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Latin American LNG demand dries up

The return of hydropower, economic pain and cheaper alternatives are dampening regional LNG consumption

LATIN America has emerged as an important liquefied natural gas market in recent years. But the region’s demand for the supercooled fuel will reverse over the course of this year, with Brazil, Argentina and Mexico all likely to take less LNG. Slowing regional demand will put pressure on producers Trinidad & Tobago and Peru, which will also have to contend with the arrival of US LNG.

Brazil has emerged as a major LNG buyer in recent years. Gas is a marginal fuel in Brazil, typically used to plug gaps in power demand when hydropower output falls. Severe drought has sapped output from the country’s hydropower base in recent years, leading to a surge in gas demand. LNG imports have been used to buttress domestic output and a steady supply piped in to Brazil form neighbouring Bolivia.

Brazil imports rose 40% from 4.1m tonnes in 2014 to 5.75m tonnes 2015. The plunging LNG price helped ease the financial hit from the surge in purchases. Brazil’s LNG costs fell from around $18 per million British thermal units in January 2014 to a low of $6.36/m Btu in January this year.

But Brazil’s LNG demand is slowing, in spite of the country grabbing headlines for buying the first cargo of US supply. Purchases in January and February this year are down more than half from the same time last year. El Niño rains have helped ease drought conditions and given more juice to the country’s hydro producers. At the same time, however, a severe recession leaves the economy needing less gas.

In Argentina, LNG demand could fall by a fifth this year in the peak winter months thanks to a cross-border pipeline supply deal with Chile. Under that deal, Chile will ship 5.5m cubic metres a day of gas to Argentina from May to September. The deal will likely boost LNG demand in neighbouring Chile, which can source gas from the Pacific Basin, where the glut of supply is particularly severe.

In Mexico, cheap LNG can’t compete with even cheaper US pipeline gas. Pipeline imports from the US surged from 2bn cubic feet a day at the end of 2014 to 3.2bn cf/d at the end of 2015 and that will continue to rise as new pipeline routes open in 2016, displacing LNG imports along the way. The appeal of US gas is easy enough to see; Mexico paid about $2.80/m Btu on average in 2015.

For Latin America’s LNG producers, Trinidad & Tobago and Peru, a weak demand picture in their backyard, and new competition from the US, is bad news. Trinidad & Tobago’s Atlantic LNG has shifted much of its exports from the US to the Southern Cone Latin American countries, which accounted for two-thirds of sales in 2015. It may have to look to Europe now.

Likewise, Peru has seen demand from Mexico, its largest market in 2014, collapse over the past two years.

It will look to nearby Chile or the major markets across the Pacific to pick up the slack.

This article is part of an in-depth series on offshore production. Next article: The European LNG dumping ground.

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