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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. 1 MUNDP 2017 – Commitment to Development – Research Report 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. 2 MUNDP 2017 – Commitment to Development – Research Report 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 3 MUNDP 2017 – Commitment to Development – Research Report 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 4 MUNDP 2017 – Commitment to Development – Research Report 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 5 MUNDP 2017 – Commitment to Development – Research Report 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. 6 MUNDP 2017 – Commitment to Development – Research Report 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. 7 MUNDP 2017 – Commitment to Development – Research Report 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 8 MUNDP 2017 – Commitment to Development – Research Report 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. 9 MUNDP 2017 – Commitment to Development – Research Report <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 10 MUNDP 2017 – Commitment to Development – Research Report