LNG the only option as regional gas supply falters
Brazil, Mexico and Chile, are turning to LNG imports to meet soaring demand for gas and they are prepared to pay a premium to secure steady supplies, writes Robert Cauclanis
LATIN American consumers are to become increasingly reliant on liquefied natural gas (LNG) imports as gas demand rises, largely thanks to a shortage of investment upstream.
Gas demand has been growing at a rapid pace, driven by the expansion of gas-fired power generation. Argentina, Brazil and Chile have recorded double-digit growth in gas consumption so far this decade. Mexican demand has risen by 5% a year since 2000. Gas supply is expected to remain robust, not least because environmental concerns have significantly slowed the pace of approval for large new hydropower projects – a traditional source of electricity generation.
However, it is unlikely that Latin American producers will be able to cater to incremental consumption needs: exploration in recent years has not resulted in significant increases in gas reserves; politics and energy nationalism have deterred investment in exploration projects and various pipeline developments; and supply from Latin America's only gas-liquefaction plant – which will exploit the 11.5 trillion cubic feet of reserves in Peru's Camisea field – is destined for North America, when it starts up around the end of the decade.
Limited upstream prospects
Upstream, Latin America has limited prospects. At the start of last year, according to Cedigaz, Central and South America held 248 trillion cf of reserves. Only Venezuela – with 152 trillion cf of proved, mostly associated gas reserves – is a significant gas-reserves holder in world terms. Yet Venezuela has no plans to become a gas exporter until at least 2010; even then, the government will not allow exports until domestic demand is met.
PdV, the state-owned oil company, claims the local market will need an extra 2bn cf/d by 2012, on top of consumption of 2.8bn cf in 2005. The wider region's gas consumers cannot afford to wait for Venezuela or gamble that regional production will meet rising demand. As a result, they are increasingly looking to overseas LNG producers to meet their needs.
There are several import projects at various stages of development: Mexico inaugurated its first LNG import terminal last year; another is under construction and two more are planned. GNL Chile hopes its Quintero plant will be operational in 2008. Brazil's planned receiving terminals could start up in mid-2008. Analysts say that even Argentina, traditionally a gas exporter, may have to consider LNG imports in the near future.
According to Marco Tavares, a partner at GasEnergy, a consultancy, and a former regional executive for Repsol YPF: "Energy renationalisation in [potential supplier countries] Venezuela, Bolivia and Argentina ... is largely responsible for pushing gas investment away, which has translated into scarcity of supply." In Bolivia and Argentina, political upheaval and gas-price freezes, respectively, have resulted in limited gas development since 2001, he says.
Mexico imports 1bn cf/d of natural gas by pipeline from the US to supplement local production of around 5.5bn cf/d. And, according to a recent government forecast, the country will need to triple gas imports to 3bn cf/d by 2014 to help cover demand of 10.5bn cf/d. Meanwhile, Brazil imports from Bolivia and Chile imports from Argentina. However, GasEnergy predicts that, by 2015, Brazil will need LNG imports of 1bn cf/d, while Chile and Argentina will each need 0.7bn cf/d, to supplement pipeline supplies.
Despite a few large gas discoveries in recent years and large planned investments in gas projects – state-controlled Petrobras and its partners expect to spend up to $21.6bn by 2011 – Brazil is unlikely to reach self-sufficiency in gas production in the near term. According to Petrobras, by 2011, the country will need 4.3bn cf/d of supplies – more than double present demand. Petrobras forecasts gas imports, including LNG, will account for 41% of Brazilian supply in 2011.
Bolivia's 26 trillion cf of proved gas reserves were once thought sufficient to supply neighbouring gas markets by pipeline and even North America from a proposed LNG export project. The country pipes supply to Brazil and has contracted to deliver to Argentina, but upstream investment has been limited for several years because of uncertainties over the future shape of the investment regime. Last year's gas-industry renationalisation means that rises in gas exports are likely to be a long time coming.
The main regional players, Petrobras, Repsol YPF and Royal Dutch Shell, have invested more than $4bn in the Bolivian gas industry since the late 1990s, but exploration and production (E&P) spending was a mere $75m in 2006. The country needs an estimated $2.5bn-3.0bn of E&P investment just to meet its contractual obligations to supply combined 2bn cf/d of gas to Brazil and Argentina in 2010. This is unlikely to be forthcoming, says Carlos Alberto López, a La Paz-based consultant and a former deputy energy minister. "Uncertainty is already leading regional energy partners to seek other, less fickle, sources of natural gas. Bolivia may have unwittingly triggered the LNG era in the Southern Cone," claims López.
