Strategic Advisors in Global Energy

Globalization & De-globalization:

Challenges to Latin American Energy Integration

Cartagena, Colombia

Roger TissotDirector, Latin AmericaCountries Strategies GroupPFC Energy

Mexico at a Crossroads | | Page 2

Economic phenomenon driven by the movement of goods and services, labor and capital

Increasing uncertainty about the benefits of globalization

For globalization to work, some conditions are required:– Peace – Rules – Institutions – A global power

Globalization is not a new concept

Challenges of Globalization What is Globalization?

Mexico at a Crossroads | | Page 3

What we are experiencing is a concerted effort toward de-globalization

This trend is not only driven by NGO’s and anti-globalization protesters

Economic imbalances are feeding de-globalization

Policies that promoted globalization are being abandoned in OECD countries

Russia is opting for centralized resource nationalism

Latin America has also been swept by a “movement to the left”

Challenges of Globalization However, globalization is under attack

Mexico at a Crossroads | | Page 4

Until now, the engine of growth had a three steps transmission mechanism:

– US: the global consumer

– China: the global factory

– LAC/Africa: commodities to China

– Rest of the world: investments to China

-2

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005

Treasury Bonds

China World

Merchandise Exports

United States

Investment

Commodities, Other Inputs

China

USA

Latam

GDP (%)

The Economic Outlook The Engine of Growth: US-China

Mexico at a Crossroads | | Page 5

The American consumer has been the engine of growth. But for how long?

A soft landing may be good for the US, but will impact the rest of the world

Policy coordination is required

0

2

4

6

8

10

12

2005 2006 2007

ChinaUSAJapanEurope

Source: Dansk Bank June 2006

0

2

4

6

8

10

Jan-00

Jul-0

0Ja

n-01Ju

l-01

Jan-02

Jul-0

2Ja

n-03Ju

l-03

Jan-04

Jul-0

4Ja

n-05Ju

l-05

Jan-06

Source Bank of Canada web page

Preferential rates charged by Banks, An Average

GDP growth

The Economic Outlook Changing Conditions Ahead

Mexico at a Crossroads | | Page 6

Drivers of the economic recovery:– increase in commodity

prices– low interest rates– strong growth in US and

China

Areas of growth concentrated in few – capital intensive sectors

The “Peruvian Contradiction”: – High rates of growth– Low trickle-down impacts

0

40

80

120

160

1999 2000 2001 2002 2003 2004

Nonenergy commodities Metals and minerals

Petroleum steel

World Bank Index Commodity Price changes

Globalization & Latin America Latin American economies driven by commodity boom

Mexico at a Crossroads | | Page 7

0

100

200

300

400

500

600

1990 2000 2003

Weak economic growth

Persistence of poverty

Populism is feed by:– lack of social mobility – inequality

47

48

49

50

51

52

53

54

1950 1960 1970 1980 1990

GINI Coefficient - Latin America

Poverty Reduction and Growth. World Bank2006

percentage

unequal

Equal

LAC Total population and population living with less than US$2/day

Million

Globalization & Latin America Neo-populism driven by twin disappointments

Mexico at a Crossroads | | Page 8

Growing sense of energy insecurity– Industrialized countries question the

intentions and capabilities of resource holders

– Resource holders question the sustainability of demand and the new obligations assigned to them

Competition for access to energy resources from industrializing countries in Asia

Populations of the major resource holders demand a greater share of the country’s revenues

The consumer view

The producer view

The Age of Energy Insecurity Suspicious on both sides

Mexico at a Crossroads | | Page 9

Energy insecurity is feeding resource nationalism

The objective is not to expropriate IOCs, but to have a a significant increase in revenues by capturing upside when prices swing

77%

11%6%6%

NOC Oil Reserves(Limited Equity Access)

NOC Oil Reserves (Equity Access)

Oil Reserves Held by New Russian Companies

Full IOC Access

IOCs are becoming rule and price takers

NOC/NOC is also providing a new challenge for IOC’s

The Age of Energy Insecurity Resource Nationalism & the emergence of the NOC

Mexico at a Crossroads | | Page 10

Can the local NOC assume the investment responsibility to develop new reserves?

– Despite increasing revenues, NOCs continue to be governments’ main source of cash

– Governments will prefer to exploit existing resources than investing in new exploration

– Alternative: NOC-NOCENARSA

The Age of Energy Insecurity The Born Again NOC

Mexico at a Crossroads | | Page 11

The NOC-NOC deal refers mostly to Chinese companies investing in Latin America

However, recently also includes the Indians and the Russians

The drivers are based on a Resource nationalism ideology:– Ensure access to a

strategic reserves to maintain economic growth

– Promote domestic industrialization

The Age of Energy Insecurity The NOC-NOC Deal

Mexico at a Crossroads | | Page 12

Venezuela, 152.3Bolivia, 26.1

Colombia, 4

Peru, 11.5

Argentina, 17.8

T&T, 19.2

Brazil, 10.9

0

1

2

3

4

5

Venez

uela

Bolivia

Colombia Peru

Argenti

na

Brazil

T&T

Gas Reserves (Tcf)

Gas ProductionBcf/d = Import

= Export= Self-sufficient= No Market

LNG?LNG?

