Crisis Hits Oil Industry and Energy Transition Alike

Mexico's state-run oil giant Pemex faces a difficult outlook due to the fall in international oil prices and the crisis resulting from the coronavirus pandemic, which threatens its production and finances, in a situation analysed during the 29th La Jolla Energy Conference, organised online by the Institute of the Americas. CREDIT: Emilio Godoy/IPS

Mexico’s state-run oil giant Pemex faces a difficult outlook due
to the fall in international oil prices and the crisis resulting
from the coronavirus pandemic, which threatens its production and
finances, in a situation analysed during the 29th La Jolla Energy
Conference, organised online by the Institute of the Americas.
CREDIT: Emilio Godoy/IPS

By Emilio Godoy
MEXICO CITY, May 22 2020 (IPS)

While it attempts to cushion the effects of the coronavirus
pandemic, the Latin American and Caribbean region also faces
concerns about the future of the energy transition and state-owned
oil companies.

These questions were discussed at the 29th La Jolla Energy
Conference, organised by the Institute of the Americas. It was
held online May 18-22, rather than bringing together more than 50
speakers at the institute’s headquarters in the coastal district
of San Diego, in the U.S. state of California, in the midst of the
COVID-19 pandemic.

Alfonso Blanco of Uruguay, executive secretary of the Latin American Energy
Organisation
(OLADE), said during a session on global trends
and the regional energy industry that the changes seen during the
pandemic will spread after the crisis and will be long-lasting.

“There will be structural transformations and we are convinced
that most consumer behaviors will change after the pandemic. Demand
will vary due to changes in the main areas of transportation and
other energy areas. The effects on fossil fuel consumption will be
strong and there will be a greater impact on renewable energies,”
he said.

OLADE, a 27-member regional intergovernmental organisation for
energy coordination, estimates that electricity demand has fallen
by 29 percent in Bolivia compared to 2019, as a result of the
severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), which
causes COVID-19, and by 26 percent in Argentina, 22 percent in
Brazil and 11 percent in Chile.”There will be structural
transformations and we are convinced that most consumer behaviors
will change after the pandemic. Demand will vary due to changes in
the main areas of transportation and other energy areas. The
effects on fossil fuel consumption will be strong and there will be
a greater impact on renewable energies.” — Alfonso Blanco

Likewise, final energy demand plummeted 14 percent in Brazil
compared to 2019, 11 percent in both the Andean and Southern Cone
regions, nine percent in Mexico, seven percent in Central America
and five percent in the Caribbean.

As countries went into lockdown to curb the spread of COVID-19,
electricity consumption by businesses and factories declined, due
to the suspension of activities.

Leonardo Sempertegui, legal advisor to the Organisation of
Petroleum Exporting Countries (OPEC), said the pandemic may be a
wake-up call for countries lagging behind in the energy
transition.

“This may be the new normal. The structure and governance of
the energy architecture to cope with the next phase are changing
dramatically. Energy poverty and the energy transition cannot be
solved regardless of who controls a resource; these challenges
cannot wait,” he said in the same session.

In Latin America, nations like Argentina, Bolivia, the Dominican
Republic, Ecuador, Honduras and Uruguay have made progress in the
energy transition since 2015, while Brazil has slid backwards and
countries like Mexico are stuck in the same place, according to the
World Economic Forum’s
Energy Transition Index
, released May 13.

As the region heads into the fourth month of the pandemic,
countries are assessing their electricity markets, which have been
shaken by the crisis.

Nations like Argentina, Chile, Colombia and Peru have resorted
to long-term electricity auctions, which have generated low prices
for renewables, while Mexico suspended such schemes in 2019.

In Argentina, as Andrés Chambouleyron, a non-resident fellow at
the Institute of the Americas, explained, industrial consumption
fell by 50 percent and electricity distributors have not been able
to obtain sufficient revenues to cover fixed costs or electricity
purchases.

The government has thus provided financing to Cammesa – the
electricity wholesale market administration company – to pay the
generators, since it is bound by contracts to buy the energy.

“There will be a permanent change in electricity consumption
in Argentina. We have cheaper gas than before; the models say that
you have to use more gas because it is cheaper than other sources.
We won’t see much change in Argentina’s energy mix, and that
could extend to all of Latin America,” said Chambouleyron, who
warned of breach of and renegotiation of contracts for energy
purchases.

