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RESEARCH REPORT
UNITED NATIONS INDUSTRIAL DEVELOPMENT
ORGANIZATION (UNIDO)
IMPROVING THE INDUSTRY STANDARDS AND
EFFICIENCY OF THE PETROLEUM INDUSTRY IN
LATIN AMERICA AND THE CARIBBEAN
TUNA COLUK
MUNDP 2017 – Commitment to Development – Research Report
Committee: UNIDO
Agenda Item: Improving the industry standards and efficiency of the petroleum industry in
Latin America and the Caribbean
Student Officer & Role: Tuna Coluk - President
Basic Overview of the Issue
Latin America and the Caribbean (LAC) is a critical region in terms of energy sources,
especially petroleum. This power had caused many conflicts over the years that were sometimes as big
as global crises and as destructive as coups. Oil has been the primary source of energy for the
countries that are located in the LAC region for years. Correspondingly, major part of their economies
is industrial, meaning that they depend on products of petroleum. The development of the industry
standards and efficiency of petroleum in this region would
not only boost the LAC countries’ domestic economies but
also influence their international affairs as it had in the
history. In terms of domestic development, an increased
production rate would result with more exportations of the
energy source. This can create huge amounts of revenue
and reduce the dependency of those nations to other
countries.
Explanation of Important Terms
Petroleum
Petroleum is a thick, flammable mixture of hydrocarbons that occurs naturally beneath the
earth’s surface. It can be separated into natural gas, kerosene, gasoline, asphalt, paraffin wax, and
other fractions. These raw materials are used in the production of various goods. The abundance of
petroleum and efficiency of the petroleum industry are essentials for a stabilized economy in the
countries that are in Latin America and the Middle East regions since their main sources of energy are
oil and natural gas. Control of petroleum influences global political relations. The term crude oil refers
to unrefined petroleum.
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Industry Standards
Industry standards are a set of criteria within an industry relating to the standard functioning
and carrying out of operations in their respective fields of production. It provides an orderly and
systematic formulation and application of standards used in a particular industry
Efficiency
Efficiency of an energy source like petroleum is the ratio of the work done or energy developed
by a machine, engine, etc., to the energy supplied to it. It is usually expressed in terms of percentage.
Increased efficiency is ideal in industrial processes mainly because it reduces the amount of wasted
energy and maximizes the energy output.
Refinery Capacity
A crude oil refinery is a group of industrial
facilities that turns crude oil and other inputs into
finished petroleum products. A refinery's
capacity refers to the maximum amount of crude
oil designed to flow into the distillation unit of a
refinery, also known as the crude unit.
The diagram visualizes the distillation process.
Crude oil is made up of a mixture of hydrocarbons, and the distillation process aims to separate this
crude oil into broad categories of its component hydrocarbons, or "fractions." 7
Coup d’etat
Overthrow of the government by the military of the state is called a coup d’etat, commonly
referred to as a coup. In French, it means “a blow against the state.” This research report will point out
how an energy source – petroleum – gave result to coups throughout the history of Latin American
countries to show the significance of the issue.
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Detailed Background of the Issue
Between the 1940s and 1970s, “Seven Sisters” had control of all the petroleum around the
world and dominated the global petroleum industry. These oil companies were Anglo-Persian Oil
Company (now BP), Gulf Oil, Standard Oil of California (now Chevron), Texaco, Royal Dutch Shell,
Standard Oil of New Jersey, and Standard Oil of New York. It can be seen that the United States of
America (USA) monopolized the industry together with Europe, and the real owners of the land that
possesses the petroleum reserves (mostly Latin American and Middle Eastern countries) had no say
whatsoever in the controlling and selling of the oil. Prior to the oil crisis in 1973, the Seven Sisters
controlled 85 percent of the world’s petroleum reserves.
In 1973, Organization of Arab Petroleum Exporting Countries (OAPEC) proclaimed an oil
embargo. Demand to petroleum was the same but since supply was not able to meet the demand, by
March 1974, the price of oil had risen from $3 to $12. After the oil crisis, the countries that are rich in
petroleum came together to form an organization called Organization of the Petroleum Exporting
Countries (OPEC) that would enable them to have control of their energy source and price it as they
desire. Currently, emerging-markets in Asia, such as China National Petroleum Corporation and
Rosneft in Russia, are dominating the industry together with the OPEC members.
