Venezuela's collapse prods region toward kicking its oil habit

Venezuela is in a state of economic freefall, with hyper-inflation pushing over 70 percent of the country’s population into poverty.

Frequent blackouts, water outages, and shortages of basic goods including medicines have prompted worries of an imminent public health emergency. And with civil discontent and street demonstrations becoming more frequent, the government of Venezuelan President Nicolas Maduro has declared a 60-day state of emergency.

But alongside the growing concern over Venezuela, the country’s challenges are also having a less visible but widespread impact – shaking the foundations energy markets in Central America and the Caribbean. For the past 11 years, Venezuela has provided cheap credit to 17 of its poorest neighbors in the form of the Petrocaribe oil alliance. Diverse countries like Belize, Cuba, Guyana, Jamaica, Nicaragua, and Suriname are all part of the alliance.

For years the small member states benefitted mightily, paying Venezuela 5 to 70 percent below market rates for oil, and rolling the remaining amount into low-interest, long-term loans. The dream-come-true arrangement proved to be a recipe for debt and dependency.

Now, although low oil prices have cushioned the blow to these nations from Venezuela’s collapse, that dependence is a kind of economic time bomb – a reliance on oil-based energy that could explode if oil prices rise. Or to put it more positively, the nations of the Petrocaribe alliance have an impetus to start carving out a future with greater energy diversity, including more reliance on renewable sources.

“No one wants to get the 3 a.m. call that Venezuela has cut all oil exports and the Petrocaribe countries have no other alternative,” warned Amos Hochstein, special envoy and coordinator for international energy affairs at the US State Department, during an event at the Washington-based think tank the Atlantic Council in May. “We can’t just rely on low oil prices as a solution.”

Some responses are under way both by individual governments and among them. These include efforts to downsize the debts, to make the region more attractive for foreign energy investors, and to bring in new power sources from natural gas to solar and geothermal.

Precarious situation

And for now at least, the feared crisis isn’t happening. Low oil prices have made the Petrocaribe oil alliance less relevant. Many countries can afford to pay market prices for oil. The quantity of overall credit from Venezuela is estimated to have dropped by around half.

But the dependence has failed to dissipate. Countries like Cuba and Haiti are reliant on Venezuelan oil to power their economies. And if oil prices begin to rise, as they have slightly over the past few months, the countries of Petrocaribe could find themselves in desperate need of Venezuelan credit at a time when Venezuela, racked by aging infrastructure, depleted oil wells, and innumerable budgetary problems, is unable to provide it.

“If the price of oil is so low that these countries are paying at market prices less than what Venezuela used to charge when subsidizing them, then it’s not a problem,” says Francisco Monaldi, fellow in Latin American energy policy at the Baker Institute and associate in the geopolitics of energy at the Harvard Kennedy School. And if prices really soared, it could allow Venezuela to afford to pay the subsidies again.

“But that’s not a scenario we expect to happen,” Dr. Monaldi says. He sees the $40 to $60 per barrel range as a worry zone.

The economic shock in some scenarios could have widespread humanitarian consequences across the region, experts say. So Venezuela’s economic demise is putting a premium on the search for a more sustainable regional energy matrix.

The imperative is obvious. Venezuela’s Maduro government is barely hanging onto power, and  it’s almost certain the country would be unable to subsidize its neighbors if oil prices were to rise substantially.

Venezuela’s economic woes don’t stem simply from plunging oil prices in an era of strong global supplies and lower-than-expected demand.

“The [Hugo Chavez] government was using the state-owned oil company as a tool for foreign policy and a tool for revenue to support its more populist measures, so it’s kind of like a cash machine,” says Lilian Cléa Rodrigues Alves, Latin America analyst for Bloomberg New Energy Finance.

The government ran huge deficits, failed to upgrade its oil infrastructure, and began to see some of its oil fields dry up.

Impetus for change

Even before Venezuela’s economic collapse, the US began engaging in diplomatic efforts to encourage moves by Central America and the Caribbean away from the Petrocaribe dependence. But the crisis increased the urgency.

In 2014, the Obama administration launched the Caribbean Energy Security Initiative (CESI), spearheaded by Vice President Biden. The aim is to assist the Petrocaribe countries to transition to a cleaner and more secure energy future.  

By pushing for a combination of gas and renewable energy sources, experts say, the region could lower carbon emissions, reduce its overall energy bills, and lower the problem of dependence on a single supplier, all in one strategic blow.

