SIX LATIN AMERICAN COUNTRIES COULD JOIN IN NEW GAS MARKET

Oct. 21, 1991
Carlos M. Bechelli Destileria Argentina de Petroleo S.A. Buenos Aires Roberto D. Brandt Ecoenergia S.A. Buenos Aires The development of a regional natural gas market in southern Latin America based on a common pipeline network is a clear possibility in the medium term. It is, therefore, important to summarize precisely the present status and outlook for the natural gas industry in Argentina, Brazil, Bolivia, Chile, Uruguay, and Paraguay (Fig. 1).
Carlos M. Bechelli
Destileria Argentina de Petroleo S.A.
Buenos Aires
Roberto D. Brandt
Ecoenergia S.A.
Buenos Aires

The development of a regional natural gas market in southern Latin America based on a common pipeline network is a clear possibility in the medium term.

It is, therefore, important to summarize precisely the present status and outlook for the natural gas industry in Argentina, Brazil, Bolivia, Chile, Uruguay, and Paraguay (Fig. 1).

LATIN AMERICAN GAS

The international gas industry has shown an extremely dynamic evolution during the past 3 decades as a result of energy policies oriented towards supply diversification in general and oil substitution in particular.

Latin America has participated in this trend with the development of natural gas production at a commercial scale in ten countries: Argentina, Bolivia, Brazil, Colombia, Chile, Ecuador, Mexico, Peru, Trinidad and Tobago, and Venezuela. Venezuela, Mexico, and Argentina are by far the largest producers, accounting for more than 76% of the gross volumes produced in the region in 1990, whereas Bolivia is the sole major exporter.

Taking into consideration that Mexico has only marginally exported natural gas to the United States in the past, while Venezuela reinjects important volumes and is relatively far from potentially significant consumption centers, the development of a Latin American regional market appears closely related to the future evolution of supply and demand in the zone of influence of Argentina and Bolivia.

INTERNATIONAL TRADE

The international oil and gas trades differ substantially. In the case of oil, relatively low costs and operational flexibility result in the existence of a world market with "instantaneous exchange" of around 48% of total commercialized production. In the case of natural gas, high transportation/distribution costs and operational rigidity only allow international trade to develop on a regional scale, with "long-term exchange" of 14.9% of total commercialized production (76.6% by pipelines and 23.4% by LNG carriers).

In 1990, 53 of 58 existing export/import operations were directed towards four regional markets: North America (with the United States as major importer), Western Europe, Eastern Europe, and Eastern Asia (with Japan furnishing most of the demand).

The remaining operations involved Bolivia/Argentina, Algeria/Tunisia (gas "in transit" to Italy), Iraq/Kuwait, Sharjah/Dubai, and Sharjah/United Arab Emirates. They represented only 2.8% of international gas trade.

Geographical limitations as a result of freight constraints tend to encourage bilateral agreements and vertical integration between exporters and importers. Therefore, future developments might result in the gradual creation of a fifth regional gas market in southern Latin America, comprising the countries shown in Fig. 1.

SOUTHERN LATIN AMERICA

The following sections describe current natural gas supply and demand in Argentina, Brazil, Bolivia, and Chile. Potential projects in these countries, plus Uruguay and Paraguay, are also covered. From this, the prospects and scope of eventual regional integration with pipeline networks can be put in perspective.

RESERVES

Table 1 gives natural gas reserves in the countries under analysis, as of Dec. 31, 1990. The figures for Chile are as of Dec. 31, 1989. Southern Latin America as a whole only accounts for 0.6% of the world's proved natural reserves, with 67.8% of that concentrated in Argentina. However, Brazil and Bolivia show a greater proportion of probable reserves (close to 50% of proved volumes vs. 20% for Argentina).

Onshore and offshore distribution of proved gas reserves as of Dec. 31, 1990, is shown on Table 2. The sedimentary basins of Argentina, Brazil, Bolivia, and Chile are shown in Figs. 2-5.

Argentina has 20 basins, comprising approximately 1.45 million sq km on land and 400,000 sq km offshore. Only six of these basins are productive at present, and three of them-Neuquina, Noroeste and Austral-have 97.7% of proved gas reserves.

The volumes for the Neuquina basin have recently been revised downwards, but still account for 55.6% of the national total. For this reason, the Noroeste and Austral offshore basins appear as the more promising exploratory areas for the near future.

Brazil has 29 basins (Fig. 3), comprising approximately 3.79 million sq km, mostly on land. Of this, 1.1 million sq km are in the Parana basin. Offshore has 1.36 million sq km.

Only 12 of the basins are productive at present. Five of them, Tucano, Reconcavo, Sergipe/Alagoas, Campos, and Santos, are contributing more than 80% of the gas produced.

