Argentina eyes liquid market for its shale gas [NGW Magazine]
The arrival of Exmar’s Tango floating LNG (FLNG) vessel in the port of Bahia Blanca on February 4 symbolised the shift under way in Argentina’s gas market. It is a switch that has regional consequences too, with the impact already being felt in neighbouring countries such as Bolivia and Chile.
For years Argentina has been buying LNG from the global market to supplement domestic gas production and piped supplies from Bolivia to meet demand. The country consumes around 140mn m³/day (51bn m³/yr), which dips to 115mn m³/day in the summer and peaks at 150-180mn m³/day in winter.
But the ramp up in gas output from the Vaca Muerta shale play in the Neuquen Basin has moved the needle in terms of market dynamics.
Argentina’s gas output expanded by 7.9% to 135mn m³/d in February, led by a 169% surge in shale gas to 31mn m³/day according to the energy ministry.
With shale output expanding fast, the ministry has forecast that gas production could double by 2023. Output at that scale would create space for LNG exports of as much as 80mn m³/day by 2023, which would require significantly more send-out capacity than the Tango FLNG unit has. It can store around 16,000 m³ and vaporise 500,000 mt/yr.
The vessel is due to start exporting in the second half of 2019, with Exmar saying it anticipates shipping up to eight cargoes/year, with capacity contracted by state-run oil company YPF for a 10-year period.
State-owned oil company YPF however recognises that much bigger export capacity is necessary to keep pace with the rapid ramp up in the country’s shale patch. Speaking at an industry event in Buenos Aires in April, the company’s CEO, Daniel Gonzalez, said it would only be possible to harness the full gas potential of the Vaca Muerta by building an onshore liquefaction plant.
The aim is one capable of liquefying 80mn m³/d of gas for export by 2023. This would be gradually increased to 120mn m³/d by 2025, with even greater exports anticipated by 2030 when domestic gas production is estimated to be as high as 400mn m³/d.
By that stage, Argentina would be a significant player in global LNG trade, competing with other exporters such as Qatar and Australia.
But this poses a major challenge for the government, although it backs the plan. A final decision is unlikely before the presidential election in October.
The poor state of the economy – inflation has been running at up to 55% with the local benchmark interest rate beyond 60% – has added an extra layer of risk to the scheme for potential investors.
Private companies are likely to be invited to build the terminal under a 25-year licence. But if the economic risks are deemed too great for private operators to stomach, the government has indicated it would call a tender and proceed with the project as a public-private partnership.
The project is estimated to cost over $10bn and will comprise a liquefaction plant and pipeline to bring in gas from the Vaca Muerta. The shale play lies due west of Bahia Blanca, which is the likely location of the new facility given existing infrastructure and the gas-intensive industries in and around the port.
Without a liquefaction terminal, there will be insufficient local demand to absorb the new supply coming to market. This situation has been exacerbated by the financial crisis in the country, with people consuming less gas to save money. Last year, some gas wells cut output by 30%-40% on some days, confirming Gonzalez’s view that only an export terminal can expedite the full-scale development of the Vaca Muerta. “You need to be able to sell the gas all year round,” he said. “The only way to do that is with LNG exports.”
This view is shared by Mauro Chavez, principal analyst for Latin America Gas & LNG, at Wood Mackenzie, who said: “There is a lack of domestic demand and even regional demand in countries such as Brazil, Chile and Uruguay is limited in terms of the Vaca Muerta's potential.”
He told NGW that a decision to proceed with the LNG export terminal was “imminent according to our analysis.”
The economic uncertainty and impending presidential election should not deter private investment in a liquefaction plant, according to Jimena Blanco, research director and Head of Americas at Verisk Maplecroft, a consultancy.
She noted that Omar Gutierrez had been re-elected as the governor of Neuquen Province and that he was supportive of the project. Though Bahia Blanca is in Bueno Aires province, she said Neuquen’s lobbying power at the federal level had expanded considerably given its importance to economic growth as the home of the Vaca Muerta. This could prove crucial in driving support for the LNG plant.