LNG?

LNG?

Source BP statistical Review 2006

Different options to connect supply and demand.

South American Gas StatusIn 2005

=Import

=Export

=Self-sufficient

=No Market

Mexico at a Crossroads | | Page 13

Currently a handful of pipeline connections are operating

Brazil and Chile are pursuing diversification options favoring LNG and domestic developments

While Venezuela is proposing an ideological regional integration

Bolivia – Argentina

Argentina – Brazil

Argentina - Uruguay

Bolivia – Brazil

Argentina-Chile

South America Gas IntegrationFew projects

Mexico at a Crossroads | | Page 14

Bolivia – Argentina

Argentina – Brazil

Argentina - Uruguay

Bolivia – Brazil

Argentina-Chile

LNG T&T – Jamaica

LNG T&T – Mexico

Uruguay – Brazil

Bolivia Brazil II

LNG Chile

Bolivia – Paraguay

Peru – Chile

GNL Bolivia -Mexico

Peru – Ecuador

Colombia – Panama

Mexico–CentralAm

LNG Peru – Mexico

T&T Caribbean

Colombia - Ven

Ven – Braz – Arg

According to OLADE by 2015 Latin America will be interconnected

Will the political and regulatory conditions be there to achieve these goals?

South American Gas IntegrationDespite a promising future

Mexico at a Crossroads | | Page 15

Different options to connect Supply and Demand:– Island model: Focus on energy independence at higher cost (LNG). – Bolivia hub: Original idea, ignored the political cost of resource

nationalism.– Venezuela Bolivarian integration: focus on regional industrialization

ignoring economic, regulatory and political challenges– Southern Cone Ring: Centers around Peru, expecting future integration

of Bolivia. Limited by Peru’s existing reserves and LNG export option.– Brazil Gas Southern Cone Hub: Petrobras and IOCs develop large gas

reserves from Santos and Espiritu Santos.

Markets will integrate but sub-optimal solutions will emerge due to political uncertainty

Regional Integration Despite a promising future

Mexico at a Crossroads | | Page 16

Final RemarksThere are increasing challenges to globalization.

In Latin America, this is expressed by the rise of resource nationalism and neo-populism

High commodity prices are the drivers of resource nationalism

Nationalists are seeking a renewed effort toward industrialization

IOCs are facing a challenging environment with more “populist initiatives”

Questions remain if in a changing economic environment, “born again”NOCs are able to assume the responsibility to develop reserves

And/or if new agreements “NOC/NOC” will be deliver

Unless there is inter-government intervention, Latin America gas will move toward market driven “networks”

Some regional projects will go ahead based on bilateral or multilateral agreement

But how secure do suppliers and markets feels about these projects?

Mexico at a Crossroads | | Page 17

PFC Energy consultants are present in the following locations:

Bahrain

Beijing

Buenos Aires

Calgary

HoustonHouston

Kuala LumpurKuala Lumpur

Lausanne

London

Mumbai

New York

ParisParis

San Francisco

Washington, D.C.Washington, D.C.

Main regional offices are shown in bold.

www.pfcenergy.com | info@pfcenergy.com

Main regional offices:

AsiaAsiaLevel 9 South BlockWisma Selangor Dredging142-A Jalan Ampang50450 Kuala Lumpur, MalaysiaTel (60 3) 2168-8870Fax (60 3) 2161-0702

EuropeEurope3 cité Paradis75010 Paris, France Tel (33 1) 4770-2900Fax (33 1) 4770-5905

North AmericaNorth America1300 Connecticut Avenue, N.W., Suite 800Washington, D.C. 20036, USATel (1 202) 872-1199 Fax (1 202) 872-1219

4545 Post Oak Place, Suite 312 Houston, Texas 77027-3110, USA Tel (1 713) 622-4447 Fax (1 713) 622-4448

Strategic Advisors in Global EnergyStrategic Advisors in Global Energy

PFC Energy consultants are present in the following locations:

Bahrain

Beijing

Buenos Aires

Calgary

HoustonHouston

Kuala LumpurKuala Lumpur

Lausanne

London

Mumbai

New York

ParisParis

San Francisco

Washington, D.C.Washington, D.C.

Main regional offices are shown in bold.

www.pfcenergy.com | info@pfcenergy.com

Main regional offices:

AsiaAsiaLevel 9 South BlockWisma Selangor Dredging142-A Jalan Ampang50450 Kuala Lumpur, MalaysiaTel (60 3) 2168-8870Fax (60 3) 2161-0702

EuropeEurope3 cité Paradis75010 Paris, France Tel (33 1) 4770-2900Fax (33 1) 4770-5905

North AmericaNorth America1300 Connecticut Avenue, N.W., Suite 800Washington, D.C. 20036, USATel (1 202) 872-1199 Fax (1 202) 872-1219

4545 Post Oak Place, Suite 312 Houston, Texas 77027-3110, USA Tel (1 713) 622-4447 Fax (1 713) 622-4448

Strategic Advisors in Global EnergyStrategic Advisors in Global Energy