Latin America and the Caribbean
During the twentieth century, major petroleum companies that were owned by the global
powers exploited the petroleum of Latin America in an abusive form that did not recognize the right of
Latin American governments to control their own natural resources. In addition, the foreign
companies drained oil deposits rapidly, without any concern for the long-term development of the
industry. They sold to Latin Americans their own oil at prices higher than those for consumers in the
United States and Europe.
“In Uruguay, in response to the history of abuse of petroleum resources by foreign companies,
the first state-owned refinery was established in 1931, which was dedicated to the refining and sale of
petroleum. In March 1933, a coup d’état occurred, and the new dictator annulled the right of the
state company to monopolize the importation of crude petroleum. The country eventually became
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obligated to buy forty percent of its crude oil from Standard, Shell, Atlantic, and Texaco, at prices set
by the oil cartel. Similar to Uruguay, from 1930 to 1966, seven coups d’état occurred in Argentina as a
result of the governments’ attempt to sign a petroleum agreement in which the interests of the
international cartel were in risk. In Peru as well, one year after nationalizing the reserves and refinery
of an affiliate of Standard Oil of New Jersey, the nationalist general Alfredo Ovando was overthrown
by a military junta. In Mexico, twenty years of foreign ownership of the oil industry had left the
country with exhausted fields and antiquated refineries by the 1930s. In 1938, Mexican president
Lázaro Cárdenas nationalized the foreign companies and formed Petróleos Mexicanos (today known
as Pemex, remains under state ownership), which assumed control of the production and marketing
of Mexican petroleum. The global powers reacted by imposing an international embargo from 1939 to
1942 on Mexican petroleum exports and on the importation of supplies necessary for wells
and refining. The dispute was resolved by the Mexican government paying compensation from 1947
to 1962.” 2
As it can be seen, the aggressive approach of the Western Powers prevented the development
of the petroleum industry in Latin America. Between 1970s and 1980s, foreign debt started exceeding
the earning power of some the countries in this region. Currently, these countries are still bearing the
burden of their external debt and poverty still remains in the region.
In 2012, three deep-water exploration wells were drilled
by an Italian platform in Cuba. None of the three platforms found
commercial quantity of oil or gas, which jeopardized Cuba's hope
to find hydrocarbons to boost its economy and prompted Italy to
relinquish its concessions in this country. There remain
A sea petroleum refinery
unexplored deep-water leases of Cuba, held by Vietnamese and
Angolan firms, in which a Russian company plans drilling. Due to a lack in the infrastructure, LAC
countries depend on other nations in refining their own oil.
Caribbean Petroleum Corporation was an oil company in Puerto Rico, which owned an oil
refinery in Bayamón, having a capacity of producing 48 thousand barrels per day and operated more
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than 20 service stations. On October 23, 2009, one of the tanks in the refinery exploded due to a faulty
gauge, leading to a massive fire that destroyed eleven storage tanks and most of the facility. As a
result, the company filed for bankruptcy. The incident points out the necessity for increased industrial
standards that would prevent such accidents and function in profitable way.
The aforementioned countries sum the current status of the Caribbean countries in terms of
their petroleum production. The country experiencing the greatest profit and wealth due to petroleum
refining is Trinidad and Tobago. Most of the other countries lack the ability to manage possible oil
drillings and therefore, have no benefits over the energy sources they already have.
Major Parties Involved
Organization of the Petroleum Exporting Countries (OPEC)
OPEC is an intergovernmental organization of 13 nations, founded in 1960 by the first five
founding members (Iran, Iraq, Saudi Arabia, Venezuela, and Kuwait). As of 2015, the 13 member
countries are accounted for an estimated 42 percent of global oil production and 73 percent of the
world's "proven" oil reserves, giving OPEC a major influence on global oil prices that were previously
determined by American-dominated multinational oil companies. OPEC's stated mission is "to
coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil
markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a
steady income to producers, and a fair return on capital for those investing in the petroleum industry.”
In other words, the member countries of OPEC indirectly have the control of nearly all the
manufactured goods based on petroleum; thus, they heavily dominate the worldwide economy.
As of December 2016, OPEC members include two Latin American (Ecuador, Venezuela), six
Middle Eastern (Iran, Iraq, Kuwait, Qatar, Saudi Arabia, United Arab Emirates), and five African
(Algeria, Angola, Gabon, Libya, and Nigeria) countries.
