Latin America's LNG slowdown
A few years ago, gas exporters thought the Southern Cone would become a huge new market. Not likely
It wasn't long ago that Brazil and Argentina were about to become an important cornerstone for global liquefied natural gas demand. In Brazil, a buzzing economy was driving power demand higher at the same time a historic drought had severely crimped hydropower output. Petrobras turned to international LNG markets to keep the lights on. Argentina's economy was also growing, while declining domestic gas output left the country increasingly short on supply. From virtually nothing in 2010, combined LNG imports into the countries topped 10m tonnes a year in 2014 and 2015, and exporters were courting the Southern Cone consumers to sign long-term deals.
But that growth now looks fleeting. Imports in both countries dropped off sharply in 2016, and the trend has continued into 2017 as output catches up with weakened demand.
Brazil imported just 2.2m tonnes of LNG last year, down 60% from the 5.5m tonnes it shipped in 2015. Shipments are even lower through the first half of this year, and are on pace to be around 1.1m tonnes for 2017—barely a tenth of import capacity. The LNG trade has slowed so much in Brazil that the Guanabara Bay import facility, once state-run Petrobras's busiest, has been sitting idle since late 2016. The Bahia import facility, opened in 2014, has only seen a couple of cargoes over the past year. Both terminals are up for sale as Petrobras looks to focus on its upstream business. But with so little demand for their services it's hard to see who might buy them.
Petrobras made headlines in early 2016 when it bought the first LNG cargo to come out of Cheniere Energy's Sabine Pass plant, and the country looked like it would be a steady customer. But it hasn't bought a single shipment from the US this year, mostly bringing the super-chilled gas from West Africa's Nigerian and Angolan facilities, as well as a few cargoes from Trinidad and Tobago's Atlantic LNG plant.
2.2m tonnes - Brazil's 2016 LNG imports
Behind the collapse in LNG imports has been sluggish demand and an uptick in domestic output. Brazilian gas consumption peaked in 2014 due to a confluence of unique factors. Historic droughts dented hydroelectric output, which supplies more than three quarters of the nation's power. At the same time, electricity demand was growing and the government was in the midst of an election campaign and encouraged Petrobras to stock up on supply to ward off any politically damaging power outages. Gas demand ran at around 100m cubic metres a day, before falling 20% to 80m cm/d in 2016. It has slipped to around 77m cm/d this year. Demand from the country's gas-fired power plants is running at about half their peak of 50m cm/d in 2014.
Also working against LNG demand in Brazil is that pipeline imports from Bolivia are cheaper. Bolivian sales, which are linked to the US WTI crude benchmark, have run at between $5 per million British thermal units and $6/m Btu since early 2016. LNG imports have averaged $6.31/m Btu this year. Even Bolivian imports have been hit by reduced gas demand, and are down by a third from the roughly 32m cm/d that have flowed over the border in recent years.
Argentina's LNG demand hasn't collapsed like Brazil's. But the decline has been noticeable. Imports were 3.58m tonnes in 2016, down 15% from a year earlier and 30% from 2013's peak. And with Enarsa, the state-run company that manages LNG imports, fully contracted through the rest of the year, it looks like 2017's imports will fall to around 3.3m tonnes. Argentine demand has at least held up, but a combination of more gas being produced at home, mostly from the emerging Vaca Muerta shale play, and higher levels of cheaper pipeline imports from Bolivia and Chile have lessened the need for seaborne supplies.
Should LNG producers consider the past two years a sign of the future or a blip? While a modest demand recovery is possible, especially if Brazilian consumption rises on an improved economy or renewed drought, most trends are working against a revival of Southern Cone LNG demand. Most significantly, both Argentina and Brazil are drawing significant investment into new production ventures that are aimed at cutting their import bills.
This article is part of an in-depth series on Latin America's upstream. Next article: Greening Latin America