Carlos Solé and Lindsey Swiger, Baker Botts, outline recent LNG regasification infrastructure developments in Latin America, despite challenging economic times.
In February 2016, Cheniere Energy loaded its first cargo from the Sabine Pass LNG terminal in Louisiana, US, onto the 160 000 m3 Asia Vision LNG carrier for delivery to Brazil’s Guanabara Bay LNG terminal. This cargo represented an auspicious beginning for the Latin American LNG trade in 2016, which still remains a relative newcomer to the industry. As shown in Table 1, which highlights key LNG importers in the Americas, Latin American LNG imports steadily increased throughout the 2000’s and, in 2014, the region consumed 22.3 million t of LNG, which accounted for approximately 9% of the total global LNG trade. In 2015, the global demand for LNG increased 2.5% over 2014, and Mexico, Brazil, Argentina, and Chile continued to represent Latin America as active LNG consumers, each within the top 15 LNG importers worldwide.
Most of Latin America’s demand for LNG is driven by the region’s push to gas-fired electricity generation and diversification away from hydroelectric power. Currently, the region produces approximately 640 million m3/d of natural gas (approximately 7% of natural gas production globally) and consumes approximately 700 million m3/d3. Consequently, in 2016, many nations in the region continued their push to develop the corresponding LNG regasification infrastructure that is needed to accommodate their LNG import demands. An expanded LNG regasification infrastructure makes particular sense for Central and South America, where LNG complements the current system of hydroelectric generation, and larger imports of LNG can be arranged relatively quickly on the spot market (albeit, typically at a premium over long-term contracted quantities) in the event of insufficient rainfall.
Rather than undertake large scale, up-front investment in multi-billion dollar onshore LNG regasification facilities, many developers in the region have instead opted for the use of floating storage regasification units (FSRUs). Performing functions similar to traditional onshore regasification facilities at a fraction of the initial investment and lead time, FSRUs are floating vessels that receive LNG from an LNG tanker, process, store, and regasify the natural gas, typically into a pipeline. The FSRU is usually moored in place for a period of time, and can be transported and used in other locations, leaving behind minimal infrastructure.
Currently, several Latin American countries have FSRU terminals. Brazil has three, Argentina has two, and Chile, Colombia and Uruguay are in the process of developing such terminals. It is likely that, going forward, key players in the Latin American regasification sector will continue to rely on the use of FSRU terminals for continued growth and stability.
However, despite the continued development of LNG regasification infrastructure in Latin America, the broader economic trends are foreboding. The drop in international commodity prices, both in the hydrocarbon and mining sectors, have slowed the economics of several nations within the region. The growth rates in these countries have stalled, or, as in the case of Brazil, have done into recession. Furthermore, most currencies have also devalued against the US dollar. These factors are likely to complicate or delay LNG regasification infrastructure.
The remainder of this article surveys the key developments in LNG regasification infrastructure developments in the larger economies of the region in 2016. It also addresses other related notable developments in the energy sectors of these countries and the related impacts of and inter-relationships with the global LNG trade.
The election of Mauricio Macri as the President of Argentina in November 2015 offered promises of transformative change for the country. By April 2016, these promises become reality when the government both settled with longstanding hold-out creditors on previously defaulted Argentine sovereign debt and returned to the international capital markets with a new US$16.5 billion bond issuance. Continuing with this trend of moving beyond the past controversies and policy failures of his predecessor, Argentina and Chile announced cross-border gas sales in May 2016, whereby imported LNG in Chile would be regasified and sold to Argentina using the pipelines that had been used to transport gas from Argentina to Chile in the 2000’s. These sales would supplement Argentina’s import requirements during its winter months and were forecast to be the equivalent of six cargoes of LNG. The impact of these cross-border sales on Argentina’s own LNG import requirements is yet to be determined, but the policy shift is a dramatic contract to the gas supply restrictions that had recently existed between the two countries.
Already, there has been much discussion in 2016 highlighting Brazil’s shrinking economy and its potential effects on the Southern Cone and the rest of Latin America. It is estimated that Brazil’s economy could contrast by up to 7.5% by the end of this year as inflation and unemployment climb to 10%. The impacts of such destabilization are reverberating throughout the region and having profound impacts on the Brazilian energy sector. Specifically, Petrobras, the state-owned integrated energy company of Brazil, announced in February 2016 that it was considering the potential divestitures, which would effectively remove its status as an integrated energy company, appears to be twofold. Firstly, and most immediately, to help the company to raise over US$57 billion to clear accumulated corporate debts. Secondly, to continue the practice of scaling down its investments and assets in non-core segments (as evidenced by the sale of its 49% stake in its gas distribution subsidiary Gaspetro to Japan’s Mitsui in December 2015). Certainly, such a transaction would be a significant restructuring of the country’s internal energy infrastructure. Nonetheless, the severity of the economic crisis in Brazil has already had an impact on its appetite for LNG imports, which has largely been driven by Petrobras to date. In 2015, the company purchased approximately 80 cargoes of LNG, and is forecast to purchase approximately 50 cargoes this year.
