[NYTr] Energy Diplomacy and the Crossroads in So American Unification

[nytr at olm.blythe-systems.com]

Americas Program, Center for International Policy - Jul 24, 2007
http://americas.irc-online.org/am/4419

Energy Diplomacy and the Crossroads in South American Unification

by Eduardo Gudynas
English translation by Patricia Black

It's possible to postulate that these days the integration of the
countries of South America finds itself at a crossroads. Different
strategies have converged to the point where the large trade blocs find
themselves at a standstill and turn into political forums. The new
attempts are centered on energy, and from there new proposals arise.
Brazil has sought to lead by consensus but has not been willing to pay
the economic and political price of this position, while Venezuela is
exploring another avenue by sharing energy projects and resources with
other countries.

The large blocs of South American unification, the Andean Community of
Nations (CAN) and the Southern Common Market (MERCOSUR) have had
different histories but today they find themselves in similar
situations. Trade problems persist and governments seem to accept that
many of these difficulties will not be resolved in the near future, so
these blocs continue to exist more and more as political forums. There
exist some areas where advances seem possible and among them energy
stands out as a central axis for new attempts at integration. But from
here new avenues are opening where there are at least two perspectives:
one is represented by Brazil's position illustrated by the role of its
state oil company Petrobras, and the other by Venezuela and the joint
agreements articulated around PDVSA, the Venezuelan state oil company.
They are demonstrating two distinct integration proposals, that in some
ways conflict. Energy Diplomacy

Since the beginning of 2007 a series of meetings and presidential
summits have taken place at a dizzying rate and in many cases energy
has played a central role.

Let's begin by recalling that in March the president of the United
States, George W. Bush, visited Brazil, Uruguay, Colombia, Guatemala,
and Mexico on the trip called "the ethanol tour." His presence fed the
idea of a major partnership between Brasilia and Washington, especially
due to trade in biofuels. Bush reinforced this idea still more by
inviting Brazilian president Luiz Inácio Lula da Silva to visit him on
the grounds of Camp David a few weeks later. As a reaction to these
meetings, first of all the president of Venezuela, Hugo Chávez,
launched a "counter-tour" in opposition to Bush, and later, joined by
Fidel Castro, began to critique the role that biofuels will play.

In this context, on April 16-17 the South American heads of state held
a meeting on the island of Margarita (Venezuela), with the presence of
Chávez of Venezuela, along with Nestor Kirchner of Argentina, Lula de
Silva of Brazil, the Bolivian Evo Morales, Nicanor Duarte of Paraguay,
Rafael Correa of Ecuador, the Chilean President Michelle Bachelet,
Alvaro Uribe of Colombia, Vice President of Uruguay Rodolfo Nin Novoa,
Prime Minister of Guyana Sam Hinds, and Prime Minister Delegate of
Surinam Gregory Rusland.

The energy summit presented objectives that all would share, such as
that energy integration, "should be utilized as an important tool to
promote social and economic development and the eradication of
poverty," or to "involve as principal actors the State, society, and
industry businesses" without omitting the classic calls for "technical
cooperation." But this type of generic agreement has been a recurring
theme in presidential declarations for many years.

The most concrete agreements were the creation of the Energy Council of
South America made up of the energy ministers of each country. This
council must develop a continental energy strategy, an action plan, and
a proposal for a South American Energy Treaty. The presidents again
recognized the importance of joint undertakings, mentioning
specifically the Venezuelan plan Petroamerica. But it also needs to be
recognized that the Margarita Declaration does not include any concrete
measures toward other energy integration in the sense of sharing these
resources beyond interconnections or the buying and selling of oil or
gas.

On other issues disagreements between the countries also recurred.
There were no agreements in support of the idea of an international
organization of countries that export natural gas. Nor did they agree
to support the great Gas Pipeline of the South as a collective
undertaking, and for now its progress continues in the hands of
Venezuela, Brazil, and Argentina. Biofuels were the object of long
discussions between the delegations, especially because of Brazil's
self-defense, until ultimately the final declaration accepts them as a
mark of the diversity of energy sources (Bolivia maintained its
disagreement on this point). Nor did they reach an agreement to launch
the Bank of the South, especially promoted by Venezuela, Argentina, and
Ecuador. Brazil resisted this proposal and made it a condition for its
incorporation that all the points be discussed again. The other
countries acceded and new discussions are currently taking place.

