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Elaborate, daunting plans

Energy shortages are a growing threat in South America because pipelines are not being built fast enough to keep up with demand, writes Robert Cauclanis

GAS shortages could occur in the Southern Cone as soon as 2010, as the region's established exporters – Bolivia and Argentina – struggle to meet growing demand in import-dependent Brazil and Chile.

A study by the Latin American Energy Organisation and the Regional Association of Oil and Gas Companies in Latin America and the Caribbean, says that to prevent a crisis, South American countries will have to embark on large pipeline expansions and steadily increase their reliance on imported liquefied natural gas (LNG).

Several ambitious pipeline projects are under consideration that would carry gas and oil from Venezuela, Bolivia and Peru to the region's main markets. But these plans have suffered setbacks; for one, South American countries are undecided about whether to invest in regional pipeline infrastructure or to build coastal export terminals to ship more hydrocarbons to the US and Asian buyers.

The practicalities

The practicalities of delivering gas or oil to the continent's biggest markets are daunting. Most of the spare gas is in Caribbean Venezuela, the deep Amazon region of Peru and the lowlands of Andean Bolivia. But the main consumption hubs are nearer to the South Atlantic and South Pacific regions, in cities such as São Paulo, Buenos Aires and Santiago.

The large distances and physical barriers involved are reflected in the price: the cost of all oil and gas pipeline projects proposed across the region amounts to over $50bn. Yet, before any of these projects can go ahead, policymakers and companies must agree on the economic, political and environmental feasibility of each. And big consumers such as Brazil and Argentina must also decide whether they can rely on gas supply from countries such as Bolivia or Venezuela.

In a backlash against foreign oil companies, Bolivia re-nationalised its energy industry in May of 2006, alienating Brazil, the biggest buyer of its gas. Then in January, Venezuelan President Hugo Chávez threatened to follow Bolivia's lead. Chavez said in January that his government is preparing a "deeper nationalisation" of the oil, power and telecommunications sectors. This will include giving the state majority stakes in the extra-heavy crude projects now run by foreign majors in the Orinoco Belt region, and in other energy interests, such as the AES-controlled Electricidad de Caracas power utility.

Venezuelan oil minister Rafael Ramirez said existing Venezuelan offshore gas concessions controlled by foreign majors such as Chevron and Statoil will be allowed to remain under foreign control. Chevron and Statoil, according to Ramirez, have made big gas discoveries offshore. However, they will not necessarily be able to develop these as LNG-export projects. Chavez has said Venezuela will not approve gas-export schemes until domestic industries are fully supplied with gas and a planned pipeline to Brazil has all the gas it needs.

Ambitious and improbable

The most ambitious and improbable of the big regional pipeline projects is the 10,000-15,000 km Great Southern Pipeline that Chávez is promoting to supply 150m cubic metres a day (cm/d) of Venezuelan gas to the Southern Cone countries. Chávez claims the pipeline could be built in as little as seven years, at a cost of around $20bn.

However, analysts doubt this. The gas line would have to cross several thousand kilometres of dense Amazon rainforest and semi-arid scrubland, before even reaching its first, medium-sized market, at Fortaleza, northeast Brazil. "This pipeline isn't going to fly," says Luiz Otavio Broad, an analyst at Agora Senior. "The project smacks of megalomania on Chávez's part."

However, while Brazilian officials, including Petrobras' chief executive, Jose Sergio Gabrielli, have in the past called the pipeline only a "remote" possibility, Petrobras and PdV on 18 January took a step forward with the first and most ambitious leg of the project. The two firms plan to complete a detailed feasibility study by the end of the year on the first section of the pipeline, which will link gas reserves offshore Venezuela's coastal Sucre State, to Brazil's northeast Pernambuco State, 5,000 kilometres to the south. Gabrielli and Ramirez would not comment on likely costs or potential construction dates, but Petrobras said it could carry 50m cm/d of Venezuelan gas – part of which could come from offshore Venezuelan reserves of more than 14 trillion cubic feet at Mariscal Sucre, which Petrobras is considering developing in a 40:60% partnership with PdV.

The companies did not explain why the first section would have only one-third of the capacity of the 150m cm/d that has previously been discussed as the finished pipeline's capacity.

GasEnergy, a Brazilian consultancy, claims Venezuela will not have enough gas to supply its own needs and to fill more than about 20% of an export pipeline designed to ship 150m cm/d. Venezuela is even about to become a gas importer: a $335m pipeline to ship 4.3m cm/d from La Guajira, Colombia, to the Paraguana refining complex in western Venezuela is scheduled to start up this year – although the plan is to reverse the flow in 2012.

Another ambitious project proposed by Chávez is a 250,000 barrels a day pipeline to carry Venezuelan crude oil across Colombia to a Pacific port, from where it could be shipped to Asian markets, particularly China. This was discussed last year, but no progress appears to have been made.

There are other export-oriented projects in the planning stages. Unlike in Venezuela, the right-wing governments of Peru and Colombia want to increase energy-sector investment by foreign companies and boost exports to the US. Brazil's Synergy Group, which operates Colombia's Rubiales oilfield, is considering building a 700 km, $0.7bn pipeline to transport crude to the Ocensa pipeline, for onward carriage to a Caribbean export terminal.

Meanwhile, the $3bn Peru LNG project, led by the US' Hunt Oil, requires construction of a 408 km gas pipeline from Ayacucho, in south-central Peru, to a gas-liquefaction plant at Pampa Melchorita on the coast. The plant, due to start up by 2010, would export around 17m cm/d of LNG to Mexico, the US and possibly Chile (so far, one supply contract has been signed, with Mexico, for half the plant's capacity).

