18 July 2017 / Jesús Rodríguez Dávalos

Technological evolution and adaptation processes are changing the way gas is being utilised in latin america. In general, there has been a steady increase in the use of gas in the region, but business strategies vary considerably depending on the size of the economies. 

Mr. Gonzalo Tamayo, Minister of Energy and Mines from Peru shared the successful story of the Camisea Gas Project in Peru gave a detailed account of its current status. He mentioned how technological advances have changed the natural gas industry dramatically, and pointed how the natural gas demand and use for power generation changed from being an uncertain reality to, only ten years later, being a highly attractive market facing an excess-demand problem. The inability of the region to supply for an increased demand was mainly due to the slower pace with which gas infrastructure has developed in the region. Since then, an adaptation process has taken place and the use of gas has expanded. With recent technological advances, the region as a whole is likely to benefit from a reliable, non-intermittent and cost-effective gas supply.

Kathryn Dyl, who serves as Analyst of Wholesale Natural Gas Markets for the Annual Energy Outlook at the U.S. Energy Information Administration addressed whether gas-abundant countries are looking to capitalize on the gas-for-power opportunity in the domestic and regional markets. She highlighted that historically LNG prices were indexed to oil. In recent years, there has been a shift and gas prices are expected to become increasingly important in terms of setting the price of LNG, particularly for U.S. exports. If U.S. Henry Hub prices are relatively low, this could stimulate U.S. LNG exports to the world by making them more competitive.

To explore this topic, John Bigalbal, Managing Director of Global Fuel for the AES Corporation commented on the future of U.S. shale gas. He mentioned that from a fuel perspective, U.S. gas can break the link of LNG supply from oil (Henry Hub versus Brent linkage). Today, Henry Hub is not highly correlated with oil prices. In fact, there is the potential for Henry Hub to go down in price as oil prices go up. As the U.S. produces more shale oil, more associated gas will go into the pipelines, potentially driving down the Henry Hub price. In other words, Henry Hub may provide a hedge over oil prices, which benefits project development as it mitigates risk associated with oil prices. 

When commenting on the balance between countries that are able to sell gas and those that will need to retreat from regional trade, Dyl pointed the importance to take prices into consideration. In Asia, when prices were very low, the South America became the priority destination. In the case of the U.S, depending on the circumstances the country has the Sabine Pass LNG export facility took advantage of chosen to prioritize short-term markets and short-term contracts in 2016, selling many spot cargos to Latin American destinations. She also highlighted that that in the United States, domestic production and pipelines of natural gas will continue to develop and the LNG market is projected to grow significantly by 2040.

Mr. Paul Roberti, Executive Director of Advisory Services at EY Mexico referred to the business opportunity for U.S. shale gas to supply the increasing demand in Central America and South America. Talking about Mexico, he said that the increasing imports of natural gas is very clear, putting aside the current trade discussions. There is a tremendous importance in the commercial relationship between the U.S. and Mexico. CENAGAS projects include 5400 miles of pipelines (9000 kilometers). 10 projects are now under construction and will be mostly completed by 2019. Those projects will double the capacity given the pipelines on the ground. Gas will play a dominant role in the country in the short and mid-term. Still, Mexico should be wary of overbuilding infrastructure considered its energy reform which is fostering renewables.

New market opportunities within Latin American countries using gas imports from the US are available with the creation of new plants along with conversion of existing ones. In the case of Mexico, new elements are creating competitive conditions for an open market, open nominations, capacity release, transparency, the electronic bulletins that ultimately allow new players and that will ultimately will encourage investment. The aim of the current administration is to increase electricity production based on natural gas and to ensure the national power supply. Mr Roberti pinpointed certain concerns such as the dependency of the gas from the north, generating storage facilities and contingency planning for storage. It is of ultimate importance to coordinate efforts and to continue a robust discussion in order to secure gas reliability.

Jorge Rivas, Senior Underwriter for the Multilateral Investment Guarantee Agency (MIGA) mentioned that natural gas can be a solution for middle-income countries with larger economies and with the needed infrastructure available, but not as much for smaller economies. With gas projections that can vary tremendously, gas may pose a risk or shock that a small economy may not absorb. Geographical reasons and distances make Latin America ideal for exports from the U.S. However, challenges include the need to develop infrastructure like regasification terminals and pipeline networks. Smaller economies present further challenges because they lack, in addition to the infrastructure, the domestic consumption or demand of LNG. The stability of legal framework (see Mexico’s successful example), political stability, infrastructure investment and a relatively predictable market are critical in LNG projects. Sometimes renewables may be the answer where LNG infrastructure is absent. He emphasized the important to look at the whole energy sector spectrum.

Regarding LNG gasification capacity for power generation in LATAM, Dyl said that unlike large gasification facilities onshore, LNG floating storage can be cheaper, faster ad provide the flexibility needed in countries such as Brazil, Argentina, Colombia, Uruguay, and Chile. These new, evolving technologies may be an attractive option for countries that do not currently have natural gas facilities or infrastructure but could benefit from LNG imports. 

Eng. Luis Reyes, Executive Director of the Consejo Nacional de Energía of El Salvador brought the unique case study El Salvador’s decision to implement Central America’s first LNG-to-Power plant. He explained how Central America’s energy prices are very high since they depend completely on oil fuel and diesel. In El Salvador, the energy matrix was made of four sources: geothermal (which accounted to approximately 25% of the total, one of the largest country-share globally), hydroelectric, biomass, and oil fuel and diesel (which represented around 45% of the installed supplied 35 to 40% of the total demand).  The high dependency on oil fuel meant that the country was naturally subject to price hikes. El Salvador understood that having natural gas would foster or generate new industries. The country opened bids leaving oil and diesel out with the objective of diversifying the energy matrix. Give the success of this initiative, El Salvador is now working towards using natural gas in other industries in addition to power generation. Eng. Reyes also mentioned that many Central American countries are in a regional electric market that allows the exchange of power and that the country aims to integrate with Mexico. Guatemala already benefits from a bilateral connection with Mexico and there is a vision to integrate regionally. The Central American Electrical Interconnection System (SIEPAC) is now working together with Mexico’s SENER, CRE and CENACE towards this objective. What talking about infrastructure, Eng. Reyes mentioned that a floating storage with re-gasification offshore facility connecting the pipeline with the power generation plant as an example of the many options the country have sought to diversify their energy matrix. Transport infrastructure remains a significant challenge. To conclude, Eng. Reyes pointed the importance to secure the gas flow in order to secure investment.