The Venezuelan proposal to call the South American Community of Nations
the "Union of South American Nations" (UNASUR) was accepted. This union
will have its headquarters in Quito and the creation of a council was
announced. Although this decision was surrounded by optimism, no plan
of action was agreed upon. Remember that this is the third name given
to the attempts at South American integration, which began in Brasilia
in 2000 as a continental free trade region, and in 2004 in Cuzco (Peru)
was named the South American Community of Nations.

An overall evaluation of these decisions shows that many presidents
really are seeking mechanisms for regional unification, and that they
have ceased to be mere promoters of exports to the global markets. It
is also evident that energy has become a central issue, and that based
on that, they are seeking bilateral or regional agreements. But, on the
other hand, it again lapses into the publicity arena when they launch
the idea of the "South American Union" in spite of the serious internal
problems inside the Andean Community and MERCOSUR, and while the South
American Community of Nations has barely taken its first steps.

Therefore, while it's true that the opportunity for discussion
continues—and it is correct to recognize progress on some points—they
should admit the difficulties in order to arrive at concrete agreements
in many aspects related to the economic and productive articulation
between countries, despite clear discrepancies that persist on various
issues. That's how these meetings end up as political forums.

A few days later on April 27-28 the fifth presidential meetings of the
countries participating in ALBA (Bolivarian Alternative for the
Americas) took place, and in this case Chávez, Morales, Daniel Ortega
of Nicaragua, and Cuban Vice President Carlos Lage, as well as
observers from Haiti and Ecuador among others, attended. There they
signed a series of agreements, including an "ALBA Energy Treaty," with
important innovations like shared access to an area of oil exploitation
in the Orinoco River basin that assures the other countries of access
to these reserves for the next 25 years. They announced the creation of
joint ventures for the utilization of natural gas and they will aim to
increase each member's refinery capacity. Even though these are still
generic goals, an ALBA Energy Council made up of the ministers of each
country was created to put them into effect.

But the most outstanding aspect was the presentation of the concept of
the "great national" company (as an alternative to the transnational
companies). In the energy agreement they announced a "great national"
energy company that will encompass wide sectors such as oil, gas,
refining, petrochemicals, infrastructure development for storage and
transportation, electrical energy, and alternative energies. The treaty
establishes that the new "great national" company will be composed of
the State-run companies.

Brazil and Bolivia Say Goodbye

Shorly after these presidential meetings what appears to be the final
solution was reached in the disputes between the Bolivian government,
Petrobras, and the Brazilian government. These disputes are a clear
example of the true distance between the declarations of the summits
and the concrete relations between the countries. Since in May 2006
Morales initiated state actions to control the extraction and sale of
hydrocarbons, there have been disputes with the Brazilian petroleum
company. For Brazil, Bolivian natural gas is a key contributor to its
energy matrix, and for many long months they disputed its price.
Immediately afterwards they added to the negotiations the transfer of
Petrobras' refineries to the Bolivian state petroleum company YPFB. An
outside observer might be surprised to find conflicts between two
governments that define themselves as leftist, but the truth is that
they were defending commercial interests and national political goals
without being able to agree on true energy unification.

The many arguments at play cannot be summarized in a single article,
but two facts can be mentioned as an example of their complexity.
First, one must recognize that Petrobras did not keep its promises to
process hydrocarbons inside Bolivia, and therefore, there was no real
contribution to Bolivian development beyond the sale of gas. This is an
example of energy interconnection without productive integration.

Secondly, it is also important to recognize that Lula's government
managed to counteract the strong internal pressures of the conservative
and business sectors that wanted to practically crush the Bolivian
nationalization of its hydrocarbons. These groups presented the dispute
as the "Gas War," alternating wounded nationalism with claims of
retaliation.

Lula's government sought a solution to the conflict for various
reasons, ranging from the need to end the internal debate within
Brazil, to avoiding future accusations of causing the destabilization
of Morales. Finally Petrobras accepted US$112 million for its
refineries in Bolivia. The Bolivian government celebrated this
arrangement, although it is a very big gamble given the limitations
that it faces and taking into account the technical capacity and
resources needed to manage the new facilities. In some way, Brazil has
abandoned Bolivia to its own fate, with a clear distancing between the
two presidents. Petrobras will maintain its contracts to buy natural
gas until they end in 2019, and it announced that as of that date it
will buy no more Bolivian gas.