In addition to the mutually beneficial, cross-border natural gas sales with Argentina, other aspects of the Chilean LNG sector have continued to experience growth. Chile has been an active participant in the global LNG market, with two existing onshore LNG regasification terminals; Quintero LNG, near the capital city of Santiago, and the GNL Mejillones in the north of Chile, near the country’s industrial mining center. This year, both Quintero LNG and Mejillones LNG are seeking approval to expand regasification capabilities. In addition, other new LNG regasification projects are in development, including the proposed Peno Lirquen LNG terminal, where an FSRU would be moored in Concepcion Bay in south-central Chile.
Looking ahead, as the price of copper recovers globally (speculation puts the average price for copper at as much as US$6330/t after 2018), it is likely that Chilean demand for LNG could also rise. Chile is the largest producer of copper in the world and, as global demand for copper increases (driven largely by Chinese demand), additional LNG will be needed to fuel power plants that provide electricity to Chile’s copper mines.
A newcomer to the discussion of Latin American LNG, Colombia is slated to become the 36th LNG-importing country later this year when it commissions an FSRU-based regasification facility on the Atlantic coast of the country near Cartagena. Höegh LNG will supply the FSRU and Mitsui & Co. has been selected to deliver Colombia’s first LNG cargo to the gas storage complex Sociedad Portuaria El Cayao SA ESP. Colombia, as with other Latin American energy markets, intends to use the LNG imports as a feed-stock for a consortium of gas-fired power generators. However, the expected import demand will be limited to a range of 6-12 cargoes per year.
The dominant theme within Mexico during the past couple of years has been broad-sweeping energy reforms in its oil and gas and electricity sectors. For the LNG sector, one of the main consequences has been the increased focus on cross-border pipeline development to allow for greater natural gas flows from the US. As shown in Figure 1, Mexico’s imports of natural gas from the US have been steadily increasing y/y. In response to increased demand for electricity across Mexico, dozens of new natural gas fired power plants are being constructed across the country. To fuel these new power plants, in 2015, the Comision Federal de Electricidad began the bidding process for nearly US$10 billion in energy infrastructure projects, including eight natural gas pipelines (with a total combined length of over 2385 km) to import additional natural gas from the US. Earlier this year, Oneok Partners, a US midstream group, and Fermaca, a Mexican gas infrastructure company, completed construction on the first phase of a pipeline project linking producing natural gas plays in west Texas, US, to Northern Mexico, with a second phase of the project currently under construction.
There are forecasts that pipeline capacity between the US and Mexico will more than double to approximately 14.7 billion ft3/d by 2019, outpacing current anticipated imports and potentially placing Mexico as Texas’s largest energy trading partner. Ultimately, increased natural gas pipeline imports from the US could render Mexico’s LNG infrastructure obsolete.
During the last few years, the discussion of LNG and Panama centered around the impact that the much anticipated Panama Canal expansion would have on the global LNG trade, as it would allow certain sized LNG tankers to take advantage of Panama’s ‘path between the seas’. In June 2016, the new locks were inaugurated and expectations continue to be that the new waterway will have a significant impact on the global LNG trade. In addition to the Panama Canal expansion, in May 2016, AES Corp. announced that it had broken ground on its integrated LNG import terminal and power plant project in Colon, Panama. During the initial year of service in 2018, the LNG regasification infrastructure will employ an FSRU and, in 2019, an onshore storage tank is expected to become operational. It is expected that this terminal will not only serve the Panamanian market, but that it will emerge as a regional energy hub that can serve the boarder Central American region and the Caribbean.
Uruguay’s LNG import terminal project experienced a difficult 2015. The project’s main sub-contractor, Grupo OAS, entered into bankruptcy as a result of Brazil’s corruption scandal, whilst the Uruguayan government terminated its agreement with the join venture (JV) consortium of Engie and Marubeni for the development of the terminal. Nonetheless, the project appeared to regain its footing in May 2016 with three important developments. Firstly, an agreement was announced with Mitsui O.S.K. Lines Ltd (MOL) for the intention of Uruguay’s state-owned JV of Gas Sayago to conclude a long-term time charter of the FSRU that was already being purpose-built for the project. Secondly, Gas Sayago launched another tender for the completion of the remaining infrastructure required for the project. Thirdly, Uruguay’s President and Argentina’s Energy Minister signed a preliminary agreement through which Argentina would purchase the terminals’ regasified LNG output that exceeds Uruguay’s requirements.
While many economic indicators might forecast rough waters ahead for the LNG industry in Latin America, and it is still unclear to what extent Brazil’s recession will impact the region, the near-term effect has been limited on the development of LNG infrastructure in the hemisphere. Looking ahead to the long-term is more complicated, particularly as global LNG markets will recalibrate to account for North American LNG export facilities coming online. Ultimately, it is likely that Latin America’s appetite and related infrastructure for LNG will continue to grow, albeit at a slower pace than recently enjoyed by the region.
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