May 10, 2017
Author: Kjetil Solbraekke, Head of Rio Office, Rystad Energy
The gas market in South America is somewhat different from the other markets around the world. To a certain degree it is a developed market with cross-country import and export, but it is segmented, relatively small, dominated by NOCs and without very transparent regulations in each country. The region is currently a net importer of gas in the form of relatively expensive LNG. On the other hand, the region has significant undeveloped resources that should have led to self-sufficiency. In this article, we have looked at the current situation in the region and what is likely to happen over the next 5 year period. We are also pointing out some longer term trends that we believe can be prolonged. The short answer is that we believe the gas market in South America will change significantly in this period.
The region in total seems to continue to depend on import of natural gas, however, the different countries are facing very different challenges and opportunities. The total gas production in South America is remarkably stable over the period from 2010 to 2022, and is expected to be fairly stable after 2022 as well. However, as shown in figure 1 the composition is changing quite a lot.
Production from Trinidad and Tobago is decreasing, while production from Brazil is increasing equally. The current and only exporter of piped gas in the region, Bolivia, is struggling to maintain the production level with current plans. A lot of the gas from Trinidad and Tobago is sold within the region; however, with the majority being LNG, this has little effect on the import situation for the importing countries in South America. Rystad Energy has no concern for limited supply on LNG on a global market. This could indicate that the importers have to go look elsewhere than Trinidad and Tobago to purchase their gas, which could indicate marginally more expensive LNG for these countries. Another important observation is that Argentina is not increasing, but slightly decreasing their gas production. Since we have already discussed Trinidad and Tobago, we will concentrate more on the southern part of the region. This is where you have both piped gas and LNG in the market and where the market in each country is inter connected.
If we look closer at the situation in Bolivia, it shows that Bolivia seems to be in a similar situation as Trinidad and Tobago was a couple of years ago. The production is predicted to go down and the local industry wants to consume more gas domestically, but little new gas has been reported to be developed or discovered. In figure 2 we show the production of gas from Bolivia divided by fields in production, under development and discoveries.
Unfortunately, there are no new fields being developed in Bolivia and this means that the production is forecast to start decreasing when the production is not any longer limited by the separation capacity, but only depending on the well pressure. Unless new resources are added fast to develop already existing discoveries or to find and develop more natural gas, the production from the portfolio of fields will decline with between 6-7 percent in Bolivia. Bolivia has currently no ability to increase their gas export to neighboring countries, but is more likely to reduce export of piped gas to their neighbors in Argentina, Brazil and Chile.
Many turn their eyes to Argentina and Vaca Muerta. This great shale and tight gas region should be able to supply both Argentina and perhaps replace Bolivia as a local gas exporter of piped gas in the region. The Vaca Muerta has a huge potential, however there are two important issues to remember. One is that conventional gas production in Argentina is on decline, this is not a new trend and is expected to continue. See in figure 3 how the expected production of natural gas in Argentina is forecasted to decline even with significant increase in the unconventional gas production.
The second issue is that developing gas production from Vaca Muerta takes time. Lack of equipment and infrastructure (i.e., roads, rails and pipe for especially water) means that the resources in Vaca Muerta will take time to be developed. It will certainly not cover the local gap in Argentina and not in the region within any reasonable timeframe either.
We know the gas production in Chile is fairly limited, so we have to turn to Brazil and the significant volumes expected to be produced associated with the oil volumes from the pre-salt fields. In figure 2 we see the gas production in Brazil divided by gas from the pre-salt fields and the rest.
Brazil is expected to nearly double their gas production over the next 5 years, and we believe this trend has a chance to be prolonged for some more years. The gas from the pre-salt is associated gas, which means it comes as a fixed portion of the oil being produced from the same fields. The gas might be re-injected in some reservoirs for some time and will also be used as fuel for the many FPSOs producing in the pre-salt. However, the pre-salt gas represents a huge economic opportunity for Brazil and should be collected and made commercially available in the market.
