TECHNOLOGY Argentina's TGN changes to increase supply, ensure delivery

Ricardo Markous
Pablo Pettinaroli
Transportadora de Gas del Norte S.A.
Buenos Aires

Argentine Gas Supply
Regulatory Framework Since 1992 [22383 bytes]

Privatization of Argentina's natural-gas industry in late 1992 has transformed the country's pipeline network.

Transportadora de Gas del Norte S.A. (TGN; Fig. 1 [26999 bytes]) owns and operates gas transportation mostly in the northern areas of the country and has evolved into an efficient and dependable system with plans for domestic and export expansions.

December 1992

In the mix of primary energy in Argentina at yearend 1992, gas held second place, accounting for 38%, behind petroleum liquids, which held 39%. This energy contribution placed the Argentine gas industry among the world's most developed.

The large participation of gas resulted from the 1977 discovery of the Loma La Lata mega-reservoir in Neuquen Province. The discovery prompted construction of two new pipelines which made possible the introduction of gas to the Argentine market.

The industry, however, suffered serious deficiencies. The Argentine energy-supply monopoly had led to an acute lack of capital investments in both upstream and downstream sectors.

Although proved reserves were sufficient at the time, growing demand would gradually render them insufficient. And the new discoveries could not keep pace with demand growth.

The fixed price of gas and the lack of opportunity to commercialize made attracting capital to develop the region unfeasible.

Gas deliverability was limited with no possibility for an end user negotiating commercial alternatives to improving it.

Transportation and distribution were bottlenecks that impeded adequate gas supply to residential users. On the other hand, supply to large industrial users during most of the winter was interrupted to divert supplies to residential heating.

This situation is partly due to the lack of underground storage in Argentina and the great swings in demand. In January 1996, for example, during the Argentine summer, residential consumption was 212 million cu m; during the middle of winter 1996 (July), consumption reached 1,116 million cu m.

System control was precarious. Reports on pipeline operations were manually transmitted over the telephone every 2 hr. Information about daily-demand requirements was scarce. More than 70% of derivation chamber measurements were obtained through days-old charts.

There were no clear rules on management of supply restrictions. Because there was no realtime information about gas use, it was also impossible to gauge the effectiveness of the supply management measures.

In this situation, long-standing energy integration agreements with neighboring countries did not materialize.

Deregulation

The Argentine gas industry operated as a monopoly: Yacimientos Petroliferos Fiscales S.E. (YPF) was the only company that commercialized gas in the country; Gas del Estado S.E., the only company to transport and distribute gas.

The restructuring of the Argentine oil industry began in 1989 with its deregulation and a program to reorganize YPF. It was completed late in 1992 with the privatization of Gas del Estado (Table 1 [11354 bytes]).

The main objectives of the industry's reconfiguration were to encourage long-term investment, to offer better services, and to promote competition.

Industry was divided into production, transportation, and distribution (Fig. 2 [12251 bytes]).

The adopted model allows neither vertical nor horizontal integration of the various links of the gas-industry chain because a company and/or its stockholders can only hold a minority participation in more than one of the gas industry's companies.

In addition, open marketing practices were allowed, the price became subject to free-market forces, and two transportation companies and eight distribution companies were created. These 10 companies were granted as concessions to local and foreign corporate groups for a period of 35 years with an option for 10 additional years through a process of public international bidding (Table 2 [60514 bytes]).

The regulatory framework was based on open access. Therefore any consumer with large-user qualification (i.e., 10,000 cu m/day [cmd] or 3 million cu m/year) may contract, on his own, wellhead gas supply with any producer and/or transportation services directly with any company and/or negotiate distribution fees with a distributor of his choice, or else lay his own distribution line.

Transportation; distribution

Transportation companies own only existing pipelines and retain no monopoly to operate in any geographic region (see accompanying box).

Upon privatization, the total existing transportation capacity was assigned to distribution companies through 10-year contracts with rights to partial reductions of, gradually, up to 60% of the capacity initially assigned.

Transport companies are not obliged to expand their transport capacity. Therefore, expansions are freely negotiated between the parties involved. Since vertical integration is forbidden, transport companies may not buy or sell gas.

Distribution business units were regionally determined considering the results of technical and financial studies. Although distribution companies have a geographic monopoly over the assigned region, large users may freely contract their own supply through the direct purchase of the gas and its transportation or distribution.