“Seven years ago when we first started talking about Vaca Muerta it wasn’t generating income for the province,” Blanco told NGW. “Now the income from the Vaca Muerta represents about 30% of Neuquen’s operating budget, which is twice as much as it receives from the government in federal transfers. In terms of the lobbying power of the province, for an investor knowing that they have a pro-hydrocarbons governor in place for the next four years reduces the risk of the volatility at the national level.”
Argentina’s fiscal fragility has led some to suggest that exporting gas through Chile would be a more sensible option, however. Exports to Chile have already restarted and there are also plans to resume supplies to Brazil.
The Chile option is interesting and could offer Buenos Aires a quicker route to market than building its own infrastructure. Chile has two onshore regasification terminals of which one, in Quintero, north of the capital Santiago, could be converted into a liquefaction plant.
This could be a strong plan to put before investors, given the existence of pipeline and export infrastructure and that investments in Chile are safer than in Argentina.
Plants in both countries would be best, with LNG out of Chile heading for Asia and out of Argentina for Europe. But the fiscal and political complexities look likely to scupper the Chilean option, according to Verisk Maplecroft’s Blanco.
“Issues about taxation of the gas would have to be resolved,” she said. “Do you tax the gas crossing from Argentina to Chile or from the actual shipment at the liquefaction plant? And how do you distribute that taxation between the two countries?”
If looked at in a political vacuum, building a liquefaction plant in Chile to process Argentine gas would make business sense but “I think there are a lot of political factors that make that plan a lot more complex than Bahia Blanca,” she added.
Meanwhile, Bolivia, aware that its market share in Argentina is under threat, has proposed a plan that would see it continue to pipe gas to its neighbour that could then be converted into LNG and exported. This is attractive to landlocked Bolivia and would ensure feedstock for Argentine LNG export facilities even if there was a dip in output from the Vaca Muerta caused by regulatory or policy changes.
State-run Argentine company Enarsa successfully renegotiated its long-term gas contract with Bolivia in February, with deliveries cut to 11mn m³/day in the summer and 16-18mn m³/d in winter, tracking seasonal demand.
Signs of slippage were apparent last year when the energy ministry said Argentina imported an average of 16.9mn m³/d from Bolivia, compared with the contractual average of 20mn m³/d until 2026.
Some officials in Argentina have suggested the country will not need any Bolivian gas at all by the end of 2020. Comments such as these have caused concern in La Paz, with Bolivia’s president Evo Morales rushing to Buenos Aires in April to meet his counterpart Mauricio Macri for talks.
After the meeting Morales said they had agreed that Bolivia would join in building liquefaction infrastructure in Argentina so that Bolivian gas could be delivered to the global LNG spot market, further evidence of the profound effect that the shale boom in Argentina is having on regional gas trade.
As always in Argentina, there are risks in play that could scupper the grand plans being promoted by the likes of Gonzalez, Macri and Morales.
With the economy still in the doldrums, Macri recently announced the government was freezing prices on gas, power, transport and other basic goods and services until the end of this year to halt inflation. This cuts profits and will dampen appetite for new investment in gas.
Price controls were previously the purview of a long line of populist presidents that ruled Argentina. But when market-friendly Macri became president in 2015, he started lifting the restrictions with a view to achieving market prices, which for gas meant a level of around $4/mn Btu.
The price freeze could accelerate a shift in investment from shale gas to shale oil development in the Vaca Muerta, however, as it is easier and more profitable to export crude.
The regulatory landscape was also altered earlier this year when the government said it was scaling back a gas subsidy programme that had been introduced in 2017 to spur production.
Despite these hiccups, Macri is still broadly seen as the best candidate for business ahead of the presidential election in October. The alternative is that a candidate with more populist tendencies could take office, have a negative impact on growth and undermine Argentina’s export ambitions.
That said, a new government of whatever stripe will recognise the value of being able to sell LNG on the global market. This would provide access to valuable foreign exchange and help to steady the economy that was buttressed last year by a $57bn credit line with the IMF.
The Tango FLNG unit looks likely to be the first step in Argentina’s journey to become a major LNG exporter. And with YPF’s CEO pushing hard for an onshore liquefaction terminal, the country’s goal of exporting 29bn m³/yr of LNG by 2023 looks well within reach.