Politics stall proposals
Latin American governments have announced a number of pipeline mega-projects in recent months, but the region's politics continue to be the biggest obstacle to project development, reports Robert Olson
THE LAST 12 months have seen a number of ambitious pipeline initiatives announced by South American governments, designed to tackle the deteriorating energy-supply situation in the Southern Cone.
Energy-poor Chile has taken the most active role in promoting cross-border pipelines, as it attempts to reduce dependence on unreliable Argentine gas supplies. But both Brazil and Argentina are also pursuing options to improve pipeline links with gas-rich countries in the region – even those as far away as Venezuela.
Talk of a gigantic South American gas ring is gaining currency with the leaders of these countries. But as is often the case in Latin America, the growth of the rhetoric has been meteoric, while the development of the projects that would make up such a network shows little progress. Negotiations over the details of the supply contracts that would underpin the development of these massive cross-border pipelines have hardly begun and, with regional politics entering a continent-wide round of elections in 2006, progress is unlikely to be quick this year.
Adding to the obstacles are long-simmering national rivalries. Chile has poor relations with two of the continent's potential gas exporters – Peru and Bolivia – and lies farthest from the third, Venezuela. At the same time, gas-rich Bolivia has just elected a president who advocates the nationalisation of the country's gas resources, which could stall the development of Bolivia's reserves for years.
Peru could also head down a similar path – support for nationalist candidate, Ollanta Humala, has been rising, according to recent public-opinion polls, ahead of April's presidential election. Humala has promised to review the existing contracts that govern the oil and gas sector in the country, a step that would almost certainly crimp investment.
Regardless of the leftward shift in Bolivian and Peruvian politics, the ambitious gas-ring plans announced in June 2005 have already been placed on hold. The project called for a $2bn pipeline to be constructed, stretching from Peru south across the Andes to Chile, where it would connect with the existing inter-linked Chilean and Argentine gas grids.
Strongly backed by Chile, which has been stymied in its attempts to secure supplies of Bolivian gas, the link would form the backbone of an eventual series of pipelines linking the networks of the Southern Cone countries with suppliers in Bolivia and Peru. However, Peru's decision to revise its sea-border with Chile has provoked a diplomatic crisis that has delayed the development of the gas ring for the time being.
Even if Chile and Peru resolve their differences, Lima now says there are not enough proved reserves in Peru to support construction of the gas ring, meaning Bolivia must be brought into the equation if the pipeline is to materialise. Without a resolution of Bolivia's long-standing demand that Chile return the coastal territory it seized in a 19th century war, securing enough gas reserves to anchor the project could prove difficult without a substantial new discovery in Peru.
The development of Bolivia's gas reserves could be further complicated by the vow of Evo Morales, the country's newly elected president, to nationalise the gas industry. Investment in Bolivia's gas sector had already ground to a halt following the passage of a controversial Hydrocarbons Law that effectively raised royalties to 50%. Morales' supporters have been pushing for an outright renationalisation of the country's energy assets, although Morales seems to be seeking a compromise.
"We will nationalise [Bolivia's] natural resources. We won't nationalise the assets of the [companies]," Morales said in December. "The clauses that give the trans-nationals the right of ownership at the wellhead are over." Essentially, Morales wants to convert existing operators into service companies, but it is unclear how interested foreign firms will be in this sort of arrangement. However, without Bolivia's gas resources, the integration of South America's gas networks is unlikely to become a reality.
Brazil: centre of developments
This puts Brazil at the centre of developments. Brazil's rapidly growing demand for natural gas means that the country must begin to take energy security seriously. Brazil's state-controlled Petrobras is also the largest investor in the Bolivian gas sector and it has a large and growing presence in Argentina, Uruguay and Peru.
Brazil's mammoth Gasene project is the only major new pipeline under construction in South America. The 1,365 km line will eventually connect the gas-rich south of the country with its northeast, in order to fuel the region's growing commodities-based economy, as well as provide a cleaner source of energy to the huge cities in the area.
The line will initially transport 350,000 cubic feet a day (cf/d) from Macae in Rio de Janeiro state north to Catu in Bahia state when it is completed. But plans call for the line to be doubled in capacity to 0.7bn cf/d. The Gasene project was conceived after Petrobras began discovering large volumes of offshore gas, which led to the shelving of plans to import liquefied natural gas (LNG) from Venezuela to supply the northeast of Brazil.
The Gasene project has been troubled by soaring costs and construction delays, leading to speculation that the scheme would be cancelled. Cost estimates have jumped from $1.2bn to $2.3bn and the planned 2008 completion date has been all but abandoned. Although the first phase of the line, a 127 km link between Cabiunas, in Rio de Janeiro state, to Vitoria, in Espírito Santo state, is on target for completion in March 2007, the overall timetable suffered a blow. The two firms building the 131 km second phase from Vitoria to the Cacimbas gas-treatment plant, in the north of Espírito Santo state, ran into financial trouble and halted work in mid-November after laying only 52 km of pipe.