Furthermore, distribution units are responsible for delivering uninterrupted supplies to all the small consumers who cannot freely contract their own service, and they are penalized if this requirement is not met. Their income is derived exclusively from distributions services.

There is a price cap on transportation and distribution tariffs (Fig. 3 [11235 bytes]). The new tariff scales were established upon privatization of Gas del Estado. Prices were determined based on the following restrictions:

• Tariffs had to cover all costs and obtain a reasonable income.

• Gas had to be of minimum cost for final users.

• Crossed subsidies were expressly forbidden. Such a subsidy arises when an end user contracts for additional delivery capacity for himself, but the cost of this additional capacity must under current regulations be shared by all end users in a rolled-in tariff calculation methodology.

Tariffs are adjusted every 6 months by the U.S. Producer Price Index (PPI) and every 5 years as determined by efficiency and investment factors.

Finally, given the fact that transportation and distribution companies are regulated, Argentina created the Ente Nacional Regulador del Gas (Enargas) whose objectives are to protect consumers, promote industrial competition, encourage long-term investment, and ensure just and nondiscriminatory tariffs.

Since privatization

Evolution since privatization (table 3 [54212 bytes])

Deregulation of the oil industry produced the necessary incentives for individual players to participate actively in regional development.

Although the Argentine gas market is quite mature (gas use is more than 40% of the energy mix), the new legal framework, the integration of markets, and business opportunities caused large companies to place their sights on Argentina as a logical hub for Mercosur.

Free commercialization of gas, total deregulation of well-side prices as of May 1994, and projected market demand have encouraged private companies to invest in the exploration and exploitation of new reservoirs.

This development allowed production not only to keep pace with growing demand brought about by privatization of Gas del Estado but also to halt the trend of shrinking reserves and make possible new projects because of assurance of supplies.

There are in Argentina at present more than 35 companies that commercialize and/or produce gas.

The results obtained in gas transportation and distribution are no less impressive. As mentioned, before privatization of Gas del Estado, transportation and distribution were supply bottlenecks. The new regulations resolved these problems.

Both, the additional capacities required by distributors to supply the demand of their clients and the options exercised by large users to secure supply on their own terms with transport companies have caused transportation capacity to grow from 65.5 million cmd to 85.7 million cmd, or more than 30% in only 4 years with an associated investment of more than $300 million.

Given that distribution companies are responsible for the supply on their noninterruptable clients, they have made investments of approximately $300 million of their own in the design of better distribution networks to eliminate supply problems that used to be common in winter.

Consequently, public polls indicate that no supply restrictions have occurred in the last 2 years.

Competition; operation

Yet another goal of the new regulatory framework was to increase competition. Enabling large users to negotiate and freely contract their own service has generated the necessary competitiveness in this sector.

It must be noted that approximately 37% of the gas sold to large users is being directly contracted with producers and that 18% of the gas destined to large users is directly contracted with transport companies.

In order to retain their large users, distributing companies have often resorted to lowering their transportation and/or distribution tariffs. They have also contracted larger capacities to be able to ensure minimum supply.

This highly competitive atmosphere attracted a new type of player to the Argentine market: the traders.

The highly seasonal nature of gas consumption and the absence of underground storage facilities brought about new alternatives for gas commercialization to optimize existing capacities.

Some examples are mutual assistance services among transportation and distribution companies, peak sale services among industries and distributors, and capacity resale.

Other important aspects to consider are the operational and administrative improvements.

Current regulations were designed and agreed upon by all industry players and presented to Enargas for approval. These regulations are based on a strict system control by all participants.

Today, for example, more than 85% of all deliveries by transport companies must be telemeasured in real time. Transport companies are also obliged to conduct four daily system checks which they must report to their clients.

Finally, there is also mutual assistance among distribution companies, which allows optimal use of the system. This methodology has expanded the tolerance threshold for imbalances and enabled reprogramming over nominations to make effective cuts, thus offering more system control despite the flexibility granted shippers.

It is also notable that at present there are clear guidelines for assignment of system capacity and, therefore, both assignments and restrictions are conducted according to contractual stipulations between each loader with each distributor.

With such structural changes as clear, indisputable, long-term rules, and freedom of response to offer and demand, old energy integration projects have begun to reappear (Fig. 4 [20450 bytes]).

