Opportunities and challenges face a changing Caribbean
The Caribbean energy landscape is shifting, posing some problems but offering many opportunities too
For countries in the Caribbean and Gulf of Mexico, the divide between the energy rich and poor is stark. In many cases, falling on one side or the other has been enough to decide a nation’s economic fortune. Trinidad and Tobago, for example, has thrived thanks to its natural gas reserves, while high oil import costs have pushed many already weak Caribbean economies to the brink.
For all of them, major changes are afoot as surging shale gas and oil production in the US, advances in renewable energy technology, new deep-water drilling, major energy reforms, persistently high oil prices and changes in the region’s geopolitics shift the energy landscape.
Trinidad and Tobago is the Caribbean’s energy powerhouse and has built an economy that is the envy of many across the region on the back of its liquefied natural gas (LNG) export industry. Yet it is facing its most difficult period since it started exporting gas 15 years ago. It long counted on the US as its primary buyer, but demand there has dried up amid surging American gas production.
Facing new challenges
Trinidad’s gas sector has weathered the immediate storm thanks to new demand from Latin America and Asia. But the government has yet to set out a long-term vision for the energy industry that takes into account new realities at home and abroad. Norman Christie, the head of BP’s Trinidad and Tobago business, the country’s largest gas producer, recently fired a shot across the government’s bow: “The industry has changed dramatically and what has got us here will not keep us competitive.”
Trinidad and Tobago’s neighbour Venezuela shares the area’s offshore gas riches. But Venezuela has so far squandered its potential. Grand plans for LNG export plants and Caribbean gas-fed regional pipelines have come to naught and the country continues to experience chronic natural gas shortages. The Repsol and Eni-led Perla development offers the best hope over the short-term, but it will be state-run PdV’s task to turn the country’s gas ambitions into reality.
In the Gulf of Mexico (GoM), the US is quietly undergoing a post-Macondo renaissance. A raft of new projects that had been put on hold in the wake of the oil spill are set to come on stream, reversing a recent slump in production.
And 2014 looks like it will be the first year of growth since the 2010 disaster. At the same time, major energy reforms across the border are set to open Mexico’s sector of the GoM to international companies. Uncertainty remains around the final details of the reforms, but the country is embracing the need for change and prospects for new deep-water projects in the GoM are bright. Oil explorers are also testing frontiers in the Caribbean as new acreage is opened up. Guyana, French Guiana and Suriname have seen some of the most intense interest.
The PetroCaribe programme, through which Caribbean countries receive heavily discounted crude from Venezuela on generous repayment terms, has helped cushion the blow of $100 a barrel oil.There, companies such as Shell, Total and Tullow Oil are betting the region’s geology will mirror that which has yielded huge oil discoveries across the Atlantic in West Africa.
Colombia too has seen renewed interest in its offshore, fuelled by hopes that discoveries in nearby Venezuelan waters can be replicated. Aruba, the Bahamas, Barbados, Nicaragua and Jamaica are all hoping to strike oil riches as well. For the region’s energy importers, the strain of high-cost oil imports, which most countries rely on for power generation, is becoming too much to bear. Energy import costs in the Caribbean as a proportion of total GDP are the highest in the world.
PetroCaribe member countries typically pay 40-60% of the oil cost upfront and pay the rest back over 25 years at rock-bottom interest rates, and often through barter rather than with cash. But what had been an economic lifeline for many now risks becoming a noose. After nearly a decade of the programme, member countries have run up huge debts to Venezuela. Jamaica’s oil-related debt to Venezuela is equal to 50% of its nominal GDP, according to RBC, an investment bank.
It has also left the fate of member countries heavily dependent on Venezuela’s volatile political and economic situation. A sudden end to the programme, either because Venezuela’s current political crisis sees the Chavistas run out of office or because cash-strapped PdV decides it simply can’t afford petro-diplomacy any longer, would leave many Caribbean economies exposed.
Policymakers are aware of the bind they are in, and many countries are looking at ways to escape their oil dependency. The emergence of abundant and relatively cheap natural gas from the US is one promising option. Natural gas would be a cheaper and more environmentally friendly alternative to oil. But it would require significant upfront investment and would require countries to work together to develop infrastructure and create a market large enough to attract sellers. Renewables also offer a promising alternative. Wind and solar costs are plummeting and the technologies are ideally suited to the small, distributed nature of most Caribbean energy systems.
The business tycoon Richard Branson has been the unlikely champion of renewable energy in the Caribbean, doing much to bring policy and financial expertise to the sector. Aruba has become a poster child for the Caribbean’s renewable ambitions. It is reaping huge benefits from its investment in wind energy and establishing a blueprint for others to follow.