Etienne H. DeffargesBooz Allen & Hamilton San Francisco
Luiz T. A. MaurerBooz Allen & Hamilton Sao Paulo
A recent combination in South America of economic and geopolitical factors is prompting development of a new integrated gas-pipeline network in the continent's Southern Cone.
The crucial factors include privatization, regional integration, economic growth, and environmental concerns.
The area, Latin America's largest regional entity, includes Brazil (population 150 million and a 1990 GNP of about $375 billion, 9th largest in the world), Argentina (population 32 million and the third largest Latin American economy after Brazil and Mexico), Bolivia, Chile, Paraguay, and Uruguay.
Argentina, Brazil, Paraguay, and Uruguay are members of the MercoSur economic bloc whose objective is to develop free trade in the re,-ion.
There are very few integrated pipeline networks in the world. Besides the giant North American system, with hundreds of producers and pipelines, there is only one other large integrated network. It connects continental European countries to their outside suppliers such as Norway, the C.I.S., and Algeria.
The emergence of a new pipeline system is therefore important for the natural-gas industry worldwide and even more so if it occurs in a region now growing rapidly after a decade of economic difficulties.
CONSUMPTION TRENDS
Today, natural-gas consumption patterns among Southern Cone countries vary significantly.
Argentina, which relies on natural gas for 40% of its domestic primary energy demand, represents more than 80% of the gas consumption in the region. In Brazil, on the other hand, natural gas accounts for only 4% of primary energy consumption or 11% of gas consumption in the Southern Cone (Fig. 1).
Recent discoveries of natural gas, however, along with environmental concerns (diesel fumes caused by buses and trucks in Sao Paulo, for example) have led Brazil to consider a very large increase in natural-gas consumption over the next few years.
Brazilian government officials have set an official goal of a 10% share of total primary energy demand for gas by the year 2000. Meeting this goal will entail a significant effort to increase both domestic production and imports, those coming from Bolivia and Argentina, leading to a new integration of energy networks in the region.
This goal will open a wide range of possibilities to gas producers, pipeline suppliers, equipment vendors, and gas users in general. For this to happen, several changes in the Brazilian institutional and regulatory frameworks will have to occur.
At about 650 MMcfd or 112,000 bbl of oil equivalent per day (BOE/d), gas production in Brazil is modest, principally relative to the country's oil demand (1.2 million BOE/d) and domestic production (650,000 b/d).
Today, 47% of Brazil's gas production is sold domestically, with 20% reinjected in production wells, 15% used internally by energy companies, 5% liquefied, and 13% flared. There are no imports of natural gas, domestic consumption being met exclusively by national oil company Petrobras.
Distribution is handled by a few regional state-owned local distribution companies (LDCs) such as Comgas in the state of Sao Paulo.
The main users of natural gas include industrials (heat)-64%; industrials (iron reduction)-5%; fertilizers-16%; other feedstocks-7%; and residential-8%.
Today, natural gas is not used for electric-power generation at all, and transportation applications (CNG) are only beginning with the first CNG service stations being established in Rio de Janeiro and Sao Paulo.
GAS' MODEST SHAPE
Historically, Brazil has been a very large oil importer. As part of its imports substitution policy, the country first focused its internal energy efforts on domestic production.
In this area, Petrobras has achieved remarkable technical success in deepwater offshore exploration. The company operates more offshore platforms than any oil company in the world and holds several exploration and production water depth records.
For example, production in the giant Marlim oil field in the Campos basin takes place in 2,000-2,200 ft of water. And successful exploration wells have been drilled below 5,000 ft of water in the Abacora field.
This technical expertise has allowed Petrobras to reach oil-production levels of up to 700,000 b/d. One of the company's key objectives is to reach 1 million b/d of production before the year 2,000.
Similarly, Brazil has also attempted to reduce its reliance on foreign oil through hydroelectricity, an abundant resource in the country. Several important hydro projects were built in the 1970s and 1980s, including Itaipu, the largest hydroelectric complex in the world with 12,600 mw of installed capacity.
Subsidized electric energy rates were also established. Consequently, the share of hydroelectricity in the country's energy matrix is now more than 20% (compared with, for example, less than 2% in the U.S. and Europe).
Besides oil production and hydroelectricity, another important domestic import substitution project is the gasohol program, which involves the manufacturing of ethanol from sugar cane, a very expensive (and subsidized) process.
At the peak of the program, almost 50% of new automobiles produced in Brazil were gasohol powered. This led to an impressive reduction in pollution levels in large cities, but the cost of the program has become too burdensome.
All these expensive domestic programs did not leave much room for natural gas; powerful, state-owned monopolies such as Electrobras and Petrobras have shifted the energy balance towards electricity and oil, away from natural gas.
Brazil's gas reserves, estimated today at about 4.3 tcf, are very modest compared to Argentina's (20.4 tcf) and roughly of the same size as gas reserves in Bolivia, a much smaller country.
And about 00% of these reserves are associated gas discovered during oil exploration and, therefore, are located offshore, which makes their exploration more costly. Furthermore, the most recently discovered large gas field, Jurua, is in the Amazon region and thus extremely distant from any large consumer center.
