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Country Looks Beyond Oil Dependency

MANAGUA – In a country as polarized as Nicaragua, there are few topics on which everyone can agree. Yet when it comes to resolving the country’s energy crisis, which has been an equal opportunity offender in recent years, both the left and right seem to speak in one voice in identifying the issue as a national priority.

Business leaders have said, “A country without energy is a country without a future;” President Daniel Ortega, “A country without energy cannot function;” and U.S. Ambassador Paul Trivelli, “The majority of modern economic activity is impossible without electricity.”

Curiously, even the various solutions proposed are more similar than they would first appear, despite being dressed in different rhetorical packaging.

During a recent renewable energy conference in Managua, Ambassador Trivelli spoke to business leaders of the importance of promoting a “new model of public-private alliance” to promote new investment in Nicaragua’s energy sector. He said that under the new model, the private sector should become the new builders and owners of power plants and electricity services, and the government should play the role of regulator.

Ortega – at least in public – has strongly criticized the privatization of Nicaragua’s energy sector, a move he claims has led to the current state of affairs. He has been particularly critical of Spanish power-distribution company Unión Fenosa, which he has referred to as the “mafia.”

“This is the model that we inherited, one that privatized the generation of energy and the distribution of energy. You, my Nicaraguan brothers and sisters, have experienced these problems first hand,” Ortega said during a speech in May. “Unión Fenosa is the best known company in this country, and not for good reasons, but for bad.”

Yet despite his criticism of privatization, Ortega seems a lot less adverse to such business ventures when he’s a part of them. Not only did his government attempt to purchase 16 percent of Unión Fenosa earlier this year – a deal that was still unsettled as of last week – but the Sandinistas’ ALBANISA oil business with Venezuela is arguably the country’s leading example of a public-private business, although critics argue it’s merely the confusion of public and private business.

ALBANISA, or ALBA Petróleos de Nicaragua, is 60 percent owned by Venezuelan state oil company PDVSA and 40 percent by unknown partners in Nicaragua.

In a government that commonly confuses state and party, it has never been made clear if the Nicaraguan state is a partner in ALBANISA via Nicaraguan oil company PETRONIC, or if it’s a private Sandinista business venture.

ALBANISA business dealings are also speculative.What’s known is that Venezuela, under an accord signed with Nicaragua on April 29, 2007, agreed to provide Nicaragua will its entire 10 million barrel oil demand, sold at market price but under favorable terms of payment.

Venezuela provides the oil directly to Nicaraguan oil distributor PETRONIC, which resells the petroleum to private companies such as Esso. PETRONIC then transfers 100 percent of its sales revenue to ALBANISA, which in turn transfers 50 percent of the money back to Venezuela as payment within 90 days, and then pays the other 50 percent over 23 years at 2 percent annual interest. Of the money paid up front, half goes to the ALBA Social Fund and another half into the ALBANISA coffers.

After all the money transfers and sleight of hand, there are many unanswered questions about where that money really ends up,whom it belongs to, and who owes what to whom.

“Who are the real partners in ALBANISA and where are the earnings from the sales by PETRONIC?” demanded opposition leader Eduardo Montealegre in a press conference last year, calling the oil deal “The Great Swindle” by Ortega and Venezuela’s Hugo Chávez.

Economist Adolfo Acevedo calculates that in the past year, ALBANISA has handled $800 million in oil business, meaning there should be $200 million salted away in a company fund for social projects. Ortega, however, has mentioned that Venezuelan aid to Nicaragua already totals $520 million. So, needless to say, the numbers have everyone confused.

“Nothing about this is clear,”Acevedo says. Foreign donors, the International Monetary Fund (IMF), the National Assembly and the media are demanding that someone in the Sandinista government explain the nature of its business dealings with Venezuela. But so far no one has.

Considering that the president of PETRONIC, Francisco López, is also the treasurer of the Sandinista Front, all financial information regarding Venezuelan aid is being guarded as a state-party secret.

“This is becoming a bone of contention in the donor community and a cause of great concern to the Nicaraguan people,” says Liberal lawmaker Francisco Aguirre, president of the National Assembly’s Economic and Budget Commission. “It’s giving rise to all sorts of speculation, none of which is favorable to the government.”

Covering the Deficit

When Ortega came to power in January 2007, he inherited an energy sector that was both broken and broke. In his first year in office, Ortega managed to reduce the frequency of energy blackouts, but the rationing continued, despite Chávez’s promise to Nicaragua to “forget about your oil problems.”

At the beginning of 2008, Ortega announced that blackouts were finally a thing of the past.

“Thank God and ALBA, the Bolivarian Revolution and the Government of Unity and National Reconciliation, we do not have, nor will we have, more energy cuts,” Ortega said during a rally in February.

But last month the energy sector again revealed its weakness when a lack of bunker fuel and technical problems at the Esso refinery led to a 90 megawatt power deficit and a return to the daily blackouts. That problem was quickly fixed thanks to a shipment of bunker oil from Venezuela, but the energy sector was exposed for its precariousness.

Nicaragua is currently producing slightly more than 510 megawatts of energy, just barely covering its demand and leaving little margin for error.