The exploratory areas onshore that appear most promising are the Parana and Amazonian regions. However, distances from these regions to the main consumption centers create uncertainty with regard to the commercial use of any reserves developed. Offshore, the Campos and Santos basins (next to the states of Rio de Janeiro, Sao Paulo, Parana, and Santa Catarina) are the most promising.

Land locked Bolivia is divided into five "geographical provinces," according to YPFB terminology (Fig. 4). Only two of these basins, Subandina and Chaquena, are productive at present. They are relatively close to the boundaries of Argentina and Paraguay.

Future prospects appear closely related to the evolution of these areas, for which reason government officials express certain concerns about their expected decline. New exploratory initiatives have been launched.

Chile has 20 basins, of which only Magallanes, near the tip of South America in the Tierra del Fuego area, is productive at present (Fig. 5). It includes land and offshore areas.

Even though some risk contracts in the north of the country have resulted in noncommercial gas discoveries, especially in the Salar de Atacama on land and the Valdivia basin offshore, exploratory prospects will greatly depend on the future evolution of the Magallanes basin.

Present expectations point toward the additional incorporation of natural gas reserves in the short and medium terms, combined with a gradual decline of production (linked to the oil extraction plans), although available volumes would still be sufficient to cover local demand.

PRODUCTION

Table 3 shows gross natural gas production and reserves-to-production ratios (R/P) in the countries under analysis during 1990. It is worth mentioning that southern Latin America as a whole only accounts for 1.5% of world production, with Argentina having 59.4% of the region's total.

The reserves to production ratio is 25.8 years for southern Latin America, with a maximum of 33.2 for Bolivia and a minimum of 21.7 for Chile. This "horizon" is relatively low in comparison with the R/P ratio of the world of 57.6 years and for total Latin America of 66.9 years.

Onshore and offshore production of gas is shown in Table 4.

As shown, 12.2% of the gas was produced offshore in 1990 in southern Latin America. However, largely due to production in the Campos basin, some 63.8% came from offshore Brazil. It is worth noting that the world's natural gas offshore production amounted to 361.5 billion cu m in 1990, representing 14.4% and 17.5% of gross and commercial totals, respectively.

The degree of state or private involvement in natural gas production varies for the different countries under analysis. In Argentina, the national oil company, YPF, contributed 80% of gross production in 1990, although private participation is rising steadily due to privatization of both central and secondary productive areas. In Brazil, state-owned Petrobras acts as sole producer.

Yacimientos Petroliferos Fiscales Bolivianos (YPFB), the national oil company of Bolivia, produced 65% of total volumes in 1990, the rest being produced by four private contractors. Finally, the state-owned Empresa Nacional del Petroleo (ENAP) accounts for 100% of gas production in Chile. Table 5 gives a simplified balance of alternative uses and dispositions of gross gas production in southern Latin America during 1990.

Commercialized volumes represent 62.5% of gross production, with a maximum of 77.1% for Argentina and a minimum of 26.4% for Chile. This compares to a world average of 82.1%. Reinjection is particularly important in Chile and Bolivia with 49.5% and 35.2% of gross production, respectively, going for that purpose.

Flaring is high in Brazil (19.0%) and Argentina (11.5%) in comparison with international levels.

TRANSPORTATION

Argentina has the most developed pipeline system in southern Latin America (Fig. 6). As of the first of this year, the system totaled almost 13,000 km of trunklines (with a maximum diameter of 36 in.) and a transmission capacity of 70 million cu m/day.

Medium-term projects oriented towards national supply include the expansion of the Centro-Oeste and Neuba 11 pipelines with origins in the Neuquina basin, as well as the eventual construction of a new pipeline starting from the Noroeste productive areas as shown on the map. In the long-term, supplementary transportation capacity from the Austral basin (especially from the offshore areas) will be required.

The Brazilian system is based on offshore gas and covers only part of the country's northeastern and southeastern states near the Atlantic coast. The network totals slightly over 2,500 km of trunklines (with a maximum diameter of 22 in.) and a transmission capacity of some 8 million cu m/day.

Three projects from the Amazonas/Solimoes basins are also being considered. The destinations would be Manaus, Porto Velho, and Sao Paulo. However, the latter is subject to economic feasibility in light of the "long" distances involved.

The Bolivian network is basically export oriented (Fig. 7) with a transmission capacity of slightly under 13 million cu m/d, of which almost 50% is committed to the international contracts with Argentina. The nominal capacity of the pipeline to Argentina is 11 million cu m/day, although only 6.1 million cu m/day are transported. The remaining 2 million cu m/day of capacity is dedicated to local networks. Future projects for its domestic supply are of minor importance.