We have not covered the demand situation so far in this article, so let us conclude with some reflections. Many of the large economies in South America have significant growth potential after years of unsuccessful policies. This goes for at least the three key countries we have evaluated in more depth; Argentina, Bolivia and Brazil. Bolivia wants to cut back on export to support increased domestic consumption. Public programs was initiated in 2010 i.e., to increase the use of natural gas in transportation. The future gas demand in Bolivia will of course also depend on available gas and the price of this gas. There are similar issues in Argentina. The country experiences black outs and periods with no gas supplies in Buenos Aires. Sources in Argentina explains i.e., that Buenos Aires experienced 4 months without gas supply in 2015. This is a clear indication of the underlying high gas demand in the country. The problem in Argentina is that gas, power and gasoline prices have been heavily regulated and subsidized, and this has created an unsustainable market and consumption pattern. Without including more details on the demand situation in Argentina it still seems rather obvious that Argentina will not become a significant gas exporter in the region for many years. First Vaca Muerta has to catch up with the loss of conventional gas production, and then respond to the increasing gas demand internally before eventually exporting gas to any of their neighbors. Of course, in this statement we are not thinking about near border trade between Chile and Argentina, which is simply driven by proximity to the customers.
Then, what about Brazil? The gas demand in Brazil has increased year by year until the economic crisis hit the economy in 2015. Part of the significant increase over the last decade was linked to the fact that the hydropower plants reduced production and were replaced by gas-fired power plants.
Figure 5 illustrates this development very clearly, more lately hydro power has been able to refill somewhat the magazines but they are still below 50%. The gas demand in Brazil is roughly 50% to Industrial, 40% to Power consumption and the rest to Residential and others. The Residential and Industrial sector are stable, but of course influenced by the economic development. The power consumption is however dependent on precipitation which is harder to forecast. This leaves gas producing E&P companies exploring for gas with an additional uncertainty. With huge fluctuations of gas demand for power the producers have to expect huge fluctuations in prices and maybe even situations where there is no offtake of the gas. There is yet to date no significant gas storage capacity installed which means that especially smaller, independent gas producers might face the risk of not being able to produce and sell their gas. In a situation where Petrobras had a monopoly and had all the information, all the flexibility in this situation could be accumulated by Petrobras – but at the loss of the consumer that would have to pay a higher electricity bill. Going forward the organization of the gas and power market in Brazil has to be modified. A certain portion of the power production should be a base load produced by natural gas. The energy in the hydro power dams can cheaply be stored and used for peak-loads and a sessional and daily basis. This change requires a significant change in how the power sector and auctions are executed, but it is a necessity for Brazil to be able to develop a more predictable and cost efficient energy market.
The rationale for such a change in policy is even further strengthened by the fact that the increase in the gas production in Brazil is expected to come from the associated gas in the pre-salt fields. This means the gas has to be produced, and either flared or sold into the market. If there is no off take and flaring is not allowed, the oil production will be held back which of course is a very costly consequence for the companies and the Brazilian society in general.
One last alternative for the pre-salt gas is to install a more steady gas consuming industry where the pre-salt gas will enter the shore in Brazil. This could reduce the risk for the oil companies producing the pre-salt oil, but it will make Brazil even more dependent on import of LNG to cover potential future gap in demand and supply for gas to power in Brazil.
To sum up these observations, we can say that the gas market in the southern region of South America will go through some very interesting years. We believe significant changes will occur and interesting positions can be taken in today’s situation. A long term strategic plan and cooperation between the relevant countries would help to bring about the best solution for the whole region, however historically it has proven difficult to get long term agreements in place. Gradually, we would expect Brazil to be the country with the ability to become self-sufficient in gas. The flow of gas should therefore be expected to rather flow from Bolivia to Chile and Argentina and less to Brazil. If we also add into this the differences in seasonal precipitation and gas consumption in general we believe that the region would benefit from more market based and flexible arrangements for gas trading between the countries. This complex and interesting subject will have to be covered in another article.
Kjetil Solbraekke, Head of Rio Office
Therese Fuglerud, Administration Manager - South America
About Rystad Energy
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Rystad Energy’s headquarters are located in Oslo, Norway. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), as well as Singapore and Dubai.