DEMAND TO INCREASE
The situation is about to change.
The country's strategy of increasing domestic oil production and building additional hydro projects, both highly capital intensive, has been seriously jeopardized by the lack of available funds and high costs of capital.
Given that low electricity prices are insufficient incentive for the building of new power plants, many in government and economic circles envision an imminent energy crisis.
In it, several hydro projects currently under way would be interrupted by lack of funds, and Electrobras could become unable to meet electricity demand.
Natural gas is a possible solution to Brazil's energy woes.
In a scenario in which gas consumption would account for 10% of primary energy demand, natural gas would be used significantly in new electric power projects. This is a much more economical resolution to a potential electricity shortage.
Whereas recent international contracts signed by Mitsui and ABB indicate that 300 mw of combined cycle gas-turbine capacity can be installed for about $50 million (U.S.), an additional investment in Brazil of $1.2 billion will be required to finish the 1,200-mw Angra II nuclear plant and $1 billion to complete the 217-mw Samuel hydro power plant.
To meet the expected additional natural gas demand, Petrobras is planning to increase production to about 2 bcfd by the year 2001 and to reduce flaring to less than 5% of production to meet at least 1.2 bcfd of domestic demand.
In addition, imports are expected to meet the remainder of the projected increases in gas demand, estimated to reach about 2 bcfd by the year 2000.
These projections represent large increases in demand relative to today's levels, but even at 10% of total energy demand met by gas, Brazil will still be much below the penetration level achieved by natural gas in many other countries-foremost among which is its neighbor Argentina, where natural gas reaches 40%.
Further increases in gas demand can thus be expected at the beginning of the next century as well.
Brazil's most industrialized states (Fig. 2) are strongly lobbying the federal government for increased access to natural gas, either imported or produced domestically. Several states have already established their own LDCs, expecting gas supplies to be available soon.
Leading these efforts is the state of Sao Paulo, which has more than 33 million people and represents half of Brazil's GNP. In Sao Paulo, gas can be used in power generation, industrial, transportation, and residential applications, and it contributes both to helping the state avoid potential energy shortages and to improving its environment.
IMPORTS NECESSARY
To meet projected demand increases, Brazil will have to import gas from Bolivia and Argentina.
As discussed previously, if the 10% participation target for natural gas is to be achieved, Brazil will have to import from Bolivia and Argentina about 800 MMcfd by the year 2000.
The transportation infrastructure has vet to be built, however. In the short term, several possibilities are being studied (Table 1). The most likely today appears to be the construction of a pipeline connecting Santa Cruz de La Sierra, in Bolivia, to the state of Sao Paulo (Fig. 3).
This pipeline system would cost $1.8 billion and could be expanded to supply natural gas to the states of Minas Gerais Rio de Janeiro, and Espirito Santo, and even to the southernmost states of the country. This entire region encompasses 80% of Brazil's total economic activity.
Subsequently, Argentinean gas could also be exported into the Brazilian market through two different routes:
- The first route would export Argentinean gas, produced in the northern provinces, to Bolivia and then to Sao Paulo, taking advantage of the existing transportation infrastructure in Argentina and Bolivia.
- The second one would require building an additional pipeline connecting the Argentinean provinces of Missiones and Corrientes to the Brazilian state of Rio Grande do Sul, which may be subsequently connected to Brazil's other southern states.
In addition, a third pipeline project could connect Bolivia to Brazil through Paraguay. That project's completion, however, seems improbable.
Regardless of the alternatives chosen, energy integration in the region will dearly become substantial, mostly between Brazil, Argentina, and Bolivia.
Bolivia might become a gas-distribution center in South America, transporting or swapping gas from Argentina's northern provinces and routing it to Brazil. Bolivia would thus become a sort of hub for an emerging Southern Cone pipeline grid.
Other natural-gas trade opportunities certainly exist, even though not discussed here. The Argentina-Chile Andean connection is certainly the most important one as a way to supply gas to Santiago de Chile and alleviate its air pollution.
Also possible is the connection of Argentina to Uruguay, a country which lacks natural gas, having access only to an expensive naphtha gas manufactured locally.
OTHER FORCES
Undoubtedly, the major driving force for the creation of a Southern Cone grid is pressure from Brazil's industrial, power generation, transportation, and residential markets. Other forces are also at play, however.
First, there is the Bolivian economy. The Bolivian natural-gas export contract to Argentina, signed 10 years ago, has recently expired.
Agreement has been reached to continue exports at current levels until December 1993 but at $1/Mcf, compared with $2.30/Mcf in the old contract. After December 1993, Bolivia will have to export gas to Argentina with no guarantee of volume or prices.
There are concerns that Bolivian hard-currency earnings from exports to Argentina could fall much below their current levels, damaging the country's revenues which depend greatly on oil and gas rents.
The state of Sao Paulo alone represents a short-term potential for Bolivian gas of 280 MMcfd.
Medium-term opportunities in Brazil represent twice as much, up to about 800 MMcfd, if gas penetration meets long-term expectations. This represents the most important commercial opportunity for Bolivia in this decade and as such is receiving priority treatment from Bolivian government officials and international financial institutions helping this country.
