Image credits: @FranciaMarquezM
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Analysis

Different Shades of Pink: Petro, AMLO and Decarbonization

By Conal Quinn | Fri, 07/01/2022 - 09:22

The pink tide is a loose term that has been used to describe the turn toward left-wing governments in Latin America. The initial successes of these leftist governments, which included a rapid rise in literacy rates as well as reductions in malnutrition, extreme poverty, unemployment and income inequality, relied heavily upon the 2000s commodities boom to fund social development programs. However, the dramatic drop in inequality and accompanying economic growth hit a wall when the commodities market crashed at the end of the decade, plunging the region into recession. The perceived overspending of the social democratic governments on welfare expansion and subsidies was highly criticized as the pink tide turned and was replaced with a string of ‘New’ right-wingers.

As center-left reformists gain ground once more across Latin America, with recent victories scored in Mexico, Argentina, Chile, Peru, Honduras and, most recently, Colombia, it is worth noting that this resurgence of the pink tide is by no means a monolithic phenomenon, least of all in the countries’ plans regarding the oil and gas industry. Throughout the most-recent campaign in Colombia, fossil fuel exploration was one of the most heavily debated issues and is sure to remain a hot topic throughout the Historic Pact leader’s presidency. The 62-year-old senator, former mayor of Bogotá and ex-M-19 guerilla  Gustavo Petro has long confronted Colombia's oil industry in defense of the environment. Furthermore, his Vice President, Francia Márquez, the first afro-colombian to hold this office, cut her teeth in politics fighting illegal gold mining in the Cauca department, winning the ‘Green Nobel’ for her activism in 2018. Both have echoed UN warnings that the world has just three years left to act to avert disaster, promising their administration will be a protagonist in the push for a worldwide energy transition.

Indeed, Petro has expressed repeatedly his plans to put a stop to fossil fuel extraction from the very day he takes office. In one particularly incendiary speech that sparked the ire of the business community, Petro equated the oil industry with drug trafficking, calling it a poison as harmful as cocaine for the environment and local communities. Petro added that both industries only serve the interests of a corrupt elite before directly referencing the greenhouse effect: "[Oil] is killing our very existence and that is why it is a poison. The scientists have said that either we stop consuming coal and oil or the human species will enter civilizational extinction within the next century. Humanity will be finished." Petro also voiced his desire to change the way Colombia integrates itself into world markets, championing the people and the environment ahead of commercial interests. “We are exporting the exact thing that scientists say we can no longer afford to consume. It is precisely what the Colombian state and society lives off today: coal, oil and cocaine: US$65 billion a year of income which does not create jobs for our people.”  Petro summarized his economic model as a “productive” and not “extractive” one, betting instead on an economy led by agriculture, tourism and innovation. However, as trade unionists were quick to point out, these industries would also have to provide for the almost 100,000 workers currently employed in the oil and gas sector. At 11 percent, unemployment in Colombia is already the highest in the continent according to BBVA research and it is forecast to increase further. 

For industry experts, these claims were mere campaign bluster and would ultimately prove difficult to pull off in a country where oil remains atop the primary legal exports. In response, the president of the Council of American Businesses, (CEA) voiced his disquiet, noting carbon and petroleum extraction are two of Colombia’s most important industries. While Colombia’s reserves may be dwindling compared to years past and pale in comparison with neighboring Venezuela or even Mexico, oil continues to be its second biggest export. Replacing oil revenues in Latin America's fourth largest economy would be a major challenge. Manufacturing and agriculture, two sectors that Petro is targeting to offset expected losses, would have to double their export capacity to fill the gaping hole left by oil, according to the most recent report from the aforementioned statistical authority. Similarly, Alvaro Pardo, Petro's advisor for the energy transition, struck a more measured tone in dialogue with AFP. "We have never said that we will reach zero carbon within one term. However, oil exploitation will be reduced to a level of an essential minimum". 

In his acceptance speech, Petro listed climate justice, together with peace and social justice, as the three pillars of his “politics for life,” in opposition to what he calls “the politics of death and destruction.” As well as rethinking the country’s Washington-backed anti-drugs policy, Petro plans to overhaul the entire energy industry, assuring that he will put an immediate stop to fracking the very day he takes office, while also tabling a 12-year program to phase out the fossil fuel industry, starting with a prohibition against new exploration contracts. Such a plan, Petro hopes, will assuage some anxieties, allowing private operators active in Colombia to see out the almost 150 contracts currently valid. Canadian E&P company Canacol, which operates eleven blocks in Colombia, is already eyeing up Ecuador and the free-market friendly policies of incumbent Guillermo Lasso as more fertile terrain for future investment. 

Mexican president Andrés Manuel López Obrador was quick to share in Petro’s victory during his Monday morning press conference, quoting words from Colombian social-democratic martyr Jorge Eliécer Gaitán and asserting that the current re-emergence of the pink tide was inaugurated by the breakthrough of his MORENA party in 2018. However, in a January interview with Bloomberg, the incoming occupant of the Nariño palace put some distance between himself and his Mexican counterpart, suggesting that the very designations of ‘left’ and ‘right’ were obsolete in the current political landscape and instead preferring to align himself with the likes of Chile’s Gabriel Boric and Brazil’s Luiz Inácio Lula da Silva, in what he termed as an “anti-fossil fuel alliance.” 

The frontrunner of the October 2022 Brazilian presidential elections, however, has poured cold water over the Colombian’s comments, stating  that the plans proposed by Petro were simply not a “real-world” option and that although a Lula-led government would support a green transition, Brazil would nonetheless continue to rely on fossil fuels, at least in the medium term. 

