How Latin America could square the energy transition circle

Latin American economies face the contradiction of being major suppliers of energy transition minerals like copper and lithium while also relying on fossil fuels to keep the lights on.

The region has around 60% of the world's lithium resources, which are essential for the transition to electric vehicles. But, although a third of its energy grid consists of renewables compared to 14% globally, at the same time, Colombia is the fifth largest global exporter of coal, and Brazil’s federal oil firm Petrobras keeps betting on oil.

BNamericas discusses this dichotomy with Fernando Patzy, Latin America manager at the Natural Resource Governance Institute (NRGI). 

BNamericas: Is Latin America's mining sector advancing in improving transparency and compliance with ESG criteria?

Patzy: Most companies have taken up the challenge of providing information voluntarily to the public, but this occurs more in countries that are or will be members of the OECD or that have undergone institutional reforms. The adoption of new laws has also driven the trend toward transparent operations and relationships in mining contexts, especially in countries where mining is part of the main sectors.

BNamericas: Chile’s lithium industry has been accused of not being transparent enough.

Patzy: Chile has a high level of lithium production. However, its governance still requires efforts to make information transparent. Lithium is a strategic mineral and cannot be concessioned in Chile. The operations of SQM and Albemarle alone position the country as the world's second-largest producer, contributing around US$5bn to the Chilean State in 2022.

But there is still not enough transparency in the Chilean lithium value chain. There is no detailed information on the taxes and royalties paid by each company, nor is it known how transactions are carried out, to whom they sell and at what prices.

At the same time, water management while extracting in the Chilean salt flat is of concern. There are voices that indicate that the impacts are greater than what is known. It's important to advance governance, clarify the generation of tax revenues and make local, social and environmental impacts transparent.

The decision of Chile to join [industry transparency initiative] EITI is very important, and could help make the sector more transparent and probably identify if there are corruption risks in lithium operations.

BNamericas: Have you reviewed Bolivia’s lithium strategy?

Patzy: Unfortunately, access to information is limited in Bolivia, but it is known that its strategy involves state predominance and that it has not been able to start any operation or industrial lithium carbonate plant for years.

Bolivia is interested in using direct lithium extraction and signed agreements to include the technology with two Chinese companies and one Russian one. But these are small plants. One would have annual production of 2,500t of lithium carbonate, something like 1.5% of Chilean production.

BNamericas: How do you assess regional progress in the energy transition?

Patzy: Some countries have defined energy policies in a timely manner, with important progress being made in Uruguay, Costa Rica and Chile, which are not oil producers.

But in countries such as Colombia, Brazil, Mexico and Argentina that have oil, coal or hydrocarbons resources, the trend is different. Policies in favor of renewables are easier to implement in countries that are not dependent on oil or coal. On the other hand, the option to advance the goals of the Paris Agreement is a sovereign decision of each nation.

BNamericas: What trends do you observe in the Latin American hydrocarbons industry?

Patzy: State oil companies are concerned with the energy transition. Some are moving faster in taking steps to decarbonize their operations, reduce fossil fuel consumption and modify their electricity consumption.

Petrobras or Ecopetrol are making efforts to gradually become new energy companies like multinationals BP or Shell that already have strategies to migrate from the conventional oil and gas business to the energy sector. In Argentina, YPF has interests in lithium.

BNamericas: Colombia is dependent on coal and oil exports. Will there be political changes in this regard?

Patzy: The export of coal occurs in a global context where countries want to stop using this fuel, such as Europe, which is its main market. Colombian coal production has fallen in recent years, from over 80Mt/y to just over 50Mt/y. Price volatility and the poor recovery in demand with the war in Ukraine have had an influence.

Large producers with Colombian operations, such as Drummond and Glencore, have strategies to continue producing as long as the market allows it and it remains profitable.

Regarding oil, we could see a production decline in the medium term, since Colombia's reserves are currently limited. Therefore, since Colombia is an exporter of these two commodities, the national situation is delicate.

However, Colombia is planning its energy transition with a roadmap that emphasizes renewable energy and electromobility. With its gas reserves also limited, it’s making efforts to replace the decline with renewable energy. This implies significant investments and energizing the economy to provide more solar panels and implement improvements in connections for both homes and electromobility.

Colombia will be a reference for other countries that depend on hydrocarbon exports for how to debate policies and take the energy transition seriously.

BNamericas: What does NRGI suggest when advising banks, companies and private individuals on energy transition strategies?

Patzy: First, you have to see the reality of each country, and how the energy matrix and resource endowment are composed. Each country is more or less dependent on hydrocarbons exports and the income generated.

It’s important to consider the signals and changes that occur globally, both in fossil fuel demand and in falling prices of renewable energies. We must think about a progressive and equitable transition that does not generate crises in territories that, for example, are coal or oil producers.

State companies should avoid risky decisions about maintaining oil production, since investments in this sector, as well as in mining, are large and long term. We are experiencing a stage of the energy transition with changes in international prices and in the supply and demand of fuels.

Decisions must be calibrated and the energy transition must be fair, measuring the impact it can have on jobs, and taking compensating measures to mitigate the effects of production.

BNamericas: Lawyers warn of increasing greenwashing and climate litigation linked to companies that want to boost their sustainability image.

Patzy: The energy transition and renewable energies generate great demand for minerals such as copper, nickel, lithium, manganese and cobalt, which has sparked the interest of governments to attract more investments. Everyone wants to act quickly because demand is high and prices will remain favorable for decades.

In the interest of attracting more investors and implementing projects in less time, there could be an increase in corruption, or certain regulations could be relaxed. On the other hand, Latin American mining faces great conflicts and resistance in territories, often due to poor performance by some companies, which opens a favorable context for corruption.

That is why we’re concerned with improvements in governance. The increase in demand for minerals for the transition must necessarily be accompanied by higher governance and social standards, so it’s a contribution to the development of communities and better income for governments. At the same time, governments must make good use of income and ideally stimulate the diversification of the economy to stop being only producers of commodities.