Argentine Energy Crunch
  2002-20XX (In Spanish), DT Nº89, FIEL.
• Navajas F. (2007),     Infrastructure
  Integration and Incomplete Contracts Natural Gas
  in the Southern Cone, January 2007, 2nd LAEBA
  meeting Seoul, forthcoming in Integración y
  Comercio (2008).
• Navajas F. And W. Cont (2005), Uma Anatomia da
  Crise Energética Argentina,en Energia Da Crise
  Aos Conflitos?, Cadernos Adenauer, Rio do
  Janeiro, Ano VI, Nº4, 2005
• Rufin C. (2004), Regional Public Goods and
  Infrastructure, in Estevadeordal A., B. Frantz
  and T.R.Nguyen (eds.), Regional Public Goods.
  From Theory to Practice, IABD and ADB,
  Washington.