Latin America – Aug 2018

Published at 13:42 27 Sep 2018 by . Last edited 11:18 22 Aug 2019.

Users licensed for the data service can access power generation data for Argentina, Brazil and Chile along with our Argentinian and Mexican gas balances and Brazilian gas supply data.

Despite expecting Brazilian LNG imports to increase through the Q4 18 and Q1 19 period, supported by low-but-improving hydro reservoir levels, we forecast total Latin American imports will drop by 0.3 Mt y/y to 5.6 Mt during the same period. We expect declines in gas demand in Argentina and Chile as the southern hemisphere moves to summer, while Argentina’s growing shale production in the Neuquen province will also replace some LNG demand in both countries. In Mexico, we still anticipate LNG imports will continue due to persisting pipeline infrastructure bottlenecks. But expected capacity additions by year-end, if timely, will ease constraints and we now think Mexican LNG demand is to slow faster over the coming two years than previously thought. We project Mexican LNG imports in 2019 at 3.0 Mt (-2.7 Mt y/y), 2.5 Mt less than our previous forecasts.

Latin American imports jumped for the fourth consecutive month in August, up by 0.3 Mt y/y to 2.2 Mt, driven by a 0.2 Mt increase in Brazilian takes on low reservoir levels that prompted stronger power sector gas burn. Chilean takes were slightly higher y/y (+0.04 Mt) due to cold weather while Mexican takes were broadly flat y/y as LNG continues to be used as growth in pipeline imports from the US stall on domestic transportation constraints. Rising domestic gas production in Argentina left LNG receipts flat y/y at 0.6 Mt despite a much colder than normal month.

Low reservoir levels support Brazilian LNG takes

Despite entering into Brazil’s high-precipitation season, which runs through Q4 18 and Q1 19, persistently low reservoir levels are set to support thermal output and LNG imports during the period. Brazil’s national meteorology office (INMET) forecasts precipitation will be much lower than normal across most parts of the country, particularly the south east/central east regions where 70% of hydro generation capacity is located. We anticipate Brazilian LNG imports will total 0.7 Mt in Q4 18 and 0.1 Mt in Q1 19, flat y/y. Domestic gas production growth from the pre-salt has been slower this year, and that should also provide some support for imports.

Reservoir levels in August were a chunky 11.1 percentage points (ppts) below the five-year average, at 39% full, prompting strong LNG imports, which increased by 0.2 Mt (40%) y/y to 0.6 Mt. However, some of this may have been bought for stockpiling.

Lower reservoir levels limited the spill at hydroelectric plants, with Brazil’s electric sector monitoring committee (CMSE) announcing earlier this month that it continues to operate thermal power plants in order not to further diminish hydro stocks. As of 25 September, reservoir levels had narrowed the gap to the five-year average to 3.5 ppts and are now 38% full. Our lower import forecast in Q1 19 compared to Q4 18 reflects an assumption of gradually normalising hydro levels.

Preliminary power generation data from ONS for August, however, indicate thermal output dropped by as much as 3.5 TWh (28%) y/y while hydro increased by a small 0.6 TWh (2%) y/y. Other sources of generation such as wind and nuclear gained by 0.6 TWh (15%) and 0.2 TWh (18%) y/y respectively, but total power generation shrank y/y by 1.8 TWh (4%) on a milder month than normal. CDDs in August were 8% lower y/y and 9% below the five-year average, limiting cooling demand and meaning that there is the potential that some LNG was put into storage for use in coming months.

Domestic gas production was flat y/y in July at 3.6 bcm, according to latest data available from ANP, the first time since April 2016 that there has not been y/y growth in monthly output. The pre-salt basin of Rio de Janeiro produced 0.12 bcm more y/y, but this was offset by declines of the same size in the Sao Paulo pre-salt area.

Looking further ahead, various LNG-to-power projects are being developed in the country to secure power supply and will support LNG imports. The most advanced is the Porto de Sergipe project, which will feed LNG to a 1.5 GW thermal power plant through an FSRU and is expected to become operational in January 2020. A joint venture between Prumo and BP is also proposing another LNG-to-power project in Acu Port (Rio de Janeiro), which would include a 1 GW CCGT. In recent days, the company announced that financing on the project is to be finalised by year-end, with construction to begin in 2019. For the whole of 2019, we expect LNG takes slightly lower y/y at 2.3 Mt and to continue at the same level in 2020, as new demand at Sergipe is largely offset by further reductions in LNG needs in the south.

Mexico: Adios LNG?

The Valley Crossing pipeline, which feeds the Sur de Texas-Tuxpan pipeline, is facing a delay from its year-end deadline to April 2019. The delay of the feeder pipe has significant bearing on the massive 2.6 bcf/d Sur de Texas-Tuxpan pipeline and supports our conservative view of moderate growth in cross-border flows during this winter. Despite CFEnergia’s announcement that it plans to stop tendering LNG in late-2018 or early-2019, Valley Crossing’s delay only highlights how ambitious such a target is and the fact that it depends on the completion of new pipeline infrastructure, specifically the Sur de Texas-Tuxpan by year-end, and the reversal of flow direction on TransCanada’s 0.5 bcf/d Manzanillo-Guadalajara. Such a timeframe seems too optimistic and we continue to expect LNG imports to backfill demand, totalling 2.4 Mt this winter (0.2 Mt lower y/y). Additionally, CFE has already announced on 24 September a tender for three cargoes to be delivered through Q4 18, which adds to two previous tenders for the same period. However, for the next two years, Mexican domestic debottlenecking of transportation constraints will see LNG consistently pushed out of this market.

Summer is coming for some

In the upcoming southern hemisphere summer, gas demand will return to its seasonal lows in both Chile and Argentina. At the same time, we project LNG takes in both countries to slow y/y as domestic production from the Vaca Muerta basin ramps up. Argentinian LNG imports will be muted in line with last year. Chilean imports will drop by a combined 0.3 Mt y/y in Q4 18 and Q1 19 as Argentinian gas exports to the country are scheduled to start in October, replacing some LNG demand.

Despite high August HDDs in both countries—Argentina’s HDDs were as much as 32% higher y/y and 18% above the five-year average, while Chilean HDDs were 3% lower HDDs y/y but still 5% above the five-year average—Argentinian LNG takes were flat y/y while Chile only imported slightly more by 0.4 Mt y/y.

Argentinian gas production recorded robust growth for the second consecutive month in July, according to latest available data from IAPG. July production expanded by a healthy 0.3 bcm y/y to 4.0 bcm, as production from the Neuqen province—home to the Vaca Muerta shale play—led the growth at 0.2 bcm higher y/y. This supports our view of declining LNG demand in both Chile and Argentina as shale gas production continues to ramp up in the latter.

Fig 1: Brazil - hydro reservoir, % full Fig 2: Argentinian gas production, bcm
Source: ONS, Energy Aspects Source: IAPG, Energy Aspects

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