US should be ready if Petro Caribe tightens credit terms, study says

The possibility that Venezuela’s financial support for energy imports in the region could erode quickly makes it imperative for the Obama administration to adopt a wide range of policies to avoid an energy crisis in the Caribbean and Central America, a recent Atlantic Council report said.

“It’s almost 10 years since Venezuela announced the Petro Caribe program, which sells products at market benchmarks, but provides credit financing,” David L. Goldwyn, president of Goldwyn Global Strategies LLC and a senior nonresident energy fellow at the Atlantic Council’s Adrienne Arsht Latin America Center, said during a discussion of the report he co-wrote with Cory R. Gill.

Petro Caribe has been an enormous political success and a significant financial drain for Venezuela, he noted. It also has undermined budgets in the Caribbean and Central American countries that use it by keeping electricity prices high through continued use of fuel oil and diesel fuel to generate power, and increasing their dependence on external financing, Goldwyn said.

“The Caribbean countries particularly should follow what Mexico and other Latin American countries are doing and convert electricity generation from fuel oil to natural gas,” he suggested. “This is an issue the US really needs to care about.”

Goldwyn said the US should make Caribbean and Central American energy transformation a major policy priority before the situation turns into a crisis. Steps could include taking a serious look at ways to facilitate more use of gas there to generate electricity, preparing to provide fuel to replace what Venezuela now supplies, and bringing together national leaders, utilities, oil and gas producers, and capital sources to determine what’s feasible and how it can be accomplished, he indicated.

Standby financing

“I think the time is right for us to demonstrate a policy that’s more pro-Caribbean than anti-Petro Caribe,” Goldwyn maintained. “We need to telegraph we’ll have a standby agreement to provide financing if [Petroleos de Venezuela SA (PDVSA)] tightens credit terms. Longer term, it will be necessary to improve these countries’ economies by helping them reduce their power generation fuel costs.”

“At the end of the day, you need an 800 lb gorilla with the financial expertise and capacity, the political knowledge to manage it, and the resource to supply these countries’ needs,” said a second speaker, Jorge Pinon, director of the University of Texas at Austin’s Center for International Energy and Environmental Policy. “Some people may laugh, but it could be Qatar. It also could be the US. What’s needed is a commitment to bring the various institutions together to get this job done.”

A third panelist, Jed Bailey, managing partner of Energy Narrative in Boston and co-author of the Inter-American Development Bank’s “Pre-Feasibility Study of the Potential Market for Natural Gas as a Fuel for Power Generation in the Caribbean,” said the IADB realizes gas has not penetrated these markets because little is produced there and LNG economics have been unfavorable until recently.

“Especially in the island countries, tankers bring in a load of fuel oil or diesel and unload them into a terminal, which ships it to a generation plant,” Bailey said. “Natural gas could use similar terminals and jetties, assuming the vessels were small enough, but pipelines would have to be converted along with the plants themselves. The biggest cost would be to get the regasification terminal built.”

Dual-fuel capable

“A lot of facilities being built today are dual fuel capable,” Pinon added. “These islands depend on tourism. Power plants which run on high-sulfur fuel oil have higher contamination potential than plants which run on LNG.”

US LNG sales to Caribbean and Central American nations would help those countries get gas at the Henry Hub price, which is the world’s lowest, Goldwyn said. “It also would provide a new market for US producers,” he said. “It would be politically difficult, but not impossible. LNG export opponents don’t like the idea of selling so much US gas to Japan and India. These would be sales of a relatively small amount, 500 MMcfd, to nearby countries in our own hemisphere.”

Institutions already exist where the necessary participants could be brought together, but the US will need to take a more aggressive role in bringing them together, Goldwyn said. The Energy Climate and Partnership of the Americas (ECPA), a multilateral forum that the Obama administration helped form would be a good starting point because it is holding a summit in 2015 and a planning meeting in August, he said.

“The US has to get these institutions together,” he said, adding, “It already has significant stakes in many of them. It’s a great opportunity for the vice president. When the White House says it’s a priority, the institutions show up. They won’t if we don’t actually try to bring them to the table.”

Contact Nick Snow at nicks@pennwell.com.

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