# Energy profile of Central America

Source: Eia
 Topics:

## Introduction

Map of Central America. (Source: EIA)

The countries of Central America, including Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama, have traditionally been dependent upon agricultural exports for a large portion of their economic activity. However, in recent years, these countries have begun to diversify their economies towards manufacturing and tourism. In 2005, the Central American countries experienced increases in their real gross domestic product (GDP) growth rates, which were due in part to export earnings and remittances, or money inflows from Latin American workers in other counties. In addition, Central America remains an important transit center for oil via the Panama Canal and as a potential energy transit center between North and South America.

Central American countries have sought to integrate their economies with world markets. One way they have accomplished this is by signing the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA). The United States approved the DR-CAFTA in late 2005, with the agreement taking effect in El Salvador (March 2006), Honduras and Nicaragua (April 2006), and Guatemala (July 2006). The agreement will take effect in Costa Rica once the Costa Rican legislature approves it in the near future. For the Central American countries involved, the DR-CAFTA stands to boost the region’s economic prospects and increase access to the United States market. Meanwhile, three countries (El Salvador, Guatemala, and Honduras) have signed free trade agreements with Mexico, and there has also been progress on further trade liberalization with the Andean Community. Panama has a bilateral Free Trade Agreement (FTA) with El Salvador and is currently exploring FTAs with Mexico and the United States.

With hardly any domestic hydrocarbon reserves, all seven Central American countries rely heavily on imported oil for their energy needs. As a result, the countries have been especially affected by high world oil prices in recent years. Partially offsetting this, many have been able to secure preferential pricing for oil from Venezuela and Mexico. Central America has a large amount of installed hydroelectric capacity, but the region still relies upon imports for some three-fourths of its total energy consumption.

## Oil

Central America's Oil Consumption by Country, 2005. (Source: EIA, International Energy Annual)

Guatemala and Belize are the only oil-producing countries in Central America, averaging 20,000 barrels per day (bbl/d) and 2,500 bbl/d, respectively, for the first 10 months of 2006. During that same period, Central America consumed an estimated 310,000 bbl/d of oil. Since 1980, the increasing number of oil- and diesel-fired power plants, in addition to robust economic growth, have caused Central American oil consumption to almost double. In the first part of 2006, Panama was the largest oil consumer in the region (74,000 bbl/d), while Belize was the smallest consumer (9,000 bbl/d).

Because of the lack of oil production in the region, Central America is dependent upon imports for the vast majority of its oil needs. To help meet those needs, Central America receives oil under preferential terms and pricing from Mexico and Venezuela. Under the San Jose Pact, Mexico and Venezuela supply Central America and four Caribbean islands with 160,000 bbl/d of crude oil and petroleum products below market price. In addition, Venezuela provides oil to the region under the Caracas Energy Accord. Under the PetroCaribe initiative, Venezuela supplies oil to Belize and 12 Caribbean members.

### Exploration and Production

Guatemala. According to Oil and Gas Journal (OGJ), Guatemala contained an estimated 526 million barrels of proven oil reserves as of January 2006. Most of the country’s oil production occurs in its northern jungles, adjacent to the border with Mexico. France-based Perenco produces the majority of oil in the country. Due to a lack of domestic refining capacity, almost all of their production is exported to the United States, and the country must import petroleum products. In 2005, the United States imported an average of 11,000 bbl/d of crude oil from Guatemala, while during the first 7 months of 2006, United States imports of Guatemalan crude oil averaged 14,500 bbl/d.

In March 2005, Guatemala opened its first oil licensing round since 1997. The country offered two blocks with known proven reserves, A6 and A7, and two additional, unexplored blocks, Cotcal and Piedras Blancas. In September 2006, Guatemala awarded a 25-year oil exploration license (Block A1-2003) to US-based Oil Guatemala. Additional blocks currently offered include A1-2005 in the Peten Sur basin and A9-2005, located in the center of the country.

Belize. In August 2005, BNE first reported that it had discovered a “modest” amount of oil reserves near the border with Guatemala. The company has estimated that the field could supply 50,000 bbl/d of light, sweet crude oil. This volume could easily meet the country’s domestic needs and provide a sizable flow of export earnings. In January 2006, first oil from Belize Natural Energy’s (BNE) Spanish Lookout came online at 1,000 bbl/d, which it later ramped up to 2,500 bbl/d. Because Belize currently does not have an oil refinery, the country exports the produced oil to neighboring countries for processing before it is sold on the international market. In June 2006, the United States began importing crude oil from Belize. As of August 2006, the United States was importing an average of 2,000 bbl/d from the country.

Nicaragua. There has been some interest in oil exploration in Nicaragua. The country has awarded exploration licenses for five blocks in its offshore Pacific and Atlantic basins, though none of these licenses has led to actual exploration activities. Nicaragua has had a long-running territorial dispute with Colombia over areas in the Caribbean Sea surrounding the San Andreas and Providencia islands, areas thought to contain commercial quantities of oil reserves.

Costa Rica. In November 1999, U.S.-based Harken Energy began a seismic exploration program in Costa Rica in the Caribbean Sea. Despite promising results, the company has been unable to acquire the approval of the Costa Rican government to commence drilling operations due to opposition from environmental and indigenous activists. The former Pacheco administration (2002-2006) had expressed its opposition to any oil activities in the country.