Venezuela
One of the leading countries in the oil industry is the Bolivarian Republic of Venezuela. It is a
Latin American country with the largest petroleum reserves in the world. Its economy is based on the
exportation of crude oil and refined petroleum products. National refining capacity is 1.303 million
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barrels per day and international capacity is 3.035 million barrels per day.1 Venezuela’s economy,
which the IMF expected to shrunk by 10% in 2015, is currently experiencing inflation that
has soared close to 1500%. By increasing the efficiency of its main energy source, the country can
generate huge revenue. Moreover, with increased industrial standards, an infrastructure for the
petroleum sector would be formed that would encourage exportation, which is vital for a country’s
economic growth.
Mexico
Mexico is a big crude oil exporter in the LAC region and has become a net importer of refined
products, primarily gasoline and diesel. Its main gas company - Pemex - controls 83% of
Mexico's proven reserves of oil.4 However, Mexico’s level of petroleum production is down from
previous decades as of 2014, mostly due to declining output from mature oil fields. “The oil sector
generated only 6% of the country’s export earnings in 2015, down from about 30% in 2009, according
to Mexico’s central bank.”5 Efficiency of the oil reserves as well as the industry standards should be
increased to end this downturn.
Brazil
Brazil is arguably the biggest petroleum producer and exporter in the LAC region. With the
recent oil discovery in Brazil, the country expects production to rise to 4 million barrels per day by
2022, which was 2.95 million barrels per day in 2014.4 However, even with the decreasing inflation
there is still room for development. Brazil is too dependent on USA to get much of a boost from the
increased production rate. The issue is as significant to Brazil as it is to any LAC country due to the
need of an economy that does need depend on external forces.
Trinidad and Tobago
Trinidad and Tobago is the wealthiest country in the Caribbean. Major part of its economy is
industrial, which means that the country’s economy is depending on petroleum products. With the
recent investments in liquefied petroleum gas (LPG), its economy showed a significant growth. Even
though the country has a leading GDP in the region, increasing the efficiency of its main energy
source is still essential, as it would affect the neighboring countries; thus, the overall economy in the
Caribbean positively.
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United States of America (USA)
“Despite its own vast oil reserves, Latin America has doubled its reliance on the United States
for fuels like diesel and gasoline over the last five years to keep its economies humming - and the
dependence is growing.”6 Due to the boost in its oil production and the decreased fuel demand, US’
reliance on importation from LAC is falling, whereas LAC’s plans on building new refineries are
delayed which gives result to more importations from US. Therefore, countries in the LAC region are
in an ever-lasting loop where they cannot invest in their petroleum industry and import petroleum
products from the US.
United Nations Industrial Development Organization (UNIDO)
“UNIDO acts as a catalyst, helping to generate national economic wealth and raise industrial
capacity through its role as a global forum for industrial development, and as a provider of technical
cooperation services.”3 UNIDO is concentrated on implementation of technical cooperation activities
and the fostering of competitive industrial production. When resolving this issue, it is advisable to
focus on both governments’ and the private sectors’ role in the LAC region.
Chronology of Important Events
1931
First state-owned petroleum company was established in Uruguay.
March, 1933
Uruguay coup d’etat occurred.
1960
OPEC was found.
October, 1973
1973 oil crisis: first oil shock due to the embargo set by OAPEC
1970s-1980s
Latin American debt crisis started.
1979-1980
1979 energy crisis: second oil shock due to the Iranian Revolution
and the following Iran-Iraq war
12 August 1980
Latin American Free Trade Association (LAFTA) was established.
October, 2006
Lula oil field discovered by Petrobras, considered to be the Western
Hemisphere's largest oil discovery of the last 30 years.
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Relevant International Documents
-Treart of Montevideo, August 12th, 1980 (Established LAFTA)
-The Ministry of Electricity and Renewable Energy by Executive Decree No. 475, July 23rd, 2007
Past Attempts to Resolve the Issue
The Ministry of Electricity and Renewable Energy of the Republic of Ecuador is carrying out
various programmes for industry, business, and the government sectors. For instance, “Energy
Efficiency in Public Buildings” provides accurate information on measures and practical consumption
recommendations that can be applied to control unnecessary energy usage in public and private
buildings of a country. The demand for foreign energy sources is aimed to be reduced and domestic
production is promoted. The National Programme for the Rational Use of Oil Products and Natural
Gas (CONPET) was created in 1991 by Brazil to promote rational use of oil products.2 The main issue
with the past attempts is that they are not focused on the industrial process but rather concentrated on
the consumption of the source. Long term solutions are required together that would form the
necessary infrastructure for a stable economy.
Recently, Ecuadorian Foreign Minister Guillaume Long, on behalf of Latin American nations,
said, “Oil-producing countries must take the necessary steps to stabilize the global crude market in a
bid to improve prices.” Improving the prices contribute to the economies of these countries but is
again a short-term solution that does not touch the core of the issue, building a strong infrastructure for
the petroleum industry.
