We have revised our LNG demand forecast downwards for Latin America this winter. LNG demand in Brazil was softer than expected in October amid an uptick in hydro generation and despite slowing y/y domestic gas production growth. Mexican LNG takes were also lower than forecasted, even with reports of acute gas shortages. We now peg Q4 18-Q1 19 Latin American LNG takes at 5.6 Mt, 0.3 Mt lower y/y and a 0.2 Mt reduction on our previous forecast. Argentina’s recent announcement of its plans to install an LNG exporting facility as soon as Q2 19 to monetise Vaca Muerta production provides further evidence of the shrinking Latin American appetite for LNG. On expectations of domestic production gains in Argentina and Brazil continuing, we project Q2 19-Q3 19 Latin American takes to drop by 1.1 Mt y/y to 9.8 Mt.
Total Latin American LNG receipts were just below our expectations in October, falling by 0.3 Mt y/y to 0.9 Mt. Imports shrank across the region’s main importers with higher hydro generation eroding thermal’s share of the generation mix and decreasing the LNG call in Brazil and Chile. Mexican LNG takes were 0.1 Mt lower y/y despite acute gas shortages reported in parts of the country, while Argentina imported no cargoes during the month as Vaca Muerta continues to ramp up and demand falls as we head into the southern hemisphere summer. LNG receipts in Colombia, Puerto Rico and the Dominican Republic expanded by a combined 0.2 Mt y/y to 0.3 Mt.
Brazil – hydro crowds out gas
Brazilian LNG imports in October fell by 0.3 Mt y/y to 0.1 Mt as thermal generation decreased by a hefty 34% (3.8 TWh) y/y, crowded out by gains in hydro output of 4.4 TWh (15%) y/y. Rainfall in October was 5% higher y/y and 18% above the 10-year average, supporting a mild recovery in hydro reservoir levels, which as of 27 November stood 3 percentage points (ppts) above the five-year average and 11.8 ppts higher y/y. Brazilian LNG takes also slowed y/y despite production losses in the pre-salt basin of Sao Paulo driving down overall domestic output. Latest ANP figures available for September show total domestic gas production was mostly flat y/y at 3.4 bcm, with declines in the pre-salt Sao Paulo basin (-0.1 bcm, 17% y/y) being offset by production ramp-ups in the Amazonas and the pre-salt Rio de Janeiro. The lower-than-expected LNG takes in October have led us to revise down by 0.2 Mt our Q4 18-Q1 19 LNG import expectations to 0.4 Mt (-0.4 Mt y/y). For Q2 19-Q3 19, we expect Brazilian LNG receipts to total 1.4 Mt (-0.2 Mt y/y), assuming a resumption of growth in pre-salt associated gas production, with a better prognosis for oil production in 2019 than we saw in 2018.
Mexico – shortages set to come
Mexican LNG imports in November so far stand at 0.4 Mt, according to preliminary data from Kpler, broadly flat y/y, following last month’s 0.1 Mt y/y drop to 0.3 Mt. The slowdown in LNG takes suggests more acute gas shortages to come in parts of Mexico, as upcoming pipeline projects such as Sur de Texas-Tuxpan and Wahalajara are still not flowing and are only expected to enter operations in Q1 19 at the earliest.
Local reports show a 24% increase in Monterrey first-hand PEMEX gas sales in the last three months, with Nuevo Leon’s chamber of industry highlighting a surge in gas prices to industrials due to supply shortages in the centre and south of Mexico. Reports put prices of LNG imported into Altamira at 7.7 $/mmbtu, while LNG sold to industrial users costs 13 $/mmbtu. Some industrials that have access to declining PEMEX gas fields are consuming gas without nominations and incurring large balancing penalties from CENAGAS. As CENAGAS turns to LNG to balance the system, the balancing fees can increase LNG prices that consumers pay by as much as 50%, pricing industrial consumers out of accessing LNG, with the latter discouraging more imports.
We expect Q4 18-Q1 19 LNG imports to total 2.4 Mt, slightly lower y/y by 0.1 Mt, before trending down by 0.5 Mt y/y to 2.7 Mt in Q2 19-Q3 19 due to additional setbacks to upcoming pipeline infrastructure and growing industrial sector concerns regarding unsustainable gas shortages.
Argentina – monetising Vaca Muerta
Latest production figures available from Argentina’s IAPG for September indicate output from the Vaca Muerta continued to ramp up, which is displacing LNG imports. Total production in September was 0.25 bcm higher y/y at 3.9 bcm, driven by a 0.2 bcm y/y increase to 2.4 bcm from the Neuquina basin, where the Vaca Muerta formation is located. Independent producer Tecpetrol, which owns 200,000 licensed acres in Argentina, has committed a $2.3 billion investment through to 2019 at the Fortin de Piedra field in the Vaca Muerta shale play. The company was targeting production flows of 15 mcm/d by early 2019, but it had reached that level in November, an increase from flows of just 1.4 mcm/d a year ago.
The sustained increase in production has muted Argentina’s demand for LNG during the southern hemisphere summer, as expected, with the country importing no cargoes in October. We do not expect Argentina to import any cargoes until April 2019, when the winter season boosts heating gas demand. However, with such strong Vaca Muerta production, the formation is moving to the point where Argentina will get more than enough gas over the coming years for its domestic needs. We expect Argentinian LNG takes to shrink by 0.7 Mt y/y in 2019 to 2 Mt and by a further 0.7 Mt y/y in 2020 to 1.3 Mt.
As we have long maintained, the increases in Argentinian domestic production will also compete against LNG to meet Chilean gas demand, with the first Vaca Muerta pipeline exports having started on 23 November. Chilean LNG imports in October dropped by 0.05 Mt (22%) y/y to 0.2 Mt and we expect the declines to continue through Q4 18-Q1 19, with LNG takes totalling 1.1 Mt (-0.2 Mt y/y) for the period.
Vaca Muerta’s production ramp-up has also prompted Argentina to look for other ways to monetise its output. State oil company YPF recently agreed a 10-year agreement with EXMAR for the 0.5 Mtpa Tango FLNG, which is to be moored at Bahia Blanca from Q2 19. The facility is expected to ship up to eight cargoes a year, around 0.5 Mtpa. Argentina has a gas shortage, albeit decreasing, during the southern hemisphere winter, so it will still likely import some cargoes during the months of April-September 2019. In 2018, it imported 2.7 Mt over those months but made no imports during the previous summer season. As such, even though the FLNG barge should be in place in Q2 19, it could be Q4 19 before we see regular exports. Argentina retains one FSRU, which we still expect it to use during the winter 2019 season for LNG imports. While Vaca Muerta gas production will eventually mean more LNG volumes will come from South America into the global market, the most immediate impact of the shale play will be to further reduce both Argentinian and Chilean demand for LNG imports.