THE DASH FOR GAS: Why is Latin American focusing on LNG?
July 2009 saw a discreet, almost ignored race between Chile and Brazil to become the first country in South America to receive a shipment of Liquefied Natural Gas (LNG). Both countries are putting the finishing touches to re-gasification plants which allow them to import LNG from anywhere in the world and them pump the gas around their conventional pipeline systems.
Brazil probably just won the race, but the Brazilian energy company, Petrobras then paid a huge complement to the Chilean importer by declaring that it would like to use the Chilean terminals, although initially only to meet its needs in the domestic Chilean market.
Chile is building two re-gasification plants: the first is at Quintero, which will serve central Chile. The other one is a Mejillones in northern Chile which will provide gas to fuel the power stations for the country's mines and smelters which are mostly in the north.
Chile's gas pipeline network is built to take gas from Argentina. Theoretically reversible valves could pump the gas the other way and so on to Brazil's big urban centres on the eastern side of the continent. Vilson Reichemback, the country manager for Petrobras in Chile, said that Petrobras was initially interested in finding out whether the two Chilean terminals could supply Petrobras's recently acquired 230 petrol stations in Chile (brought from ExxonMobil for US$400m) with gas for vehicles.
Why are Brazil and Chile so convinced that they have to import LNG rather than buy some of the huge deposits of gas from Bolivia, Peru or Argentina? Both Brazil and Chile have learnt the hard way that over-reliance on a single supplier is a sign of economic vulnerability. Chile had depended on Argentina and Brazil invested heavily in Bolivia. Both countries have proved themselves to be unreliable.
What is not clear is whether the new LNG plants are intended to be prime energy sources or back-up energy sources. For historic reasons, neither Bolivia nor Chile want to rely too much on each other. The Bolivians believe that if there was to be a problem with gas supplies to Chile, as there inevitably will be, Chile would use the difficulty as an excuse to bully Bolivia. The wilder fear, on the Bolivian side, that Chile would march in and seize the gas is highly unlikely: Tarija, where Bolivia's gas is, is a long way from Chile and in a part of Bolivia that has been claimed by Argentina. The Argentines would be unlikely to stand idly by if Chile tried to seize such a strategic asset on Argentina's borders.
On the Chile side, the experience of depending on Argentina has prompted policy markers to say that they will never do something similar again.
Chile's key re-gasification facility is GNL Quintero in central Chile. The plant is coming on stream a year ahead of schedule. The actual re-gasification facility is offshore and feeds the gas to 150,000 cubic metre storage tanks. GNL Quintero, Chile's opened for an initial delivery in mid-July. Its first vessel brought 145,000 cubic meters of LNG from Trinidad & Tobago. Other supplies will come from Russia; Nigeria and Indonesia. The Chilean terminal is scheduled to be fully operational in August.
The Quintero terminal uses a ship as an offshore terminal and therefore gets around local construction permit problems, though there will be two onshore storage tanks that will allow the terminal to supply up to 6.5m cubic metres a day. The gas will be used in central Chile.
British Gas has a 40% stake in the Quintero terminal and a 21 year contract to supply the terminal with up to 1.7m t of gas a year.
Brazil's first re-gasification plant is at Pecem port terminal in Ceara State, north-eastern Brazil. The facility is operated by Petrobras and it took delivery of the gas from Royal Dutch Shell. The Shell delivery was of 135,000 cubic metres. Shell said that the delivery was the first to South America. The delivery is part of an agreement between Shell and Petrobras signed in 2008, aimed at raising Petrobras' gas importing capacity as well as supplying power plants.
Chile and Brazil's move into LNG poses a major problem for Bolivia. The hardline policies over gas, espoused by President Evo Morales, have transformed the economy's position and the national accounts, but they have also infuriated foreign investors. Petrobras is one of Bolivia's biggest foreign investors.
Brazil's heavy investment in its own oil and gas reserves and now its commissioning of LNG re-gasification facilities has clearly signalled that it does not want to increase its dependence on Bolivian natural gas. This strategic change, and the slowdown in the Brazilian economy, has meant that Brazil is cutting back on its imports of gas from Bolivia. It is now importing only the minimum 24m cubic metres specified in its contract.
The Brazilian and Chilean thumbs down for Bolivian gas means that either the country will have to increase exports to Argentina or it will have to consider shipping gas out to Peru's gas-liquefaction plant in Lima. The problem with this is that Bolivia will once again be left as a commodity supplier and the gas liquefaction plant owners will pick up the main benefits of the trade.
