Nov 07, 2006 -- STATE DEPARTMENT RELEASE/ContentWorks

Further integration of energy markets is the best way to advance energy security interests of the United States and its North America Free Trade Agreement (NAFTA) partners, Canada and Mexico, a U.S. Energy Department official says.

"We have to recognize that we are linked through our energy security polices," Energy Department Deputy Assistant Secretary David Pumphrey said.

He spoke at a November 3 conference on energy cooperation in the Western Hemisphere organized by the Center for Strategic and International Studies, a Washington-based policy research organization.

Researchers and private experts attending the event supported the view that energy integration of and interdependence among the three countries have advanced further than any similar regional effort in the world and bring many benefits to all involved.

Canada and Mexico are major providers of petroleum and natural gas to the United States and the Canadian and U.S. electrical grids are highly integrated.

Pumphrey said private companies from the region, which enter in multibillion public-private partnerships with local governments in Canada and the United States, drive the integration.

In recent years, governments of the three nations have been trying to figure out within the North American Energy Working Group (NAEWG) what to do to make the region's energy markets work even more efficiently "somewhat irrespective of the borders that exist," he said.

"We are trying to allow investors to be able to access energy sources throughout this integrated marketplace," Pumphrey said.

NAEWG, established in 2001, is credited with helping to harmonize minimum efficiency requirements for home appliances in the three countries and boosting electricity trade and power market integration. It is part of the trilateral Security and Prosperity Partnership (SPP) whose energy work plan also covers oil sands, natural gas, nuclear power, coal and new energy technologies.

Pumphrey said similar opportunities for cooperation and integration exist throughout the entire Western Hemisphere. A report he cited concluded that aggregate gross domestic product of Latin America and the Caribbean can grow by 1 percent by 2018 just by increasing substantially the level of integration of the electricity sectors in the region.

To advance collaboration and integration in this and other energy sectors, countries must rely on market-based principles, Pumphrey said.

"We need the market to help countries make right energy choices and attract investment," he said.

OTHER DEVELOPMENTS IN WESTERN HEMISPHERE

Pumphrey said countries in the hemisphere must make massive investment in energy development to ensure the most efficient use of their resources. The International Energy Agency estimates that such development in the Western Hemisphere would require at least $5 trillion ($1.3 trillion in South America) by 2030, an estimate likely to go up as the costs of developing heavy and nontraditional oil deposits are included, he said.

The recent trend to reject the market-based approach in countries such as Bolivia and Venezuela creates concern that such an investment will not be forthcoming, Pumphrey said.

Bolivia's president, Evo Morales, has nationalized the country's oil and natural gas reserves and negotiated new contracts with foreign energy companies that allow the government to receive more revenue from their operations.

Venezuela has asked foreign energy companies for more payments in taxes and royalties, required them to enter into joint ventures with the state-owned company, PDVSA, and relegated them to minority partners in those ventures, according to news reports.

Pumphrey cautioned against the temptation to step up government involvement in the energy sector to increase shares of energy-resource revenue. Government intervention in energy markets distorts the economy by making the state's budget overly dependent on energy resource revenue, he said.

Sidney Weintraub, the editor of an upcoming book on energy challenges and opportunities in the hemisphere, said that state's heavy involvement in the energy sector, combined with barriers to foreign investment, is likely to lead to declines in oil and gas exploration and production. He said such a risk exists in Mexico where the Mexican petroleum company, Pemex, is starved for funds, technology and expertise. It lacks money for exploration and production because it is heavily taxed and does not have sufficient expertise and technology because the Mexican Constitution does not permit foreign equity investment in the energy sector, Weintraub said.

Another expert, Lowell Fleischer, said the Venezuelan PDVSA is in somewhat similar state as a result of the mass firing of experienced oil workers and a significant part of revenue being diverted for social causes.

Weintraub contrasted these approaches with that of Brazil, where the also-state-owned Petrobas runs its operations more efficiently as it is allowed to reinvest some of its revenue and enter into joint ventures with foreign firms.

For more information, see North American Free Trade Agreement and Security and Prosperity Partnership of North America.

(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State.)

News Provided By