Petrobras has continued to back the project and says it intends to re-tender the Vitoria-Cacimbas stretch in early 2006. China's Sinopec, which has agreed to construct the third and largest phase of the pipeline, stretching from Cacimbas to Catu, is expected to begin the tendering process in early 2006, according to Petrobras.
China offered to help finance and construct the Gasene line in 2004 as part of a broader package of economic accords between Brazil and China, but since then progress has been slow. With the cost of building the 1,000 km final phase of the Gasene line surging, interest in building an LNG import terminal in Recife, in the northeastern state of Pernambuco, has been re-ignited and both Shell and BG are studying the option.
Although Petrobras has expressed some interest, the company says it remains committed to Gasene. "Our priority is building the Gasene pipeline and developing our own gas projects to supply the northeast of Brazil," Petrobras' president, Jose Gabrielli, said in December.
Petrobras has a growing portfolio of offshore gas assets in Brazil, but the company suffered a setback recently when it reduced its reserves estimate for the Mexilhao discovery in the Santos basin. The company has since scaled back its plans for production from the area to 420m cf/d from earlier forecasts of 0.52bn cf/d. Other nearby discoveries are likely to make up the difference, Petrobras officials say, but the downgrade highlights the vulnerability of the country's energy supplies and has led to renewed interest in developing a variety of sources.
One potential source could be Venezuela. President Hugo Chávez is keen to use his country's gas reserves to cement Caracas' ties with its neighbours as he seeks to wean Venezuela off its close economic relationship with the US. Plans to export the country's surplus gas to the US as LNG have not been shelved, but the government is switching its focus to pipeline exports to Brazil and, eventually, Colombia.
A proposed pipeline through the Amazon to the Brazilian city of Manaus would be the first phase of a $10bn plan to build a massive gas pipeline network running the length of the continent, from Venezuela down to Argentina. An alternative route would bypass Manaus and head directly for the northeast of Brazil, where it would link up with the existing Brazilian pipeline network somewhere near Recife.
Complicating matters for a planned Venezuela-Brazil gas pipeline are environmental issues. A pipeline from Venezuela to Manaus would have to cut through the Amazon rainforest and would attract heavy opposition. Petrobras only recently won approval to begin construction of a natural gas pipeline from its Urucu oilfields, in Amazonas state. Petrobras produces some 350m cf/d from these fields, most of which is reinjected or flared because of a lack of markets.
The company plans to build a 550 km pipeline from Urucu to Porto Velho, in neighbouring Rondonia state, and another 725 km pipeline to connect Coari and Manaus in Amazonas state. Environmental regulators approved the Porto Velho line in September, after a four-year legal battle, and Petrobras secured a $350m loan in December for the Coari-Manaus line from Brazil's state-owned development bank BNDES.
With the development of supplies from Urucu for Manaus, any line from Venezuela will probably have to traverse the 3,700 km between Ciudad Guyana on the Orinoco river and the northeast of Brazil. Given the large distances involved, any pipeline between Brazil and Venezuela would have to carry substantial volumes of gas to keep transportation tariffs within an acceptable range.
According to the Venezuelan government, initial flows would have to be in excess of 1bn cf/d if transportation tariffs were to be kept around $1/m BTU level, which is comparable to the pipeline tariff paid by Brazil on its supplies from Bolivia. The pipeline would be part of a broader continental pipeline network that would connect the Venezuelan, Brazilian and Argentine gas grids, costing $10bn or more.
Before such a pipeline could be developed, Venezuela would need to boost its own gas reserves. Although the country claims over 150 trillion cf of reserves, less than 15 trillion cf of this figure is non-associated. Venezuela also wants to increase domestic consumption by 2bn cf/d by 2012 through new petrochemicals and power-generation projects, on top of reducing large supply deficits in the west of the country. State-owned PdV is building the 430 km ICO pipeline that, when completed, will join the country's western and eastern gas pipeline networks, allowing supplies from the east to help cover the 1.2bn cf/d deficit in the west.
Big plans, big spending
Venezuela is focusing its exploration efforts in offshore areas where companies such as Chevron have discovered large new gasfields. Chevron has found between 5 trillion and 7 trillion cf of non-associated gas in blocks 2 and 3 of the Deltana platform area, off the country's northeast coast, and further exploration is being planned for the nearby Gulf of Paria.
PdV has drawn up plans to spend $0.78bn by 2010 to build new pipelines extending from Guiria, on the Paria peninsula near the Deltana area, to connect with its eastern gas grid. The planners expect the pipelines, which will extend 464 km in total, to have a combined capacity of 2bn cf/d. PdV also intends to construct the offshore pipeline infrastructure that will be needed to transport the gas from the Deltana blocks to the hub at Guiria.
PdV has also revived long-stalled plans to build a 150m-200m cf/d pipeline from Maracaibo, in western Venezuela, to Colombia's offshore gasfields near Rio Hacha. The 200 km line would carry Colombian gas to Venezuela for seven years, but would then be reversed to allow Venezuelan gas to be shipped to Colombia as Venezuelan supplies rose. Chávez and his Colombian counterpart, Alvaro Uribe, agreed in principle late in 2005 to proceed with the project, with construction set to begin in the second half of this year.