For Chile, where domestic gas production covers less than a fifth of demand, imports from Argentina, its major supplier, have already dwindled since 2004, because of Argentina's own supply crisis. According to GasEnergy, by 2010 Chile can count on Argentina to supply only a "tiny" fraction of the contracted 0.9bn cf/d supply – last year, it received an average of 0.6bn cf/d. The country hopes its LNG plans will fill the gap.
But while LNG imports will help these countries secure much needed supply, they will also come at a considerable cost to consumers. As latecomers to the LNG market, Latin American countries could have trouble obtaining long-term LNG contracts and may have to rely on the nascent spot market for years to come.
Analysts say LNG prices for Latin American importers may come at substantial premia to US Henry Hub gas prices, which have recently been trading at around $7.00/m Btu – significantly higher than the $2-5/m Btu range that Brazil, Argentina and Chile are accustomed to paying for pipeline imports.
Desperately seeking supply
Petrobras plans to begin LNG imports in 2008. But GasEnergy's Tavares says 2010 is a more realistic date for significant volumes to arrive and, even then, Brazil will probably have to rely on spot purchases until 2012, when long-term contracted supply becomes available.
Likewise, in Mexico, the Energía Costa Azul import terminal, being built by Sempra Energy in Baja California, is due to be completed in 2008, but contracted deliveries from BP's Tangguh project in Indonesia and supply from Russia's Sakhalin-2 project may not be ready by then, as both projects have suffered delays. Mexican officials approached Australian suppliers looking for an alternative, but were told production is nearly fully committed over the next five years.
Mexico's first LNG import terminal, at Altamira, on the Gulf of Mexico, received its first shipment in mid-2006. The plant, owned by Shell (50%), Total (25%) and Mitsui (25%), has contracted to supply the country's power authority with 0.5bn cf/d for 15 years. Shell plans to supply the terminal from Nigeria.
California's Sempra Energy is operator of the country's second plant, with planned capacity of 1bn cf/d. Costa Azul, near Ensenada on the northwest Baja California peninsula, is a 50:50 joint-venture with Shell, which will supply the LNG. The plant, which is due to start up in 2008, will supply the local market, but also plans to pipe some gas to the US.
Two other import terminals are proposed for Mexico. Repsol YPF and Suez LNG North America have a concession to build a receiving terminal on the west coast, at Lazaro Cardenas, with a capacity of 400m cf/d. Repsol YPF said in February that it is "carrying out studies to determine the project's viability".
Meanwhile, Houston's DKRW Energy signed an agreement in 2004 with the northern state of Sonora to build a 1.3bn cf/d in the Gulf of California. It hopes to bring the plant on stream by 2009, to serve customers in both Sonora and across the border in the US.
A third import plant – Terminal GNL Mar Adentro de Baja -- had been planned by Chevron offshore the northwestern coast. However, the $0.7bn project, which was to have had a capacity of up to 1.4bn cf/d, was abandoned in March following a lengthy battle with environmental groups.
Petrobras unveiled plans last year to build two terminals to begin receiving supply by mid-2008 – a 0.5bn cf/d floating regasification offshore southeastern Rio de Janeiro state and another floating regasification unit, to receive 250m cf/d, at the northeastern port of Pecem. Petrobras sources say that although the terminals may become operational in 2008, it will be some time before they can receive full import volumes – and the company has yet to secure supplies.
Earlier this year, Petrobras' gas director, Ildo Sauer, said the company is considering building a third terminal, to serve northeastern Bahia State. GasEnergy's Marco Tavares says Petrobras may push for the northeast region to rely on LNG in order to avoid building costly pipelines to link the underdeveloped region to the industrialised southeast.
On the central coast at Quintero, state-owned Enap has commissioned a 330m cf/d import terminal, being built by a consortium led by BG at a cost of around $400m. The plant is due to begin commercial operations in late 2008, reaching capacity in 2009. The terminal will rely on supply from BG over a 20 year period, the government says. Enap, AES, Endesa, Gener and other power generators will buy the gas.
Copper mining firm Codelco is considering a terminal in the north of the country, at Mejillones, to supply the northern power grid. While utility Gasatacama and Suez have agreed to study another plant to serve the northern grid by 2009. The region relies on supply from Argentina.n