Argentina's stuttering economy is cutting back on its imports of gas from Bolivia. The pipeline can handle 7m cubic metres a day (cmpd) but currently Argentina is buying only about 6m cmpd.
Prices
Currently Bolivia is charging Brazil US$7.8 per 1,000 cubic feet of
gas shipped to Brazil. Its price for gas shipped to Argentina is US$5.7 per
1,000 cubic feet. Chile is apparently going to pay US$8.23 per 1,000 cubic feet
for the LNG it imports at Quintero. This is half the price it had been paying
for the gas it had been importing from Argentina.
In North America, gas prices vary. The benchmark is the Henry Hub price, but this is the price of gas close to the production areas in the southern US. In the consuming markets in the north of the country the prices tend to be significantly higher.
Currently, the Henry Hub price is US$4 per 1,000 cubic feet.
Peru
What is interesting from Bolivia's point of view is
that Peru has a looming gas supply problem. Bolivia's problem is that it has
rotten relations with the government of President Alan García.
What may force a deal is the growing realisation in Peru that the previous government of President Alejandro Toledo made some crazy deals over the way the huge gas deposit at Camisea (and now around the central big find) would be exploited.
There is a growing realisation in Peru that it over-estimated the size of its Camisea gas deposits. It now seems clear that Camisea does not have enough gas both to meet the growing demand in Lima and to feed the LNG plants which will send the gas up to North America.
The government has already warned Pluspetrol, which leads the consortium that operates lots 88 and 56 of the Camisea natural gas field, that it is reviewing the contract. Pluspetrol has committed to exporting 40% of Camisea gas. Analysts have said that if Pluspetrol's exports go to Mexico as planned starting in 2011, then there will be a shortfall in the Peruvian market, where demand is growing quickly.
Yet Pluspetrol has said it has reserves that will meet local demand and that it will go ahead with expansion and export plans. Pluspetrol says its Camisea fields have 14.1 trillion cubic feet (TCF) of reserves, with a useful life to 2047. This is much higher than the 8.79 TCF estimate from a consulting firm Gaffney, Cline & Associates that analysts use as a figure for proven reserves.
Peru's problem is that it has allowed gas from lots 88 and 56 to be exported. Originally lot 88 was destined just for the domestic market but a change in the law in 2005, meant that the gas could be used for export. Peru has now got itself into a situation where it has proven gas reserves of 8.8TCF, but 8.7TCF of these reserves are committed to the export market.
What could happen is that Peru could start using the 2TCF Repsol YPF found in lot 57 close to Camisea. Repsol is already a partner with Pluspetrol in the 15 year, US$15bn, deal to export gas to North America, particularly to Mexico. Under Repsol's contract with Mexico, Repsol charges Mexico 91% of the Henry Hub price, so around US$3.64 per 1,000 cubic feet.
Repsol in fact pays much less for the gas because it knocks off the cost of liquefying the gas and then transporting it to Mexico and the US. Some analysts believe that these charges reduce the price Camisea actually gets for its gas that is exported to North America to US$0.14 per 1,000 cubic feet. This would be by far the lowest price in the region. What makes the situation even more galling to the government is that the Camisea producers charge domestic Peruvian users far more than they charge export customers. The price for power stations is US$1.51 per 1,000 cubic feet while the price for industrial users is US$2.54 per 1,000 cubic feet.
- Some stats
Oilmen and traders reckon that the relationship in price between oil and gas
should be 6:1. This is because a barrel of crude oil produces 5.8m British
Thermal Units (BTUs) of energy. The burning of 1,000 cubic feet of natural
produces just over 1m BTUs.
Some traded believe that the relationship also
holds on a value basis. So if oil gets over the 6:1 ratio, then the prices must
be about to turn. The problem with this reasoning is that energy systems cannot
easily switch between the two fuels so they cannot arbitrage the prices. In the
US only about 10% of energy users can do this and in Latin America the
proportion is even lower.
The general assumption now in the global market is
that world gas prices are going to stay comparatively low for some time.
The
problem for gas producers is that the expansion of LNG facilities has come just
at a time when demand for all sorts of energy, apart from in China, is falling.
This means, traders say, that there is now a race to the bottom. The assumption
is that a lot of the builders of these LNG facilities to liquefy the gas may
find it hard to find markets.