Love in the time of LNG

Big corruption scandals rattling the presidential palaces of Planalto and La Moneda in Brazil and Chile, respectively, aren’t the only things the two countries have in common these days. Brazil and Chile are heading down the same energy path, too. It’s a path paved with LNG.

Gone are the days when flush reservoirs were enough to keep South America’s lights on. This is especially the case in Brazil, where drought seems to be the new normal. The snowless peaks overlooking Santiago this autumn might be a sign of the same problem. Even where rivers still overflow, big hydroelectric projects such as Belo Monte in Brazil and HidroAysen in Chile have proved tough to get past community and environmental opponents.

Natural gas, cleaner burning than coal, is emerging as the only viable thermal alternative to dwindling hydroelectric reservoirs.

Brazil has abundant gas supplies associated with sub-salt deposits offshore, but they are expensive and complicated to extract. Onshore gas has so far proved disappointing, and pipeline gas imports from Bolivia are stagnant at best.

No surprise that Brazil’s LNG imports are skyrocketing. State-controlled Petrobras, mired in the corruption imbroglio, finally looks set to cede its LNG import monopoly to new actors. Brazilian companies spearheading three power generation projects tied to new LNG-receiving terminals have already won long-term supply contracts since late last year, and more are expected to follow in upcoming procurement auctions. Brazil’s three existing import terminals, with almost 50mn m³/d of total regasification capacity, could easily double over the next few years, opening commercial opportunities for a coming-of-age commodity that is increasingly transacted on a spot basis.

When Argentina’s gas exports started dwindling a decade ago, Chile resorted to diesel before rushing into coal generation, sparking a backlash that has rendered new coal projects all but impossible. Alternative renewable projects appear to be thriving, although the intermittency of wind farms and fast-growing solar plants is snarling traditional dispatch. Gas has emerged as the fuel of choice for new conventional power stations. Unlike coal stations, they can be switched on and off easily to accommodate wind and solar fluctuations.

Chile only has a trickle of gas production in the remote deep south. So here, too, generators are flocking to LNG. Chile’s Quintero LNG terminal just completed a 50pc expansion, and another boost to a full 20mn m³/d of design capacity is under evaluation. The underutilised northern Mejillones terminal should reawaken once the country’s central and northern grids are interconnected in a few years. In the south, French state-controlled utility EdF already won a long-term contract for a power project tied to a floating storage and regasification unit (FSRU) that Cheniere plans to install. A twin power plant will compete in another auction to be launched this week. Duke Energy, Chile’s state-owned oil company Enap and the country’s generation oligopoly — comprised of Italian Enel-controlled Endesa, US AES subsidiary AES Gener and Chile’s Colbun — are likely to compete as well. In the north, lead generator Engie, formerly known as GDF Suez, could leverage its interconnection project to participate, too.

Argentina’s regular LNG imports through two terminals, and planned terminals in Uruguay and Colombia, are deepening South America’s love affair with the liquid fuel. The capacity to reload vessels, now primarily a European domain, is starting to take root here as well. US LNG exports, to be launched late this year ahead of the expansion of the Panama Canal, and future potential exports from Mexico, will give the continent’s importers even more regional options beyond Peru and Trinidad and Tobago. This all adds up to more liquidity. And more liquidity means South America’s importers can also look forward to more transparent pricing.

(To access a webinar by the Argus LNG team in London, entitled LNG market trends: Sun rises on Europe, click here)

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