Solution Alternatives
Promoting high-efficiency industrial equipment and systems is essential in improving the
efficiency of the petroleum industry. Since LAC countries lack the necessary equipment, foreign
companies conduct drilling activities in their territory. The governments of the LAC countries should
yield a bigger portion of the GDP to the petroleum industry due to the potential income from exports
and reducing dependency on other countries. Even though the equipment is expensive in the long
term, this will be advantageous as increased efficiency reduces the production costs. On the other
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hand, increased production rate enables countries to use their petroleum reserves in the most beneficial
way possible, increasing the predicted earnings.
Designation of leading institutions for planning, coordinating, implementing, and monitoring
energy efficiency policies and programmes in the LAC region can be an important point in the
development of the petroleum industry. Most LAC countries have the necessary energy source but
lack the expertise on how to manufacture it due to the fact that their source were ran by Western
Powers in history. These institutions can be lead by engineers who would work on optimization and
would build a stronger backbone for the LAC countries’ economies.
Establishing regular energy efficiency data collection and stimulating investment in energy
efficiency are aspects that should be further debated on. At this point, asking for OPEC’s help will be
in order as members include LAC countries. The nations that are not OPEC members, mainly the
European countries, should be encouraged to make investments since they also import oil.
Development of information and awareness campaigns and educational programmes are alternative
solutions that should be further brainstormed in terms of feasibility as they are less significant than
industrial solution alternatives.
The sources for all alternatives should be specified in the resolutions. It should also be kept in
mind that oil is a non-renewable energy, and its production should be eco-friendly and done with great
caution to prevent harmful effects on environment. For instance, the oil spill in the Gulf of Mexico in
2010 caused a considerable damage on sea life together with its severe economic impacts. Extraction
of fossil fuels is often hazardous to health and environment. This reason itself is enough to emphasize
on the need for expertise when approaching the issue of production of petroleum.
Bibliography
1. Carpio, Claudio, Mr. Energy Efficiency in Latin America and the Caribbean Situation and
Outlook. Ed. Manlio F. Coviello and Hugo Altomonte. Santiago, Chile: CEPAL,
2010.Comisión Económica Para América Latina Y El Caribe. United Nations, Apr. 2010. Web.
27 Dec. 2017.
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<http://www.cepal.org/publicaciones/xml/2/39412/lcw280i.pdf>.
2. McKelvey, Charles, Dr. "Petroleum in Latin America." Global Learning. N.p., 17 Oct. 2013.
Web. 27 Dec. 2016.
<http://
www.globallearning-cuba.com/blog-umlthe-view-from-the-southuml/-petroleum-in-latinamerica>.
3. Suárez, Carlos Chanduvi. "Latin America and the Caribbean." United Nations Industrial
Development Organization. UNIDO, n.d. Web. 29 Dec. 2016. <https://www.unido.org/
latinamericaandthecaribbean.html>.
4. Carpenter, J. William. "The Biggest Oil Producers in Latin America." Investopedia. N.p., 13
Oct. 2015. Web. 29 Dec. 2016. <http://www.investopedia.com/articles/investing/101315/
biggest-oil-producers-latin-america.asp>.
5. "Mexico - International Analysis." Energy Information Administration Beta. U.S. Energy
Information Administration - EIA - Independent Statistics and Analysis, 09 Dec. 2016. Web. 14
Jan. 2017.
<http://www.eia.gov/beta/international/analysis.cfm?
iso=MEX>.
6. Parraga, Marianna. "Analysis: Latin America Grows Increasingly Hooked on U.S. Fuel
Imports." Reuters. N.p., 17 Nov. 2013. Web. 15 Jan. 2017. <http://www.reuters.com/article/usoil-latam-imports-idUSBRE9AG07120131117>.
7. “Crude Oil Distillation and Refining Capacity.” Energy Information Administration Beta. U.S.
Energy Information Administration - EIA - Independent Statistics and Analysis, 5 July 2012.
Web. 21 Jan. 2017.
<http://www.eia.gov/todayinenergy/detail.php?
id=6970>.
Useful Links
•
https://isid.unido.org/files/ISID/UNIDO_in_LAC_Region.pdf
•
https://www.iea.org/publications/freepublications/publication/
EEPolicyRecom_LatinAmerica_Caribbean.pdf
•
https://www.utdallas.edu/~pujana/latin/PDFS/Lecture%2012-%20LAoil.pdf
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