The Chilean system covers a short distance in the provinces of Magallanes and Tierra del Fuego. It has a transmission capacity of 6 million cu m/day on the trunkline to Cabo Negro (at present over-dimensioned with regard to local needs).

Although there is a rather significant potential demand in the center-south zone of the country, projects to supply Santiago and other major cities from the Magallanes basin have been dropped for economic reasons.

The degree of state or private involvement in the gas transportation business varies for the different countries considered.

In Argentina, the national utility Gas del Estado controls the trunkline and distribution network almost completely, but an extensive regulatory reform and privatization process is under way.

In Brazil, the national oil company, Petrobras, holds the monopoly on gas transportation and shares the distribution system with several state utilities (the most important of which belong to Rio de Janeiro, Sao Paulo, Ceara, Pernambuco, Alagoas, Bahia, and Minas Gerais). The present system, established by the Constitution of 1988, is under discussion, and probably will be modified in 1993.

In Bolivia, the national oil company, YPFB, controls the gas transportation and distribution systems.

Chile combines the operation of the trunklines by the state-owned ENAP with private intervention at the distribution level.

CONSUMPTION

Table 6 shows volumes of gas available for consumption during 1990. This is "apparent consumption" or "volumes available for sales" without consideration of consumption by oil or gas companies or stock differences between the beginning and end of the year. Argentina is the major consumer, taking 82.3% of the region's production.

Additionally, Table 7 presents the distribution of internal sales by type of user, which once again reveals the greater "maturity" of the Argentinian system. There, gas contributes to about 40% of primary energy consumption.

In the case of Chile, it is noteworthy that consumption of gas as a petrochemical feedstock at the 750,000 metric ton/year Cape Horn methanol plant at Cabo Negro 15 miles north of Punta Arenas on the Straits of Magallanes largely exceeds fuel utilization, which is dominant in the remaining countries.

REGIONAL INTEGRATION

There are a number of possibilities that could develop to make southern Latin America into the world's fifth regional gas market in the medium term. Here is a review of the situation as of August 1991.

EXISTING CONTRACT

The only existing natural gas export/import operation in southern Latin America takes place between Argentina and Bolivia. It began in 1972, and involves two separate contracts totaling 6.1 million cu m/day, or some 2.2 billion cu m/year. In 1990, this volume represented slightly over 0.7% of the worldwide international gas trade and resulted in an overall exchange of (U.S.) $223.7 million.

The price of natural gas in force by the third quarter of 1991 is $2.38/million BTU, a relatively high value in comparison with similar operations. The adjustment formula follows the evolution of fuel oil prices in New York, Rotterdam, and Italy with a quarterly lag.

These contracts expire on Apr. 30, 1992, for which reason both governments are negotiating for eventual renewal. The negotiation is extremely complex because at present Argentina could easily attain natural gas self-sufficiency, which was not possible in 1968 when the first agreement was signed. But Bolivia continues to depend very heavily on this operation, which represents more than 40% of its total exports.

However, if the contracts were to be extended, conditions would certainly change, both in volume (which could eventually be reduced) and in prices (which should tend to be aligned with the internal value of natural gas in the future deregulated Argentine market).

Additionally, government officials are considering the possible creation of a binational trading company, made up of public and private companies of Argentina and Bolivia, which would commercialize Bolivian gas internationally.

POTENTIAL PROJECTS

The most important initiatives relative to international gas trade in southern Latin America concern eventual pipelines between neighboring countries.

Several LNG projects have been proposed during the past 2 decades. They include exports from Argentina or Chile to overseas' markets, or imports to Brazil from Algeria. They were later dropped because of constraints on reserves' availability or economic competitiveness.

At present, Bolivia and Argentina appear as potential exporters in the region while Brazil, Chile, Uruguay, and Paraguay might become importers.

BOLIVIA/BRAZIL

Negotiations between Bolivia and Brazil concerning exports/imports of natural gas have been going on for almost 20 years, with substantial changes. Initially, Sao Paulo was considered as the market. In 1974, the pipeline was expected to have a capacity of 6.8 million cu m/day, whereas in 1978 the volume was defined at 11.3 million cu m/day.

At present, the initiative contained within a "cooperation package" signed by Presidents Paz Estenssoro and Sarney comprises a 580 km long pipeline from Santa Cruz de la Sierra to Puerto Suarez and Corumba on the Bolivian/Brazilian border with a transmission capacity of 6.5 million cu m/day (Fig. 6).

Exports under the package are to be 3 million cu m/day. The difference between capacity and export comes from the volumes to be consumed by a new power generating plant at Puerto Suarez.

