Thought Leadership

Southern Cone gas market is on the cusp of transformative change

Brazilian demand is surging at the exact moment as supply from Argentina is increasing significantly and looking for a route to monetization. Simultaneously, production continues to decline in Bolivia, a traditional natural gas supplier to the Southern Cone countries, and little is being done by way of reserves replacement through exploration drilling. All these factors, in conjunction, create several distinct opportunities for the different players in the region when it comes to the supply-demand balance. Even countries like Uruguay and Paraguay are entering into the conversation as potential routes for piped gas from the Vaca Muerta to reach the demand centers in southeastern Brazil. Decisions being considered today will significantly affect the composition of the Southern Cone gas market in the next decade, and the picture may be radically altered from what is seen today.

Read this special insight from W. Schreiner Parker, Managing Director for Latin America at Rystad Energy.

For all of the uncertainty in the Southern Cone gas market, the one constant is that Brazilian demand will continue to grow substantially through 2030 and beyond. From a low of 69 million cubic meters per day (MMcmd) of demand last year, that figure is expected to increase to over 120 MMcmd by 2032, a 74% increase in nine years. Most of that demand increase is underpinned by a need for more natural gas in two areas. The industrial sector will grow from 38 MMcmd to 58 MMcmd as economic growth and fuel replacement will increase opportunities for natural gas. The power generation sector will show the most significant development, moving from 11 MMcmd to almost 40 MMcmd due to the addition of new gas power plants at the base of the power mix and flexible ones to sustain the growth of renewable energy.

At the same time, the amount of associated gas being produced from the pre-salt assets in the Santos Basin is also set to rise precipitously. In 2023, Brazil produced around 55 MMcmd of domestic gas. With projects under development and discoveries taking FID, that figure could increase to over 86 MMcmd production by 2030. Infrastructure constraints raise questions about how much of this gas could be monetized or if it would need to be reinjected. Brazil has limited gas pipeline capacity to bring the associated gas back to shore. Considering the water depth and distance, building these pipelines from scratch can be prohibitively expensive. Indeed, some of this gas will reach the market, particularly projects linked to Routes 1, 2 and 3 and others like Equinor's BM-C-33, which will have its dedicated pipeline connecting Raia Manta and Raita Pintada to the continent. However, the fate of the majority of this gas production remains unknown at the moment.  

Brazil now has to hedge its bets by developing LNG regasification infrastructure along its massive coastline, inserting new private companies into Brazil's gas market. Over the next decade, Bolivian imports are expected to fall from the 15 MMcmd seen last year to as little as 1.3 MMcmd by 2032. Argentina, the other big buyer of Bolivian gas, is set to end its imports this year due partly to the decline in Bolivian gas production but also due to the increased gas production in Vaca Muerta. The export country was producing at a peak of almost 60 MMcmd a decade ago and has seen volumes fall essentially by half to 32 MMcmd this year. A decade from now, production is forecast to be only 17 MMcmd, barely covering Bolivia's current domestic demand of 15 MMcmd. The Andean nation's political turmoil has done little to address the situation, and it seems there is more turmoil on the horizon. Like this, the Brazilians are trying to get in front of this situation and as forecasted now, that drop in piped gas imports will be replaced by a growing volume of LNG imports. In 2024, Brazil imported just 4.7 MMcmd of LNG; by 2032, that figure is expected to come in at 18.5 MMcmd, and there is no shortage of planned and under-construction LNG regasification projects popping up in the South American giant.

The real question in the future is if gas from the Vaca Muerta can be competitive against the LNG price Brazil is paying today and in the future. The growth story in gas production in Argentina is impressive. With a full complement of operators, including state-owned YPF, supermajors like Chevron and independents such as Vista, plenty of capital can be invested. Gas production is set to increase by 58.5% from 2023 to 2033, landing around 203 MMcmd in that year. Like the Brazilian pre-salt, there have been infrastructure constraints in the Vaca Muerta, which have, until recently, made it difficult to find a route to export these volumes. However, with production increasing dramatically, new takeaway projects are being planned and executed quickly. If Argentina gas is to reach Brazil, it will have to take one of four paths: either by reversing the flow of the existing lines from Bolivia to Argentina and then sending it onward through the GASBOL pipeline to Brazil, leveraging existing and planned pipeline infrastructure with small buildouts to connect from Argentina through Uruguay to Brazil, connecting directly from the Corrientes Province through to the state of Rio Grande do Sul again using existing, under construction and planned pipes with some build out necessary, or, conceptually, through a 500-kilometer pipeline that would transverse the Paraguayan Chaco.

Which, if any, of these routes the Vaca Muerta gas will take is still up for debate. Others have designs on LNG exports from Argentina, and all options for monetizing this resource will be examined exhaustively. Whatever destiny this gas has, major capital injections will be needed to get it to its destination. And yet, from a 40,000-foot view of supply and demand economics, it seems Brazil could be a natural fit. Demand there will continue to grow, and supply from Bolivia will continue to decrease. These two factors alone tell a very compelling story that is being picked up on by producers, governments, and investors alike. How the Southern Cone gas market looks in a decade has yet to come into focus, but even the most myopic of observers can begin to see the contours developing. Whether each of these actors can align to move in concert and reshape this essential regional market is still a looming question, and it will take a lot of coordination to achieve the end goal of Argentine gas supplying Brazilian demand. But the game is afoot; now, time will tell who comes out on top.