“The system is in a very tense situation. We are producing the exact amount that we are consuming,” David Castillo, president of the Nicaraguan Energy Institute (INE), recently told The Nica Times.

Castillo says the situation is “critical, but not desperate.” He notes that two new Hyundai power plants will be coming online at full capacity this month, providing an additional 40 megawatts to the national grid.

An additional 80 megawatts will be added before the end of the year – totaling an increase of 120 megawatts of power in 2008, the same amount added during the five years of the previous government of President Enrique Bolaños.

While the power-up will put Nicaragua in a more comfortable situation in terms of its energy generation, it will also make the country even more dependent on petroleum, which is not good news as oil prices continue to reach new unexplored heights.

As it is, Nicaragua is already the most petroleum dependent country in Central America, generating some 80 percent of its energy from oil.

“We are even more dependent on petroleum now than we were a year and a half ago, when we were experiencing six to eight-hour blackouts a day,” the economic commission’s Aguirre noted.

The government, however, says the new thermal plants are just a stopgap measure to get the country out of its immediate crisis caused by a deficiency in generation capacity.

“The (long term) goal is to transform the energy sector to use more renewable energy to avoid the negative impact that oil has on our power generation,” Castrillo said. “Each day the price goes up and that affects the competitiveness of the country.”

Beyond Petroleum

Despite the government’s slippery oil business with Venezuela, and the recent enthusiasm with which the administration announced its first oil exploration concessions off the Caribbean coast, industry insiders say the government realizes the importance of moving beyond petroleum toward renewable energy sources.

Nicaragua currently depends on petroleum for around 80 percent of its electricity production – the greatest oil dependency in all of Central America, and a particularly depressing statistic considering that Nicaragua in 1966 generated 72 percent of its power from hydro and geothermal sources.

By comparison, Costa Rica generates around 80 percent of its power from hydroelectric and wind sources and only 20 percent from oil, while Honduras and El Salvador use petroleum for around 40 percent of their power production – half of Nicaragua’s oil dependency.

At a time when international oil prices are reaching new heights at a breakneck speed – jumping from $74 a barrel when Ortega took office in January 2007 to $133 a barrel last week – the effects are felt particularly hard on Nicaragua’s tiny economy.

Nicaragua’s electricity rates have gone up four times in the past year – making them the most expensive in Central America – the pump price for a gallon of gasoline has climbed to over 100 córdobas ($5.20) – also the highest in Central America – food prices have doubled in less a year, and accumulated inflation is up more than 22 percent since Ortega took office.

In addition, notes former Central Bank president Mario Arana, the rising cost of petroleum is also having a negative effect on other important macroeconomic indicators, such as Nicaragua’s trade balance, which is being affected by a petroleum bill that could be around $1.3 billion in 2008, nearly double what it was projected to be for the year.

“This is a complicated situation that is affecting Nicaragua’s competitiveness,” Arana says.

Arana, who is now on the board of directors for Polaris Geothermal, Nicaragua’s leading geothermal company, says that the government has a clear understanding of the scope of the problem and realizes that the only viable solution is to move toward renewable energy sources in the future.

The National Assembly has already demonstrated its will to promote alternative energy production by lifting a restriction that prohibited the production of renewable energy in protected areas – home to most of the country’s rivers and other areas suitable for exploiting renewable energy resources.

Companies such as Polaris, however, insist it’s possible to be productive and green at the same time. The geothermal company hopes to lead Nicaragua’s renewable energy revolution with plans to increase their geothermal output to 200 megawatts – or four times the country’s total energy demand – in the coming years.

Polaris says that in the so-called “land of lakes and volcanoes,” the amount of untapped geothermal energy underneath the country’s crust is “Nicaragua’s oilfield.”

The government has also placed high hopes on a $200 million Iranian-financed hydroelectric project that would produce 70 megawatts of energy. Smaller hydroelectric plants, such as 17-megawatt “Larreynaga” plant and the 10-megawatt “El Bote” plant, both in rural Jinotega, are expected to be built and come online much sooner.

The addition of those two plants will help boost the country’s hydroelectric output, which currently consists of the two aging state-run plants Centroamerica and Santa Barbara, both of which produce at far less than their 50 megawatt installed capacity.

There are also expectations for the AMAYO wind-energy plant that has a concession to produce 40 megawatts of wind power in the southern Pacific department of Rivas. The AMAYO Wind Consortium, powered by 19 wind turbines, will be the first wind-powered plant to sell energy into Nicaragua’s energy grid, although there are other private wind-power initiatives in various rural parts of the country.

The combined total of all the projects – if they don’t get stuck in politics – would dramatically change the panorama of Nicaragua’s energy sector, providing the country with a homegrown solution to a growing international problem.

More importantly, the investment in the energy sector would provide much needed infrastructure to Nicaragua, without which the country is condemned to remain in poverty.

“The formula in a free market is simple,” says Ambassador Trivelli. “Without investment, there are no jobs; without jobs, no poverty reduction. But there’s something even more basic – without infrastructure there’s no investment.”



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