The cooperation package includes the construction of a 500 mw thermal power plant in Puerto Suarez and export of its energy production to Brazil. It also includes two petrochemical plants. But all this appears rather uncertain due to financial constraints on Bolivia.

The pipeline has an estimated cost of $350 million while the "cooperation package" totals $2 billion. This financing seems highly uncertain, given that Eximbank and the World Bank have apparently dropped their support after an initial tender for the project design had been launched.

Consequently, the original idea of linking Santa Cruz de la Sierra with Sao Paulo appears far from implementation.

BOLIVIA/CHILE

Considerations have been given to exporting natural gas from Bolivia's San Antonio field to northern Chile, but no formal negotiations have taken place.

ARGENTINA/BRAZIL

Negotiations between Argentina and Brazil concerning exports/imports of natural gas started more than 10 years ago, shortly after the discovery of the "giant" Loma La Lata field in the Neuquina basin in 1977-78. Talks have been interrupted and resumed several times.

Originally, the project was conceived as a 10 million cu m/day, 30 to 32-in. diameter pipeline to Sao Paulo. After 1982, the possibility of using gas from the Noroeste basin was considered.

Around 1986, a smaller pipeline of 2 million cu m/day with a diameter of 12-16 in. was proposed, with final destination being Porto Alegre, Brazil. In 1991, Presidents Menem and Collor de Melo relaunched the idea of an operation involving Sao Paulo.

Potential demand in southern Brazil certainly exists. It amounts to some 6 million cu m/day in Rio Grande do Sul, Santa Catarina, and Parana, and at least 20 million cu m/day in Sao Paulo for the year 2000. The main obstacles are the long-term availability of sufficient reserves in Argentina, pricing conditions, and institutional constraints related to the future role of Petrobras and the state gas companies (especially Comgas, of Sao Paulo) in Brazil.

ARGENTINA/CHILE

Conversations on gas exports between Argentina and Chile have also been carried on for almost 2 decades with several interruptions and resumptions. Volumes discussed have varied from 1 million to 5 million cu m/day.

According to estimates from the Chilean Comision Nacional de Energia (CNE), Chile's center-south zone from Santiago to Concepcion has a potential gas demand of 1.5 million cu m/day at present, with projections of 2.5 million and 3.4 million cu m/day for the years 2000 and 2010, respectively.

The Argentinian/Chilean discussions have included three main alternatives:

  1. Gas exports from Argentina's Neuquina basin to Santiago, Chile, crossing the Andes in the Argentine provinces of Mendoza (Paso Maipo) or Neuquen (Pino Hachado, Pehuenche, etc.):

  2. The so-called "North-Pacific pipeline," from the Noreste basin in Argentina to the Tocopilla mining region in Chile.

  3. An eventual "swap" of Chilean natural gas from the Magallanes basin (in the extreme south of both countries) for Argentine gas from the Neuquina basin (in the center) or the Noroeste areas (in the north).

The first alternative is by far the most developed, and there is a predefinition on behalf of both governments by which the project should be preferably carried out by the private sector.

In September 1990, a binational technical qualification tender was launched, but the process was interrupted a few months later. In May 1991, the Foreign Affairs Ministries of both countries established general patterns for the regulatory framework of the future operation, the most important of which refers to a maximum volume of 5 million cu m/day, an operating philosophy based on "common carrier" principles and taxation rules.

ARGENTINA/URUGUAY

Official negotiations between Argentina and Uruguay started 10 years ago and have shown little progress.

Uruguayan demand was initially estimated at 1 million cu m/day, but was later revised to approximately 500,000 cu m/day.

ARGENTINA/PARAGUAY

Preliminary ideas regarding natural gas exports from the Noroeste basin to Asuncion in Paraguay have been considered, but no formal negotiations have taken place. Exploratory conversations were based on volumes ranging from 500,000 to 1 millon cu m/day, and generally linked the project to the construction of a pipeline between Argentina and Brazil.

OUTLOOK

Based on this analysis of the current situation, the development of a regional market appears as a clear possibility for the medium-term. This is true even if both production and consumption levels of southern Latin America as a whole are scarcely significant in terms of an international comparison.

Natural gas energy in southern Latin America could play as important a socioeconomic role for the region as coal and steel did during the early days of the European Economic Community.

However, future export/import operations should be adequately dimensioned in order to avoid endangering national supply in a region with a reserves/production ratio of 25.8 years, and taking into consideration the inexistence of "spot markets" in international gas trade.

In the short and medium terms, the outcome of the gas contract negotiations between Bolivia and Argentina and the possible start of imports by Chile will determine to what extent southern Latin America might in fact become the fifth regional market in the international gas trade.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.