While Brazil takes its leave of Bolivia, Morales' government sought
support in other countries. The clearest examples are the agreements
with Venezuela, including technical assistance from PDVSA, as well as
new oil explorations in the northern part of the country. Also it
procured a long-term agreement for the sale of natural gas to Argentina
in order to reduce its dependence on Brazilian sales.

These disagreements between Brazil and Bolivia are possibly the most
well known, but others exist that are very similar and less publicized.
For example, Paraguay is demanding changes in the old contracts for the
sale of electrical energy to Brazil from the Itaipú dam that the two
nations share; and Argentina has re-initiated the intermittent
suspensions of gas exportation to Chile, in spite of the contracts and
agreements between the two countries.

The Shadow of Corruption

Another real problem that is becoming evident in the energy sector is
the return of the shadow of corruption, in both the private and public
sectors.

The most alarming case is unfolding in Argentina, where after repeated
accusations, irregularities in the payment of taxes by the Swedish
company Skanka, in charge of natural gas transportation projects, were
confirmed. As the investigation continued, evidence showed a scheme of
overcharging more than US$5 million for the work ordered by the
Argentinean government.

The case has some shocking aspects, such as the accusation that the
plan to overcharge came from high government officials, who themselves
set up the mechanism the funds came from. The projects were financed by
an enormous Argentinean governmental trust set up to finance works of
infrastructure, and exists without parliamentary control. Contributions
to this fund come from both the Argentinean treasury and the Brazilian
National Bank for Economic and Social Development (BNDES). The progress
of the investigation caused President Kirchner to remove from office
various high officials, including the manager of the state trust as
well as the president of the recently created national gas company. The
investigations have expanded to other companies (Techint and
Odebrecht), and to undertakings in other countries on the continent
(like Peru).

Almost simultaneously, in Brazil, a political investigation discovered
a bribery scheme established by construction companies that involved
top figures in both federal and state governments, legislators, and
business people. The case resulted in the resignation of the energy
minister, Silas Rondeau.

All these are bitter blows to the attempts to achieve a greater
presence of the State sector, whether by means of State companies or by
means of greater regulation of private companies. Many of the energy
integration agreements are turning into juicy deals, very difficult to
control, that require new processes for transparency. Interconnections
and Integration: Two Distinct Concepts

Even though energy appears time and time again to be the axis of the
new efforts at integration, it is necessary to point out that in many
cases what is called "integration" is really "interconnections," such
as gas pipelines, oil pipelines, or electrical networks. These
undertakings are important, but they are only connections that permit
the commercialization of energy. A large part of the optimism comes
from considering the agreements for interconnection as advances in
unification, but in reality they are not synonymous since there is
still a need to agree on common strategies regarding access to
resources and the ways that they will be used.

This distinction between "interconnection" and "integration" allows us
to understand how two countries as interconnected as Bolivia and Brazil
still don't make progress in the process of energy integration. The
same situation applies in the case of the problems between Paraguay and
Brazil, or Argentina and Chile, already mentioned.

In the same way, the difference between "interconnection" and
"integration" also explains the progress in the energy negotiations
between Colombia and Venezuela, in spite of the ideological differences
between the two governments. Indeed, these countries have carried out
projects like the Ballenas-Maracaibo binational gas pipeline, that
carries Colombian gas to Venezuela and includes a possible expansion to
Panama and the rest of Central America, as well as the Venezuelan
investments in Colombia for such works as the construction of a
fertilizer plant in Cartagena. Uribe and Chávez do good business, but
they don't build common energy policies; it is an example of business
without integration between two politically distinct regimes. In the
same way , in the Southern Cone, there exists an intricate network of
electrical and gas interconnections between Argentina, Bolivia, Brazil,
Chile, and Uruguay, but they have not achieved a common energy platform
within MERCOSUR.

In the last few years, the confusion about infrastructural
interconnections, both in highways and waterways and in energy, has
been one of the pillars of defense of an optimistic version of the
progress of linking South American countries. Nevertheless, these
connections in almost every case still depend on conventional
commercial interests anchored in the import and export of energy and
guided on some occasions by business goals of making a profit and on
others by classic nationalistic postures. Since they are business
ventures, whether they are private or public, the shadow of corruption
enters in. Meanwhile, in the presidential summits, like the one in
Cartagena, they try to find a common energy strategy, but they still
haven't found effective actions that will lead to real integration.