Burning fuel oil not only tends to be costly as a fuel for electricity, it also releases more planet-warming greenhouse gas than natural gas or renewables. And climate change is considered one of the top threats facing the region due to rising sea levels.

Success stories

Across the Caribbean and Central America, some countries are diversifying their energy markets faster than others. Jamaica and the Dominican Republic, for example, are seen by many as regional success stories.

When Venezuela grew desperate for hard currency, the two countries struck a deal that allowed them to pay off their Petrocaribe debts in full. The Dominican Republic paid $1.9 billion to settle around $4.1 billion in debt, and Jamaica provided $1.5 billion to settle its debt of almost $3 billion. They are now the only two Petrocaribe countries that no longer owe large sums to Venezuela.

Also in Jamaica, the government launched new policies to incentivize the Jamaica Public Service Company (JPS), the sole distributor of electricity on the island, to begin using natural gas.

“The government in Jamaica has promised JPS that if they convert to gas they’ll give them a tariff,” says David Goldwyn, senior Latin America Center energy fellow at the Atlantic Council. “They’ll estimate how much electricity they’ll generate in a year, and if they generate more they’ll get an extra check from the government and if they generate less they have to pay back.”

“You have to enable the national utility to function on an economic basis, because if you do that they’ll invest in a transition,” he explains.  

Renewables rising

Likewise, Nevis Island successfully implemented legal and regulatory reforms that helped launch the emergence of its own geothermal energy sector. It successfully held an open tender that a private consortium won to develop geothermal power on the island. Eventually, the government envisions that the island will be completely run by geothermal power.

Meanwhile, many Caribbean nations have pledged to move forward with low- or no-carbon energy projects. The Caribbean Community (CARICOM) nations set an overall target of 20 percent renewable energy by 2017. Aruba has a plan to be powered completely by renewable energy by 2020.

Solar and wind technologies are also being developed in places like Jamaica and Nicaragua, while liquified natural gas (LNG) facilities are constructed in Panama and El Salvador. Previously, LNG wasn’t economically viable for small-scale economies, but now that’s beginning to change with the expansion of the Panama Canal and the beginning of US shipments, experts say.

As the Caribbean and Central American nations seek their energy road map, a core challenge is to bolster the necessary regulatory and legal frameworks to attract private investment, whether in renewables or natural gas infrastructure.

Experts see political will in the region’s leaders to make this transition, but governments still face obstacles that include corruption and entrenched interests in many public utilities.

How to lure investment

“Investors are really interested, but they need a business environment where they can have confidence that they’ll recover their investment,” says Mr. Goldwyn. “All of the parties want to do a deal, it’s just that the governments will have to make some decisions, and some sacred cows will have to be slaughtered.”  

What’s more, most of the region’s governments lack the credit to borrow on the public market and fund power plant conversion. Restructuring energy markets so that investors are confident they won’t lose money will be vital to helping the region diversify its energy mix.

Translation: Countries will need to begin paying market prices for energy and allowing external companies to build power plants and compete with national utilities, experts say.

Meanwhile, many of these countries are too small to easily attract investment. All seven Central American countries, for example, have a combined energy market the size of Maryland.

With this in mind, the US is working to help Central America complete an integrated power grid known as the Central American Electrical Interconnection System (SIEPAC). The idea is that banding together allows companies that invest in one country to gain access to them all.

Following a recent meeting between Vice President Biden and regional leaders, the State Department announced it would seek to provide $5 million to boost Central America’s energy market integration. In January last year, the US provided $20 million in clean energy finance for Central America and the Caribbean.

Many experts say more international financing will be key to securing the region’s energy future. Some of that support will come from multilateral entities such as the European Union, the Inter-American Development Bank (IDB), and the World Bank.

The region’s oil dependence is a risk, but many see it also as an opportunity.

“The US government and some of the multilateral agencies would like to take advantage of this situation, for example through a MOU [memorandum of understanding] between the US DOE [department of energy], the IDB, and the Caribbean Development Bank to foster renewable energy,” says Ms Rodrigues Alves.

The efforts nations have made so far are already starting to set the groundwork for a more diverse, cleaner, and more secure energy future. But there's a long way still to go.   

“I think in the long term there should be a concerted effort to help these countries create infrastructure so they aren’t dependent on oil,” says Monaldi.