FT REPORT – ENERGY IN THE AMERICAS: Riches beyond the wit of politicians

By Carola Hoyos, Financial Times
Published: May 08, 2007

When in his 2006 state of the union speech George W. Bush singled out America’s dangerous addiction to Middle East oil, Arab leaders, European politicians and oil industry executives scratched their heads in bemusement.

In fact, the US – the world’s biggest consumer of oil and gas – still gets most of its oil from the Americas, home of four of its top five sources of supplies: its own oil fields, and those of Canada, Mexico and Venezuela. Saudi Arabia, its fourth largest supplier, is the only exception.

In terms of oil reserves, the news should also be reassuring – the US is flanked by Alberta’s vast oilsands in the north and Venezuela’s even bigger Orinoco heavy oil deposits in the south. They hold more oil than much of the Persian Gulf.

Meanwhile, practically all the US’s natural gas comes from the Americas, with Canada and Trinidad and Tobago being its main foreign suppliers. Contrast this with Europe or Asia, which must turn to the Middle East, Africa and the Caspian for their oil and gas, and a picture of a continent with a considerable degree of selfsufficiency emerges.

But, despite looking good on paper, the actual energy situation for the Americas is not as simple as it appears.

The continent may have been blessed with hydrocarbon riches, but it has also been cursed with lawmakers beholden to powerful interest groups in the US and populist presidents in Mexico and Venezuela. And the vast oil fields of Canada and Venezuela come with the catch that they are expensive and environmentally damaging to exploit.

Into that mix have been thrown the twin conundrums of how to ensure that the world’s biggest economic engine gets the energy it needs without its addiction to hydrocarbons causing catastrophic climate change.

In 2002, as the world focused on whether the US would invade Iraq, finally freeing the world’s third- largest oil reserves from tyrannical rule and UN sanctions, breakthroughs in technology allowed Canada to add 175bn barrels of oil – 50 per cent more oil reserves than Iraq – to the world’s books. It was the first big increase since the mid-1980s, notes Daniel Yergin, chairman of the consultancy Cambridge Energy Research Associates.

In the ensuing five years, Iraq’s great promise has festered at the hands of insurgents who have plunged the country into political chaos and prevented international companies tapping its riches, while Canada’s Alberta province has experienced a black gold rush.

By last year, Alberta’s oilsands contributed almost half of Canada’s oil output, double their share a decade earlier. As world oil prices tripled and technology advanced, the entrepreneurial oilmen who had started the Athabasca rush have begun to give way to big international oil companies, including ExxonMobil and ChevronTexaco of the US and Europe’s Royal Dutch Shell and Total.

While across the rest of North America few oil mergers and acquisitions were being made as executives worried about buying at the top of the cycle, Canada’s heavy oil was prompting a plethora of deals. Last month Royal Dutch Shell succeeded in buying the fifth of Shell Canada it did not already own for C$8.7bn.

Much of the oil produced in Canada heads south of the border to the US, whose stronger-than-expected economic rebound from the September 11, 2001, terrorist attacks has helped fuel a five-year rally in world oil prices.

The US now consumes more than 20m barrels of oil a day, a quarter of world consumption, and about as much as the combined total of the next five consumers: China, Japan, Russia, Germany and India.

But as petrol prices climbed to more than $3 a gallon in 2005 and hurricanes Katrina and Rita – which hit the US Gulf of Mexico, America’s energy centre, that summer – forced Washington to rely on the world’s emergency stockpiles of gasoline and oil for the first time, the US became increasingly aware of the vulnerability that comes with its oil dependence.

Concern about climate change was also mounting. This year Al Gore, former vice president and presidential candidate, pushed the climate agenda into the American mainstream when he won an Academy Award for his documentary, An Inconvenient Truth. As the 2008 presidential elections near, all the main candidates are talking about energy security and the environment. Even big oil is getting into the act. ConocoPhillips, the US’s third largest listed energy group, recently announcing that it wanted a mandatory federal framework to mitigate climate change. As in Europe and China, nuclear-generated power, with its light carbon footprint, is also making a comeback in the US.

For transport, Mr Bush’s answer is ethanol. In his 2007 state of the union speech, he unveiled a hugely ambitious plan to reduce US gasoline consumption by 20 per cent in the next decade, mainly by increasing use of ethanol as an additive. The idea has the added bonus of pleasing the farm lobby, but critics argue that using ethanol for transport is not cost-effective, drives up food prices and is only marginally less polluting than gasoline.If the US, however, were to rely on sugar-based ethanol, which is more efficient than the corn variety, the gains would be significantly greater, energy analysts say, pointing to Brazil’s model. Brazil’s may be the example to follow, but countries such as Guatemala, El Salvador and even Cuba are well- placed to take advantage of the ethanol demand boom.

Latin America’s increasing promise as a supplier of biofuels stands in stark contrast to its diminishing potential as a big source of additional oil and gas.

Mexico and Venezuela, its two biggest producers, both suffer from ageing fields and governments that use their national oil companies as piggy banks for social programmes.

In Mexico, the giant Cantarell oil field – once the second largest in the world – is declining at an alarming rate, prompting pessimistic analysts to predict that Mexico could become a net oil importer within a decade. In Venezuela, populist President Hugo Chavez has in the past six years fired 18,000 skilled staff at PdVSA, the country’s national oil company; toughened fiscal terms for international oil companies and this month seized control of the Orinoco heavy oil projects. Instead of growing, Venezuela’s production has shrunk.

In his most recent state of the union speech Mr Bush warned the US’s dependence on foreign oil left it vulnerable to hostile regimes – again he hinted at the Middle East and Africa. But few regimes – if any – are as hostile as that of Mr Chavez, proving that a continent blessed with hungry energy consumers and vast oil and gas riches is not necessarily spared the energy challenges that vex the rest of the world.

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