Perspectives at Play

Today we can distinguish two principal perspectives in the proposals
for energy linkage. The first one can be described as a strategy based
on classic commercial agreements for the buying and selling of energy,
dependent on market demands, where the businesses involved (whether
public or private) seek to maximize their profits and their benefits in
these sales. It's in this way that the conventional international
agreements have functioned and that the transnational companies in the
Northern hemisphere operate.

Recently various countries have acted in this way (like the pacts to
buy and sell gas between Argentina and Chile, and Bolivia with Brazil),
and so have regional companies (the clearest example is Petrobras).
This posture is not opposed to the promotion of energy interconnections
since these connections are indispensable in order to permit the
commercialization of the products. But energy integration, in the sense
of having common energy resources, elaborating joint undertakings, and
helping shared productive initiatives, does not exist.

The second strategy is much more recent and still in the initial
stages. It also includes commercial agreements and promotes
interconnections, but it offers the novel idea of trying to share
energy resources and to link them to joint productive projects. This
stance is promoted by the Venezuelan government, whose principal agent
is the state petroleum company PDVSA. It operates by means of joint
projects or joint ventures between PDVSA and a local partner, usually a
governmental company. But at the same time it permits this local
partner to participate in oil enterprises inside Venezuela. Thus, there
are monetary payments, but they can also resort to other procedures
such as payment in local products that they export to Venezuela. In
many cases, there is an obvious imbalance in the prices, and Venezuela
is contributing more than it receives.

>From the first perspective, joint projects of this type are not carried
out, and countries do not share their hydrocarbon deposits in this way,
instead keeping them for direct exploitation or concessions under
classic trade rules. A good example has been the role of Brazil and
Petrobras, since the controversies with this company have not only
taken place in Bolivia, but also in Ecuador, Peru, and Argentina. In
all these cases, the Brazilian company has acted like any other
transnational corporation, seeking to maximize its earnings without
promoting local development and with a poor social and environmental
performance.

In the meantime, the Venezuelan enterprise PDVSA has spun a web of
agreements in many other countries. For example, it has signed
agreements with the state companies of Ecuador (Petroecuador), Colombia
(Ecopetro), Paraguay (Petropar), Uruguay (Ancap), YPFB (Bolivia), among
others, and even with Petrobras itself. The agreements are of different
types; some involve Venezuelan investments in national refineries to
adapt them to the extra-heavy crude oils of that country (for example,
in Paraguay and Uruguay); in others there is shared access to oil
fields (for example, Venezuela permits Ecuador's co-participation in
the Orinoco Belt, while Ecuador gives Venezuela priority to access the
large oil reserves of Ishpingo-Tambococha-Tiputini). They reach
agreements in which Venezuela agrees to receive products as
compensation (for example, the agreement with Uruguay's ANCAP grants
participation in Venezuelan oil fields, but Venezuelan crude must be
processed in Uruguay and they accept as payment Portland cement and
other Uruguayan products under advantageous conditions), while in other
cases there are also important components of direct support, such as
what we see in Bolivia.

Although Brazil presents itself as a regional leader, one must admit
that it has not followed this type of path and has not been willing to
cover the costs of agreements that promote productive enterprises
between neighbors. Furthermore, its state companies, not just
Petrobras, but others like Odebrecht, have acted unilaterally in
neighboring countries. This is not a problem exclusive to Brazil, since
similar things have taken place between other important countries in
the region, such as Argentina and Chile, who have not tried to promote
further regional unification either, and whose state companies have
repeated business practices and entrepreneurial traditions. The
difference stems from Brazil's attempt to position itself as a regional
leader whereas other nations do not seek this position.

At a Crossroads

The series of cases and examples presented throughout this article
permit us to offer an analysis of the current trends. It is possible to
state that in the last few years there have existed two types of
linking processes between South American nations.

The European model of unification, based on a common market that
develops parallel to a political structure, was represented by
MERCOSUR. This effort clashed with the impossibility of taking the
necessary step to supernationalization, and Brazil in particular would
not accept this measure. Because it is also the largest economy in the
region, it could have attempted a substitute or palliative measure to
permit certain levels of asymmetrical trade that would benefit the
smaller neighboring countries. But Brazil was not willing to pay that
price either, and on the contrary, its conduct in Bolivia did not
manage to change the entrepreneurial logic of maximizing competitive
advantages and profits. The only substantive concession was granted to
Argentina, accepting a commercial agreement with protection of
vulnerable sectors, reducing friction with Argentina at the cost of
increasing the disenchantment of Paraguay and Uruguay. In the
situation, MERCOSUR advances and retreats regarding trade problems that
it cannot resolve since it lacks a supernational normative framework,
and, therefore, continues to stagnate under a very incomplete customs
union. This explains why the block operates mostly as a political
forum. Currently the relevant fact is that there appears to be an
acceptance (mixed with weariness) of this situation among the partners
of MERCOSUR.

