Region of Oil/Gas Exploration Circled

Paraguay's Chaco region borders Argentina's and Bolivia's petroleum and natural gas zones and for many years there's been speculation that there might be oil and gas in northwest Paraguay. Amerisur Resources (UK-based) has just received permission from the Paraguayan government to explore the Piriti-Pilar Basin for oil and natural gas.

Another company, Texas-based Crescent Group, has held a concession for the Piriti Basin since 2008, but it's hit a few legal road bumps which have recently been resolved in drafting a new agreement.

These developments are interesting for a few reasons. First, none of the potential petro stuff is new news--every few years there are announcements that exploration and drilling in the Chaco are set to start. But what is interesting is where the authority over oil and gas lies within the Paraguayan government: the Ministry of Public Works and Communication. And this might be why there's so much confusion with the Crescent Group (and why Paraguay's public learned of the Amerisur developments via the London Stock Exchange rather than any government announcement in Paraguay). Rather than creating a separate energy ministry (which is how Brazil's government is organized) to administer the hydroelectric and now potentially hydrocarbon resources, there is a Vice-Ministry of Mines and Energy under Public Works. 

The Vice-Ministry has been traditionally focused on Paraguay's vast hydroelectric resources and so the oil-gas concerns are but a side note. Currently it's headed by leftist Mercedes Canese, the daughter of well-known Itaipú-dam activist Ricardo Canese who has been involved with pressuring Brazil to renegotiate the amount of money Paraguay receives for its Itaipú energy sold on the Brazilian market. The Vice Minister is from the part of the President Lugo coalition that is most leery of foreign investment (and certainly of private firms) and that most admires the way Morales has steered Bolivia's energy policy in a nationalistic and social re-investment direction.

Thus, the Vice-Ministry's posture and the little institutional development for how to administer oil and gas resources (e.g., the person in charge of hydrocarbons within the Vice-Ministry has a background in biology and ecology but not in energy) imply that there will likely be more road bumps ahead.

The political side of electricity.

Following the passage of the Joint Declaration's Itaipú energy provisions, Paraguay's government has embarked on a more aggressive strategy for Itaipú Binational hydroelectric dam. Paraguay owns 50% of the electricity produced by the world's largest dam (in 2010, Itaipú produced 87,970 GWh), but most of this is consumed within Brazil because Paraguay lacks the demand for its energy. Since 2008, the new government in Paraguay has sought to use its hydroelectric resources in a targeted way, to fund social and economic development. One part of this strategy includes increasing consumption and demand within Paraguay by attracting foreign investment.

Rio Tinto Alcan, the aluminum giant, is in talks with the Paraguayan government to open a smelting plant in Paraguay, but among the chief sticking points is just how much Paraguay's public utility company, ANDE, will charge Rio Tinto Alcan for electricity. Figuring out this number isn't just difficult because of various technical and financial factors that have to be considered. It's difficult because there are political hopes and promises and expectations that are attached to Itaipú energy for Paraguay. And these aren't minor hurdles, but significant competing priorities that drive the actions of decision-makers within Paraguay. The dam is an arena for major political battles within Paraguay--promises to change the way Itaipú dam's energy and financial resources were spent within the country was a key campaign pledge in the new government. And because of historical tensions between Paraguay and Brazil, the dam gets interpreted through a patriotic frame of reference.

And so, while the base cost of electricity from Itaipú is about $43.80/MWh, one of Paraguay's most influential engineers/members of Fernando Lugo's leftist government insists that $60/MWh is the minimum that should be charged. This contradicts CRU Strategies' (a UK consulting firm focused on mining, metals, and fertilizer) recommendation that the price be set somewhere between smelting industry standard: $35-$38/MWh. For a sense of perspective, recently in the U.S., a representative from Rio Tinto Alcan complained that the amount they were paying for electricity in Kentucky--$43.50/MWh--was 65% greater than the average cost for aluminum smelting worldwide--$26/MWh. And, to further complicate matters, it seems that smelting electricity costs in China run between $49 to $55/MWh.

The likely resolution will fall somewhere between the extremes ($26 and $60/MWh), but the process will be troubled by the intangibility of these numbers. What I mean is this: in Paraguay, electricity price seems to have nothing to do with the product delivered. There are regular black-outs (some caused by apparent error within the Paraguayan half of Itaipú itself), people often have illegal electricity connections, and the degree of financial mismanagement within the electricity sector (often described as "corruption") means that there's no trust that a price reflects value. Price instead reflects social power. You pay a set price not because that's what something is worth, but because that's what someone more powerful than you has said you should pay for it.

And so, one of the hidden factors in the price of electricity that Rio Tinto Alcan and the Paraguayan government are debating is that of trust. How much do Paraguayans trust that their government is demanding a fair price for the nation's natural resources? If the answer is "not much," then that means that no matter what the final number, it'll be perceived as "not enough." And this is the pressure that's being placed on Paraguay's negotiators.