Low oil prices threaten to slow down the energy transition in Latin America, although renewable energies already compete with the costs of fossil fuels, agreed experts at the 29th La Jolla Energy Conference, organised online by the Institute of the Americas. The photo shows solar panels on a house in Ajijic, in the western Mexican state of Jalisco. CREDIT: Emilio Godoy/IPS

Low oil prices threaten to slow down the energy transition in
Latin America, although renewable energies already compete with the
costs of fossil fuels, agreed experts at the 29th La Jolla Energy
Conference, organised online by the Institute of the Americas. The
photo shows solar panels on a house in Ajijic, in the western
Mexican state of Jalisco. CREDIT: Emilio Godoy/IPS

While renewables are already competing in price with
conventional sources, low oil and gas prices undermine their
expansion, a predicament that alternative energy sources have been
facing in recent years.

In addition, the rise in the cost of international credit and
the fluctuations of the dollar against local currencies may make
generation more expensive.

In another session on the outlook for state-owned oil companies,
Marta Jara, former president of Uruguay’s public oil company
ANCAP, said the current crisis could accelerate the transition, but
called it a “major challenge”.

“The temptation is to be opportunistic and forget the roadmap
of the energy transition. We must invest in sustainable energy
systems, decarbonise transport. It is important to secure funding
and create jobs. I hope the crisis opens the door to be more
innovative,” she said.

Viable or not?

The plunge in fossil fuel prices is damaging the finances of the
region’s oil producing countries, such as Argentina, Bolivia,
Brazil, Colombia, Ecuador, Mexico, Peru and Venezuela, and state
companies in the sector are facing problems with regard to planning
and operations.

But it benefits net importers, like the countries of Central
America or Chile, whose oil bills have shrunk, while for consumers
in both oil producing and importing countries the cost of
electricity could go down.

“The most competitive will be the countries with lower oil
extraction costs. Some projects will not be economically viable. We
will see greater economic problems than in 2019,” predicted Lisa
Viscidi, director of the Energy, Climate Change and Extractive
Industries Programme at the non-governmental Inter-American Dialogue, during
a panel on the situation in several Caribbean nations.

The pandemic and a rise in Saudi production announced on Mar. 10
led to a collapse in oil prices and the consequent risk of
bankruptcies in the industry. State-owned oil companies have fared
better than others so far in the crisis.

In another session on the outlook for state-owned oil companies,
John Padilla, managing director of the private consulting firm IPD
Latin America, stated that “it will take time to get out of this
situation, with effects for the region, and the need for great
efficiency.

“Most nations have been exporters, efficiency will be the key.
What has not been done is to cultivate domestic and regional
markets, state enterprises are not going to play the same role as
they always have,” he said.

Public companies such as Brazil’s Petrobras and Colombia’s
Ecopetrol entered the crisis in a better position than Mexico’s
Pemex, Venezuela’s PDVSA and Argentina’s YPF, according to
experts.

“These are difficult times, even for the best prepared. We can
hope that if the country and its company are in trouble, if
governments need money, they can get more out of the companies,”
said Francisco Monaldi, interim director of the Baker Institute for
Public Policy’s Latin America Initiative at the private Rice
University in the U.S. state of Texas.

In his view, “Mexico is in better fiscal conditions, it should
not be a problem. But Pemex can drag Mexico down. If the government
doesn’t change direction, it could become a serious problem,”
he said as an example.

Although Pemex will increase its investment in 2020, the oil
company reported losses of 20 billion dollars in the first quarter
of this year. Due to the crisis, Petrobras limited its investment
to 3.5 billion dollars and its daily production to 200,000 barrels,
and postponed the sale of eight refineries.

For Lucas Aristizábal, a senior director in Fitch Ratings’
Latin American corporates group, some state-owned oil companies are
viable and others are not.

“In 2021, the financial contribution of oil will be lower for
governments. If they want the companies to play a key role, they
will put more pressure on their financial structure. The current
situation illustrates the economics of these corporations,” he
said during the forum.

Pemex and YPF were already losing money per barrel in 2019,
while Petrobras has more balanced production costs.

On the oil horizon, and in the midst of the COVID-19 crisis,
Guyana has become the rising star, although there is still
political uncertainty, as the result of the Mar. 2 presidential
elections is still unclear.

“It’s hard to predict what will happen. There is a risk of
U.S. sanctions that would not affect investment in the sector, but
would pose a political risk to the country,” said Thomas Singh,
in the Department of Economics at the public University of
Guyana.

The country expects to extract 600,000 barrels per day by 2024
and take in revenues of five billion dollars, with reserves
exceeding five billion barrels.

The post Crisis
Hits Oil Industry and Energy Transition Alike
appeared first on
Inter Press Service.

Source: FS – All – Ecology – News
Crisis Hits Oil Industry and Energy Transition Alike