### Oil Transport Infrastructure

Shipments of Petroleum through the Panama Canal by Type, 2002-2005. (Source: Panama Canal Authority)

Panama Canal. In 2005, approximately 27.7 million tons of crude oil and petroleum products passed through the Panama Canal, 17 percent of which was crude. Petroleum shipments represented 15 percent of total canal traffic in 2005, up from 12 percent in 2004. About 70 percent of petroleum shipments go from the Atlantic to Pacific Ocean. In 2005, less than 1 percent of total U.S. crude oil imports and around 3 percent of U.S. petroleum product imports passed through the Panama Canal.

The relevance of the Panama Canal to global trade, especially petroleum, is currently threatened by the increasing size of modern shipping vessels. Some oil tankers, such as ultra-large crude carriers (ULCC), can be nearly five times larger than the maximum capacity of the Panama Canal. The Panama Canal Authority (ACP), an autonomous body that administers the canal, has made small, incremental upgrades to the canal to facilitate larger ships. The ACP has floated an $5.2 billion plan to pursue a significant expansion of the canal that would allow ships about twice as large as the current maximum. Currently, the largest vessel that can transit the Panama Canal is known as a PANAMAX-size vessel (ships ranging from 50,000 - 80,000 dead weight tons in size). The expansion project, which includes the construction of a third set of locks, would double the current capacity of over 300 million tons per year to over 600 million tons per year and allow for the transit of more than 16,000 vessels per year. In July 2006, Panama’s National Assembly approved the expansion project, which was followed by the Panamanian people overwhelming approving the project in October 2006. Work on the Canal expansion is expected to begin in 2008 and finish in 2014. Petroleum Export Zones. In 1992, the Panamanian government created the Petroleum Export Zones (ZLP). Within these zones, all petroleum activities are exempt from all taxes and many regulations. Due to the large amount of shipping traffic in the area, the marine fuel industry has been the largest investor in the ZLP program. Currently, there are eight ZLP areas in Panama, including the international airport outside Panama City and seven marine terminals. Proposed Nicaraguan Canal Project. Nicaragua has recently revived the proposed Nicaraguan Canal Project that would link the Atlantic and Pacific Oceans. The$18 billion proposal is designed for ships currently too large to navigate the Panama Canal. The Nicaraguan Canal would be approximately 170 miles long (going through Lake Nicaragua), and would have four sets of three-level, double-lane locks. Nicaragua’s Congress will need to approve the project before any work can begin.

Trans-Panama Pipeline. As mentioned above, many crude oil carriers are too large to fit through the Panama Canal. To remedy this situation, a joint venture of the Panamanian government and U.S.-based Northville Industries built the Trans-Panama Pipeline (TPP) in 1982. The original purpose of the TPP was to facilitate crude oil shipments from Alaska’s North Slope to refineries in the Caribbean and U.S. Gulf Coast regions. The idea was for very large crude carriers (VLCC), ships too large to transit the canal, to offload Alaskan crude on the Pacific side, then move the crude oil to another VLCC waiting on the Atlantic side. However, in 1996, the 800,000-bbl/d TPP was shut down as oil companies began shipping Alaskan crude along alternative routes. In February 2005, Venezuelan President Hugo Chavez began talks with the Panamanian government on reversing the flow of the pipeline. This would facilitate increased Venezuelan crude oil exports to China.

Other Pipelines. Perenco operates a crude oil pipeline in Guatemala that links its production fields to the port of Santo Tomas. In January 2003, U.S.-based Phenix Pipeline and Oleoductos Premier de Nicaragua announced plans to build the 280-mile Central American Pipeline Project to transport petroleum products between the Pacific and Atlantic coasts. The company has submitted an environmental impact statement to the Nicaraguan government, but construction on the project has yet to begin.

### Downstream

Refining Capacity in Central America
Country Facility Capacity (bbl/d)
Costa Rica Limon 24,000
Nicaragua Managua 20,000
Source: Oil and Gas Journal

According to OGJ, only Nicaragua, El Salvador, and Costa Rica have operating crude oil refining capacity in Central America. The countries each operate a single facility, with total crude oil refining capacity for the three of 66,000 bbl/d. In 2002, Panama and Guatemala both closed their refineries, due in part to increasing competitive conditions of the global market. However, the Mexican government has voiced potential plans to build a new refinery in either Panama or Guatemala. Mexico would supply oil to the refinery, which would have a 250,000 bbl/d crude oil refining capacity. Venezuelan President Hugo Chavez has also proposed building a refinery in Panama with crude oil refining capacity of 150,000 bbl/d.

## Environment

Central America remains one of the world's poorest regions. This has encouraged massive exploitation of the area's natural resource base. Oil exploration activities in certain parts of Guatemala, such as the northern Peten rainforest region, have encouraged road construction, accelerating the clearing of land and forested areas. These activities have lead to large-scale erosion and soil loss, leaving many areas vulnerable to flash floods and mudslides as the natural landscape's ability to retain water is jeopardized.