For example, some of these projects are: the GasAndes pipeline to Santiago, the pipeline in the province of Entre Rios in conjunction with Uruguayan companies, the pipeline to supply the town of Uruguayana in southeastern Brazil and the mirror town of Paso de los Libres in Argentina, and energy integration projects for mining enterprises in northern Chile.

TGN: Achievements, future

Transportadora de Gas del Norte (TGN) has been one of the leading companies in shaping these changes (Table 4 [11353 bytes]).

In the initial stage, between 1993 and 1996, TGN focused its energies on supplying historically unsatisfied demand as well as the growing demand that would result from Argentine transformation.

During that period, TGN increased its transportation capacity from 22.6 million cmd to 32.4 million cmd, or 43%. Investments to expand capacities totaled $187 million.

During 1996, TGN transported 9.126 billion cu m compared to 7.721 billion cu m in 1993. Likewise, supplies of its three peak days in 1996 increased to 31.6 million cmd from 25.1 million cmd in 1993.

In the future, TGN will devote its efforts to supply the growth in internal demand and facilitate, to the extent of its abilities, energy integration projects with neighboring countries.

At TGN the future looks auspicious. To date, the company is committed to provide an additional transportation capacity of 8.9 million cmd more than its present 32.4 million cmd capacity.

Most of the new committed capacity (8 million cmd) is intended to supply Chilean customers. Including this additional volume, TGN has increased by 83% its contracted capacity in only 4 years.

Furthermore, TGN is involved in other integration projects, and the chances for increased domestic demand are also favorable. By 2002, on its tenth anniversary, TGN estimates that it will have more than doubled its initial capacity.

Although transportation companies in Argentina supply different markets, they all compete in supplying the metropolitan area of Buenos Aires.

An important fact is that MetroGas, the largest distributor in Argentina, with more than 6 million customers, is itself a TGN client. At the time of privatization, MetroGas' exclusive supplier was Transportadora de Gas del Sur (TGS).

As a result of competition, TGN increased its client portfolio from 5 to 23, supplying seven of the eight distributors in the country.

Operation; markets

TGN has at present telemetered more than 99% of the gas injections and more than 95% of the deliveries.

Although TGN has adequate information systems, it is simultaneously installing supervisory control and data acquisition (scada), gas supply and balance (GSAB) systems, and a dynamic simulation model. Each of these will compare favorably with those in the best companies in North America and the rest of the world.

Vendors of these advanced tools say this is the first simultaneous implementation of the three technologies anywhere in the world. This poses a new challenge not only to TGN but to the Argentine industry in general.

It is expected that the implementation of this technology will increase system reliability, optimize transportation, and shorten response time to supply orders and authorizations in an ever expanding and increasingly competitive market.

The geographical placement of the TGN system, in central and northern Argentina, and the potential of the gas-producing basins to which it is connected, place the company in an enviable position to do business in neighboring Chile, Bolivia, Paraguay, Brazil, and Uruguay.

As an example, the GasAndes pipeline that is nearing completion will begin to supply gas to central Chile later this year. Two consortia competed intensely and freely for that market. Development of this project has allowed TGN to commit to an 8 million cmd expansion.

Another example of integration and new market development is the pipeline largely funded by the province of Entre Rios in Argentina and the Uruguayan companies UTE/Ancap, and TGN with minority participation, to supply the province and the Uruguayan coast. This project is under way.

The state government of Rio Grande Do Sul has issued an international public invitation for the construction of a thermal station in the town of Uruguayana.

It will be supplied by a gas line of approximately 440 km originating in the town of Aldea Brasilera in the Argentine Province of Entre Rios . It is expected that construction will be completed early in 1999.

Finally, there are several energy supply projects for mining concerns in northern Chile. These are at present fueled by coal-fed thermal units, and the demand is growing by 15% annually.

Several consortia are at present conducting feasibility studies to build a gas line to supply the region's electrical needs or else to build thermal units in northern Argentina from which the electricity can be exported by means of high tension lines.

Privatization and deregulation, and clear, long-term rules to live by may dramatically change the energy map of South America (Fig. 5 [21099 bytes]).

Due to the relative newness of the game plan, its stability is imperative if the favorable investment climate is to continue.

Also, so that integration may take effect, it is necessary that regulations among different countries be compatible and protect consumer rights everywhere, guarantee investors' rights, prohibit the establishment of crossed subsidies, and eliminate import/export barriers.

The Authors