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Energy security in a time of energy transition in Latin America: The role of oil, gas and cleaner fuels

By Arthur Deakin

When the Intergovernmental Panel on Climate Change (IPCC) released its first report in 1990, Russia had just opened its first McDonalds as a symbol of the country’s transition to a free market. Now, 22-years later, McDonalds announced it was temporarily closing its 900 Russian stores due to the country’s invasion of Ukraine. A few weeks later, the IPCC released its sixth report and issued a stark warning:  for the world to have a 50 percent chance of meeting its climate goals, greenhouse gas emissions must peak by 2025. By 2050, the world will have to reduce coal usage by 95 percent, oil by 60 percent, and gas by 45 percent.

With an average annual growth rate in global emissions of 2 percent from 2000 to 2018, it is hard for any self-preservationist to encourage companies to invest in additional fossil fuel development. But fossil fuel production still accounts for 80 percent of total energy supply and renewable energy capacity is not yet developed at scale to replace it. How can the world ensure energy security and economic growth while preserving the planet? These are the types of questions we will be answering at the 5th Latin America Energy Summit in Santiago, Chile on April 20, 2022.

There is a consensus around the much-needed development of additional renewable energy capacity, the change in consumer behaviors and the pursuit of energy efficiency. But, when it comes to the role of fossil fuels, the narrative is not as clear. In areas where renewable energy can’t be used as a substitute, either because the country does not have the resources (financially and/or geographically), or the infrastructure to do so, the logic would be to replace the use of dirtier fossil fuels, like coal and heavy fuel oil, with “cleaner” fossil fuels, like light crude and natural gas.

Guyana’s cleaner fossil fuel reserves, which emit fewer emissions than heavier crude in other jurisdictions, has attracted tens of billions of dollars in investment commitments from major oil players. To compliment the prioritization of cleaner fuels, and accelerate the reduction of emissions while promoting macroeconomic growth, governments should eliminate fossil fuel subsidies as fast as possible.

The switch to low carbon fuels (which are different from cleaner fuels), such as biogas and green hydrogen, will also be fundamental in decarbonizing heavy industry, agriculture, and transportation. To that end, large energy companies are investing billions of dollars in research and development and cleaner fuel initiatives to ensure that they can maintain a large share of the fuels market. State-owned Petrobras is transitioning its refineries from biofuels to a renewable diesel labeled HBio, even though some critics claim that this diesel is not actually renewable. In Chile, Enel X (the electromobility arm of Enel) is piloting the use of green hydrogen to decarbonize large trucks and equipment fleets used in Anglo American’s mining operations.

The transition towards low carbon fuels, and the cancellation of dirtier fossil fuel projects (coal, heavy crude) must also be coupled with carbon capture storage and utilization (CSSU) technologies that reduce emissions throughout the entire value chain – from extraction to refining. Without the removal of CO2 from the atmosphere, emissions from current and planned fossil fuel infrastructure (including transportation and industry sectors) would account for more than the total emissions the world can release by 2050.

Although carbon capture technology is not yet feasible for large-scale deployment, governments need to provide tax cuts and subsidies to make them cost beneficial.  Investors and energy companies also need to place bets on promising cleantech companies such as PLSAR, which aims to remove 30 percent of CO2 released from fuel combustion, or ZEG, who is producing biogas using agro-industrial residues. Without the financial backing and technical expertise from legacy players, this transition will happen at a much slower pace than what is needed.

Latin America and its “cleaner fuels” will also have an important role to play in this energy transition as Europe shies away from Russian imports. Argentina’s Vaca Muerta is the second-largest non-conventional gas shale formation in the world, but political instability, currency controls and corruption has meant that less than 10 percent of its total land area has been developed at scale. In Mexico, president AMLO is planning on building three new LNG regasification plants but has scared away most investors with his volatile policies aimed at propping up state-owned energy companies. Thus, another key question to be answered is whether Latin America will be able to contribute without shooting itself in its foot.

Investors should gravitate toward assets in countries with business-friendly environments, like Guyana, or relatively stable political jurisdictions, like Chile, while discarding dirtier assets in authoritarian countries. New and existing fossil fuel projects should also be required to have a carbon capture strategy in place, while governments must release more aggressive policies that encourage the electrification of vehicles and the investment in emerging clean-tech startups. A global carbon tax, with a redistribution mechanism to alleviate the pain on the lower class, would encourage companies to move away from fossil fuels at a quicker pace.

Thirty-two years since the release of the first IPCC report, the world finds itself in an unrecognizable place: without the strengthening of policies beyond those implemented at the end of 2020, the world will warm 3.2°C by 2100—more than double the limit set by the Paris Agreement.



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