Another model was based on an important opening to international
markets, both those of neighboring countries as well as those on other
continents. It is an extreme form of "open regionalism" that was
followed by Chile, and more recently by Colombia and Peru. These
countries have not been able to articulate a more in-depth unification
process within CAN, since their goal is the opening of trade and they
did not expect to reach other agreements, such as, for example, common
productive policies. Contrary to what happened with MERCOSUR, where
they still maintain certain levels of trade protections, in the CAN
they opt for a strong liberalization; but at the same time, the Andeans
abandoned attempts at supernationality and even those at having a
customs union. Therefore, the CAN also wound up being a political
forum, although for different reasons and by a different route than
MERCOSUR.

We find ourselves facing two different paths that for different reasons
now meet at a crossroads in a similar situation, where the commercial
and economic aspects are stagnated and the blocks continue as political
forums. This explains in large measure the reasons why the attempt at
South American unity, whether under the name of Community or Union,
also expresses itself as a political forum.

In this situation, the role of Brazil is key. In recent years, it has
maintained a more or less defined idea of a regional unification
project. Its proposal, initiated in the year 2000 under the F.H.
Cardoso administration, was adapted by Lula da Silvas's government,
keeping the central nucleus and giving it some nuances of its own. Its
position is that of exercising regional leadership by consensus, or a
benevolent leadership, where it seeks to promote a certain amount of
regional unification, but is not willing to assume the cost of this
leadership, whether in the economic or the political realm.

Furthermore, Brazil has announced that it will carry out negotiations
separately from the rest of MERCOSUR by means of a strategic agreement
with the European Union, while it keeps alive the idea of joining the
OECD (Organization for Economic Cooperation and Development, the
organization of industrialized countries). Although it is considered
different from a trade agreement, this distinction may be a mere
difference in terminology since it will involve mutual commitments and
concessions. That step will be a hard blow for MERCOSUR, and will be
invoked by Paraguay and Uruguay to seek in turn an agreement with the
United States. Accordingly, the business lobbies inside Brazil that
promote free trade agreements will be strengthened.

In this way, in Brazil there exists a strong tension between the desire
for regional integration and the costs and obligations that this task
requires. This type of tension is not present on the path of open
regionalism nor in the positions taken by Chile, since its essential
goal is trade liberalization.

The most relevant recent change is Venezuela's stepping forth with a
different idea on regional unification. Its position points to a closer
relationship between South American nations and a more active
disconnection from globalization in order to gain greater autonomy.
These ideas, contrary to the Brazilian perspective, are currently much
more diffuse—in some cases imprecise, at times contradictory, and they
are under construction.

Under some circumstances, the government of Caracas seems to opt for
strengthening regional unification but in others it would seem that it
obstructs it: it abandoned the CAN and requested admission to MERCOSUR,
and although it is taking its first steps there, Chávez has already
said that this block is not working in its current state. Then it opts
for the South American Community of Nations and then proposes to rename
it Union of Nations, but immediately reinforces its own program under
ALBA.

This makes the Venezuelan stance seem at times contradictory and it
generates a lot of controversy. But beyond these arguments, one must
recognize that it offers a key difference in opposition to the previous
proposals: Venezuela is willing to assume for now the political and
economic costs of its integration proposal. This is based not only on
the great availability of funds owing to the oil profits, but also
reflects another political stance with regard to neighboring countries.
In this case there are no tensions with regard to a supernational goal
or wounded sovereignties, since a shortcut based on joint ventures with
the participation of various countries has been reached. Joint projects
of state companies, especially the co-participation in the Venezuelan
oil reserves, have indubitable economic importance, but they also form
a network of help and support to try out another integration process.

[Eduardo Gudynas (egudynas(a)adinet.com.uy) is an analyst at CLAES D3E,
a center for the investigation and promotion of sustainable development
(www.integracionsur.com) and collaborates monthly with the Americas
Program, www.americaspolicy.org. The opinions expressed are solely
those of the author.]