The surge in global LNG prices, due to strong Northeast Asian buying, limited October’s Latin American LNG imports, which dropped by 0.08 Mt y/y to 1.16 Mt. While Mexican LNG takes expanded by 0.15 Mt y/y on domestic pipeline constraints and Brazil imported 0.07 Mt more y/y due to low hydro generation availability, it was not enough to compensate for lower takes by Argentina (-0.18 Mt y/y) and the Dominican Republic (-0.07 Mt y/y). Chile’s LNG receipts were flat y/y, while Puerto Rico did not import any cargoes in October due to hurricane damage to its infrastructure.
Mexican LNG takes ticked up by 0.15 Mt y/y to 0.47 Mt in October as downstream congestion on the domestic gas pipeline system continues to be an issue. While the 1.5 bcf/d El Encino–La Laguna pipeline, which will take gas to the border from the southern Texas Waha hub, has recently been confirmed to us for an end-December start-up, southern connections to the pipe are still subject to delay. Construction of the large 2.6 bcf/d Texas–Tuxpan marine pipeline, originally scheduled to be online by mid-2018, has been suspended by a court amid concerns of its environmental impact and is now optimistically scheduled to be online in December 2018. We now forecast Mexican LNG takes will rise by 0.32 Mt y/y over the heating season.
The release of official Mexican statistics for September sheds a light on the demand losses from both the hurricanes and the earthquake that struck Mexico during the month, affecting the country’s power sector and Pemex’s refining and production activities. These losses translated into a 0.6 bcf/d y/y drop in total gas demand to 7.6 bcf/d.
LNG imports into Argentina shrank by 0.18 Mt y/y to just 0.06 Mt in October as the bulk of LNG cargoes head for the higher-priced East Asian markets. LNG for delivery into Argentina priced as high as 9.15 $/mmbtu by the end of October, which is 2.32 $/mmbtu higher y/y. Gas-fired generation was moderately lower y/y, by 0.11 TWh (2%), which was the first decline since February. In October, thermal generation was generally down, with coal-fired generation 56% lower y/y, as hydro generation gained by 0.76 TWh (26%) while diesel-fired generation expanded 0.14 TWh y/y (107%).
Lagged data from IAPG puts September total gas demand at 3.84 bcm, a 21 mcm increase y/y. Gas production continues to struggle to expand y/y, totalling 3.71 bcm, 19 mcm (0.5%) lower y/y. Although production at the Vaca Muerta basin has been steadily increasing, adding 39 mcm y/y in September, declines in conventional fields are offsetting the gains.
Delays in gas subsidy payments to producers, which have already affected cashflows, and the recent wave of economic reforms announced by Argentinian President Mauricio Macri could further threaten Argentina’s shale gas revolution. After the 22 October mid-term election victory, which strengthened Macri’s party position in Congress, several plans have been announced to cut the country’s fiscal deficit, including significant reductions to current gas and power subsidies. Gas production subsidies will reportedly only be fully available to new producing fields, while fields that are currently producing will need to maintain output of at least 0.5 mcm/d until the end of 2019 or the producer must return the money to the state. Reportedly, producers such as YPF SA and Pampa Energia could already be reviewing their production plans. Argentina’s energy ministry has also announced natural gas costs to businesses and residential consumers could increase by 58% and 43% respectively, which is likely to slow gas demand growth in the country.
Chilean LNG imports were flat y/y at 0.25 Mt in October as spot cargoes headed to the premium markets of Northeast Asia. October power statistics are not yet available.
Low hydro reservoir levels continue to support thermal power generation in the country, which drove LNG imports slightly higher y/y, up by 0.07 Mt to 0.27 Mt in October. Reservoirs stood 26% full, 18 percentage points (ppts) below the five-year average at the end of the month. As a result, hydro generation was 3.34 TWh (10%) lower y/y at 29.30 TWh, while thermal and wind generation gained 1.29 TWh (13%) and 0.98 TWh (26%) y/y respectively.
As of 27 November, hydro stocks stood over 9.5 ppts lower than the five-year average, with reservoir levels in the Southeast/Central-West region, which holds most of the country’s hydro generation capacity, 8 ppts lower y/y at 25.2% full. Precipitation forecasts from INMET, Brazil’s meteorological agency, for the December–February period forecasts above-normal precipitation levels in the Central-West and Central-East regions that could help restore reservoir levels. If so, LNG imports will have limited growth as hydro generation would gain its share in the generation mix.
Delayed ANP data, shows domestic gas production 0.11 bcm higher y/y at 3.42 bcm in September with year-to-date production reaching 29.65 bcm, 1.92 bcm higher y/y. The Rio de Janeiro and Sao Paulo pre-salt basins continue to lead the growth, expanding by 70 mcm and 30 mcm y/y respectively in September.
We have left our LNG import forecasts largely unchanged for Q1 18 at 2.4 Mt, posting a moderate decline of 0.1 Mt y/y. Over all of 2018, we see LNG demand dropping by 1.6 Mt y/y, though most of that is driven by expansions of gas production at Argentina’s Vaca Muerta and Brazil’s presalt – with the former having some risks. The deterioration in Brazilian hydro holds some upside for LNG demand in H1 18. In 2019, we expect imports to be up by 1.2 Mt y/y at 14.9 Mt on a full year of LNG imports from Uruguay.