Secondly, there is Argentina and the current deregulation and privatization of its natural-gas industry. The Argentinean natural-gas industry is currently undergoing historic change.
In the midst of a large scale privatization effort by the Argentinean government, the gas industry - foremost state-owned Gas del Estado - is being split into production, transmission, and distribution components.
Natural-gas production activities have already been fully deregulated.
Following the initial round of concession sales through the Houston Pan, many oil and gas companies, both local and foreign, have participated in the deregulation effort and now own many of Argentina's gas-producing fields.
Currently, however, the government-controlled YPF oil and gas company still owns much of Argentina's present gas production including the largest Argentinean gas field, Loma de la Lata. The present plan is for gas-production privatization efforts to continue. The potential for new gas discoveries is great, with much interest in the southern Tierra del Fuego area and the central areas of Neuquen and Mendoza.
Several local independents (for example, Astra, Perez Campanc, Plus Petrol, and Tecpetrol) and international oil and gas majors (for example, Deminex, Repsol, and Total C.F.P.) have participated in the concession bidding process.
The gas-transmission component is now also being privatized, along with the gas-distribution activities of Gas del Estado. That company's pipeline infrastructure is extensive, covering the entire length of Argentina and consisting of two North-South and three East-West pipelines converging to Buenos Aires (Fig. 4).
Although capacity in the northern pipeline (Campo Duran-Buenos Aires) is considered adequate for current demand, capacity is constrained during peak winter months. Much of the current capacity, is filled by gas imported from Bolivia. Additional compression capacity along the pipeline could increase capacity.
Newly privatized transmission companies will operate under an open access, transportation-only tariff environment with no allowances for pipeline companies to buy and sell gas. Large consumers (industrial, power generators, or LDC'S) will negotiate purchasing contracts directly with producers, with gas brokers also allowed in the market.
Both transmission and distribution companies will be regulated by a newly created regulatory body, the Ente regulator.
The gas-distribution industry is at the same stage of deregulation as the transmission side of the business.
Distribution may well be split into eight operating companies. For the most part, the split will occur regionally, centered on major gas-user areas.
The level of interest in gas transmission and distribution privatization is very high. Along with many local companies, quite a few international energy companies appear to be participating in the bidding process.
These changes in the Argentinean industry can also have several important spill-over effects, among them the following:
- Attract more private capital into the sector, both to increase oil and gas production and build additional pipeline capacity in Argentina.
- Increase natural-gas availability in Argentina's domestic markets, thus making Bolivian gas less necessary for Argentina, generating in the region an excess of Bolivian gas supply which could be exported to Brazil.
- Allow private oil producers in Argentina to export to other countries, including Brazil, thus establishing a gas-to-gas competition situation in the region and forcing gas producers to sell at lower prices favoring gas penetration in Brazil.
- This gas-to-gas competition could be reinforced by the recent invitation by the Argentinean government for Petrobras (Braspetro) to produce gas in the northern provinces for future sales to Brazil using the Bolivian pipelines good market move to force the transportation system to be treated as a common carrier, thus allowing additional Argentinean gas to be exported to Brazil through the Bolivian pipeline.
Finally, the establishment of Mercosur, a general trade agreement (centered on Brazil and Argentina) for Southern Cone countries to take advantage of their mutual competitive advantages, should foster further integration of industries and markets.
The Mercosur agreements have replaced a long tradition in Brazil and Argentina of focusing on economic self-sufficiency, instead encouraging these countries to work as an economic bloc. Obviously, natural gas is an important element of integration and is now the number one priority in the energy agenda of both governments.
Prospects for growth in natural gas production and consumption in the region are therefore very bright. Integration of the natural gas networks of Argentina, Bolivia, and Brazil, later extended to Chile and Uruguay, should allow all these countries to benefit from their individual comparative economic advantages, creating regional wealth.
Argentina, where the current high share of natural gas-penetration indicates that only relatively modest increases in domestic gas demand (power generation, new connection for residential users close to existing pipelines) are likely, will become a much larger gas exporter, first to Brazil, then to Chile and Uruguay.
Bolivia will continue to export its gas production, mostly to Brazil. An entire new network of pipelines crisscrossing these countries will be built within the next 10 years (Fig. 5). Brazil will join the increasing number of countries relying on natural gas for economic growth.
One can imagine, if beyond the year 2000 natural gas' share in Brazil's energy demand grows to European levels (18%) or even U.S. levels (26%), the tremendous new opportunities which will appear for all businesses participating in the natural-gas industry.
ACKNOWLEDGMENT
The authors wish to express appreciation to the following for general assistance in compiling data for this article: Instituto Maua & Associaco Comercial do Rio de Janeiro, Gas Natural Energia do Rio de Janeiro; Poulallion, Paulu Brasil Energia; Conselho Estadual de Energia 1986 do Estado de Sao Paulo; and Adriano Rodrigues and Danilo Dias, Programa de Planejamento Energetico, Universidade Federal do Rio de Janeiro.
Copyright 1993 Oil & Gas Journal. All Rights Reserved.