Similarly, López Obrador leads a chorus of voices from developing economies who argue it is only fair for their fossil fuel-rich nations to continue exploiting their abundant resources as a cash cow to fund immediate improvements to living standards. For López Obrador, restoring PEMEX to its former glory is simply a matter of socioeconomic pragmatism. Under the previous administrations, the NOC saw its funding cut and debts spiral as initiatives were instead pursued to promote the private sector and facilitate the entry of new companies into Mexico’s flagging hydrocarbons market. The current administration’s strategy for the NOC can be summarized with the government’s slogan “For the Recovery of Sovereignty.” This strategy has re-centered PEMEX as the “lever for national development,” as López Obrador sets Mexico on course for energy self-sufficiency by 2024. Such a target requires upping oil production by a third to 2.4MMb/d and increasing the consumption of domestic fuel. To help achieve this, López Obrador commissioned the construction of Mexico’s first refinery in forty years in Dos Bocas at a cost of US$12 billion and rising, as well as buying up Shell’s shares in the Deer Park refinery in Texas. Such moves raised the eyebrows of industry experts who question how the President expects to recoup this mammoth investment in an inevitably declining industry. 

Under the previous administration of Enrique Peña Nieto, Mexico took major strides toward a green transition, setting ambitious targets and becoming the only developing nation to deliver a climate action plan ahead of the Paris accords. Now Mexico is moving in the opposite direction, as López Obrador has been accused of actively curtailing cleaner energy initiatives in pursuit of a “retrograde” economic model straight from the 1930s, dismissing renewables as a “sophism”  and not a solution for Mexico’s energy sector given they would see foreign enterprise prioritized over the public sector. Gustavo Petro, in contrast, does not share López Obrador’s anxieties of an energy sector based on wind and solar falling into the hands of private ownership. Instead, he talks of building a more democratic capitalism to bring modernity to Colombia and overcome the fetters of what he sees as an enduring feudalistic mode of production.

Front and center of his economic model is López Obrador’s plans to wean Mexico off its reliance on foreign trade and investment and towards more protectionist policies. While López Obrador has stayed true to his word, respecting contracts previously awarded to private operators, the door to future farmouts has been closed shut. Instead, rescuing PEMEX is key to the president’s promise of energy sovereignty as the backbone for greater economic stability. "By taking care of our oil industry, which belongs to the nation and all our people, and using it for domestic consumption, ending sales of crude and imports of refined gasoline, we will ensure fairer fuel prices for all.”

While both proposals appeal to left-wing rhetoric, the content of López Obrador’s plan has a completely different focus. Instead, it was Petro’s right-wing opponent in the presidential run-off, Rodolfo Hernández, who voiced concerns for energy self-sufficiency. Meanwhile, outgoing president, Iván Duque, whose approval ratings are the lowest in the country’s history, previously predicted that Colombia was on track to increase production to 2MMb/d within four years, more than doubling the current rate. The right-winger who oversaw brutal state repression of the Paro no Para protests last year, has also promoted the controversial practice of fracking, something environmental activists successfully managed to put on hold pending a tribunal. 

In a mid-April interview with Bloomberg TV, Duque claimed Colombia was primed to take advantage of US requests for the country to supply more crude oil in the face of major shortages generated by the war in Ukraine, which has sent crude prices through the roof. Duque also stated that with increased foreign investment in offshore drilling, Colombia could ensure energy self-sufficiency, given the country has proven reserves for the next eight years and new exploration contracts could see reserves increase to meet domestic demand for a further 15 years. In this light, Petro’s plans could see Colombia miss out on a billion dollar opportunity, one that Mexico is already cashing in on. Even Argentina, a country that has traditionally been hesitant to invest in new exploration projects, is seeking to up petroleum production by 70 percent in the next five years as left-Peronist President Alberto Fernández seeks to profit from the favorable export market to repair economic woes. Speaking to El Tiempo, Colombian Petroleum Association (ACP) president, Francisco Lloreda noted: “If there is a lesson that the war in Ukraine and the energy uncertainty in Europe are beginning to teach us, it is that the world will continue to need oil and gas for many years to come.”

As the pink tide treads new waters, left-wing leaders across Latin America would be wary not to repeat the mistakes of the past, risking susceptibility to dutch-disease with the short-term successes of resource nationalism fueled by what promises to be an ever more volatile oil and gas market in the coming years. In the case of Colombia, Ecopetrol is currently the worst-performing NOC in Latin America according to Bloomberg. As Pardo notes, it might be time for Latin America’s fourth largest oil producer to cut its losses, “Five years ago, we were producing 1MMb/d. Today we are at levels of 730-760Mb/d. I think we have reached a peak and we are starting to go down." Similarly, Sofia Forestieri, Upstream Analyst, Rystad Energy, notes it has been years since Colombia experienced a significant increase in proven reserve volume

While peak oil might have been reached in Colombia in 2013, the long-term challenge for Petro will be replacing an industry that in 2021 still accounted for a third of Colombian exports, worth some US$13.5 billion or roughly 5 percent of GDP. The ACP, meanwhile, estimates that Petro’s reforms may bring even greater precarity to the Colombian economy as forex reserves could fall by as much as US$68 billion between 2022 and 2032. This would obviously be quite a considerable cost to absorb for a country in which the external debt is already half of its GDP and where already rampant inflation has turned the Colombian peso into the most devalued currency in Latin America. 

The data used in this article was sourced from:  
BloombergLinea, Reuters, Infobae, The Petroleum Economist, Upstream, Forbes, Milenio, El Tiempo, Semana, Expansión, Cirsd
Photo by:   @FranciaMarquezM
Conal Quinn Conal Quinn Journalist & Industry Analyst