However, the gas pipeline may face financing problems as the supply for the LNG plant will be sourced from the Camisea project. A Camisea liquids pipeline operated by a consortium that includes Hunt has ruptured five times since it began operating in 2004, raising a furore among environmental groups and prompting several pipeline audits.

The Inter-American Development Bank, which is considering a $400m loan to Peru LNG, said in December that it wants more detailed information on the condition of the liquids pipeline before approving the loan for the LNG terminal.

Chile

THE country's booming, mining-based economy is demanding ever-increasing quantities of energy just as its neighbours are refusing to deliver any more gas. Natural gas accounted for just 8% of the country's total energy consumption in 1996. But by 2004, it made up more than 26% of energy supplies and continues to gain market share, according to the US Energy Information Administration. Chile's National Energy Commission forecasts gas demand will top 11bn cm this year.

Gas supply comes from Argentina, through seven pipelines. However, Argentina has cut gas supplies with increasing frequency since 2004 to ensure it has enough gas for its domestic market. And deliveries will continue to fall until they end in 2010, executives from state-run Enap predicted in October. Enap is banking on LNG imports and successful domestic gas exploration to meet the shortfall. Enap has contracted the UK's BG Group to build an LNG import terminal. It is also seeking to develop a recent, modest gas discovery in the southern Magallanes region, which the government hopes will eventually supply 5m cm/d to Chile's southern region.

Efforts to secure gas from Bolivia and Peru, two potential suppliers, have so far been unsuccessful. Bolivia refuses to pipe gas to Chile because of a 125-year-old land-border dispute; while Peru has said it may not have enough gas to ship both to North America and to Chile, while still ensuring it meets domestic demand.

Bolivia

Several new pipelines to link Bolivian reserves to neighbouring countries are being studied. Their success, says the hydrocarbons minister, Carlos Villegas, depends on billions of dollars of exploration and production investment the country will need to help boost production. That, though, seems unlikely to be forthcoming, given the marginal role available to the private sector since last year's nationalisation of gas assets.

Proposed pipeline projects include a $450m pipeline linking gas-rich Tarija, in the south, to markets in Paraguay and Uruguay, which have no proved reserves of their own.

A larger project, and one that is more likely to go ahead, would involve a 965 km, 20m cm/d pipeline from southern Bolivia to northern Argentina, complementing the existing, 440 km, 7.7m cm/d line. The new, Argentine-funded pipeline could boost imports of Bolivian gas to 27.7m cm/d by 2010, from around 5m cm/d last year.

According to Bolivian officials, a new 20-year gas-supply contract signed between state-owned YPFB and Argentina's national oil company, Enarsa, will earn the country $32.5bn. Argentina has agreed an initial price of $5.00/m Btu for Bolivia's gas. The companies plan to sign a construction contract for the 20 cm/d pipeline within a few months.

Petrobras, which has invested $1.5bn in the country's gas sector, initially reacted to the re-nationalisation by cancelling billions of dollars in planned investment. However, CEO Gabrielli said in December that Petrobras is again looking into expanding the pipeline links between Bolivia and Brazil. Petrobras had earlier planned to double pipeline capacity to 60m cm/d.

Brazil

At home, Petrobras plans to spend $22.1bn to increase domestic gas supply to 121m cm/d by 2011, from around 50m cm/d now. The plans include imports of 21m cm/d of LNG to at least two import terminals, with a 14m cm/d floating regasification unit to be located offshore southeastern Rio de Janeiro and another floating regasification unit, to receive 7m cm/d, to be located at the northeastern port of Pecem, in Ceara State. The re-gas units may begin operation in early 2009, and Petrobras is counting on a boost in domestic gas production to 70m cm/d, plus at least 30m cm/d of Bolivian imports.

Rumble in the jungle

PETROBRAS has learned the hard way some of the difficulties oil companies can face with infrastructure projects in the Amazon. Its Urucu pipeline project – a 670 km gas pipeline from central Amazonia to the Amazonas state capital, Manaus – is going ahead, but only after years of legal wrangling with environmental and indigenous-rights groups.

The $0.67bn pipeline will carry 4.7m cm/d of gas when it starts up – planned for March 2008. However, maintenance will be expensive. To reduce its environmental footprint, Petrobras agreed not to build a service road next to the pipeline and will have to service it by helicopter.

To expand the country's domestic gas distribution network, Petrobras has commissioned the construction of thousands of kilometres of domestic gas pipelines by 2011 at a cost of $4.4bn. In addition to the Urucu-Manaus gasline in the Amazon region (see box), Petrobras is building the 1,400 km, 20m cm/d Gasene pipeline to link gas markets in the country's southeast and northeast regions. Gasene, scheduled for completion by 2009, is being built in partnership with China's Sinopec.

Petrobras also plans to add capacity to its southern gas pipelines to help accommodate new production from the Santos basin, offshore São Paulo. Consumers in Brazil have been warned that these large gas investments will require a significant rise in domestic gas prices.

Argentina

The country's gas demand of around 125m cm/d is the highest in Latin America. The market has grown at an average rate of more than 10% a year since 2002, when Argentina devalued its currency and the government imposed a freeze on gas prices that has helped boost demand. However, low domestic prices for both oil and gas have resulted in reduced investment in oil and gas projects.

To boost investment, the government recently introduced measures to fund an expansion in gas-transport infrastructure. Since 1 January, Argentina's largest gas consumers – such as factories, gas-fired power and petrochemicals plants – have paid a surcharge of an extra 30%, on average, for their gas supply, according to local press reports. Proceeds will go toward financing a $2.4bn expansion of the national pipeline grid, which will lift its capacity by 17% ahead of 2009. n

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