We have retained our forecast that Latin American LNG imports will fall by 2.1 Mt y/y through Q2 19–Q3 19 on higher pipeline imports and domestic production. There is some timing risk to this number, as it assumes Mexico’s new pipeline infrastructure ramps up in a timely enough fashion to allow increased pipeline imports from the US and thus a 1 Mt y/y fall in Mexico’s LNG imports. Further south, gains in Vaca Muerta’s shale gas production will reduce LNG demand in Argentina and Chile, although Argentine shale output is facing financial headwinds. Argentina’s 0.5 Mtpa Tango FLNG arrived at Bahia Blanca earlier this month and is set to export its first cargo in Q2 19. The only sources of LatAm LNG demand growth over Q2 19–Q3 19 are Puerto Rico, Colombia and Jamaica, but their combined growth increment of 0.2 Mt y/y is too little to offset declines elsewhere.
Mexico continues to import LNG (January takes were flat y/y at 0.2 Mt), despite CFEnergia’s ambitious claim in September 2018 that it would stop tendering LNG by year-end 2018 or early 2019 due to delays to Mexican pipeline infrastructure starting up. The most important delay has been the 2.6 bcf/d (26 bcm/y) Sur de Texas-Tuxpan, which is now expected to first flow gas in Q2 19. The delay has led to CFE’s 20 February tender for three cargoes (around 0.2 Mt) into Altamira between 6 March and 22 April.
Altamira LNG imports are eventually to be replaced by pipeline gas flowing through Sur de Texas-Tuxpan, while Manzanillo LNG takes are to be swapped for piped gas through the Wahalajara system and the reversal of TransCanada’s 0.5 bcf/d Manzanillo-Guadalajara pipeline. As we have long maintained, ramp-up on Sur de Texas-Tuxpan is likely to be gradual, with initial volumes capped by limited downstream connections. As for the Wahalajara system—comprised of the 1.5 bcf/d El Encino-La Laguna, 1.2 bcf/d La Laguna-Aguascalientes and 0.9 bcf/d Villa de Reyes-Aguascalientes-Guadalajara pipelines—there has been no recent update on the currently expected May 2019 start-up, although we do not disregard the chance of further delays. For the Q2 19–Q3 19 period, we expect Mexican LNG imports to slip by 1.0 Mt y/y to 2.1 Mt on some ramp-up in pipeline imports through Sur de Texas-Tuxpan.
Some downside risk also exists to our forecast Argentinian and Chilean LNG import reductions as financial woes threaten to curtail Vaca Muerta’s production growth, although we do not expect to see the full impacts until 2020. Vaca Muerta gas production raced higher by 9% y/y to 26 bcm over January–November 2018. The growth has been driven in part by a healthy subsidy programme under which the government pays producers a guaranteed 7.5 $/mmbtu price for output. The subsidy will drop to 6 $/mmbtu by 2020, but that is still a healthy level. As output has grown, however, the government has increasingly struggled to pay for all the gas being produced. In late December, the energy ministry was merged with the finance ministry as the government instituted austerity measures dictated by the conditions attached to a $50 billion IMF loan. The budgetary pressures caused by the subsidies have now led to a cap on both the existing level of subsidies and subsidies for new production.
Subsidy limitations are already having an impact. One of the key Vaca Muerta producers, Tecpetrol, which has been involved in a $2.3 billion drilling programme in the Fortin de Piedra area, announced plans this month to halt work at three of its four rigs due to the changes. YPF also warned in late January that it will face losses due to changes to the subsidy scheme and was considering reducing its planned $4.5 billion investments in the region. While local producers are pulling back, foreign companies remain interested. Petronas announced a $2.3 billion joint venture with YPF in December, while BP, ExxonMobil, Chevron, Equinor, Total, and Qatar Petroleum are all current Vaca Muerta investors. The change to subsidy arrangements should slow medium-term output growth in Vaca Muerta, but the acceleration in production means 2019 will still see healthy y/y growth, allowing LNG demand to drop further. In Q2 19–Q3 19, we forecast that Argentinian LNG imports will shrink by 0.9 Mt y/y while Chilean LNG takes slow by 0.2 Mt y/y as piped gas from Argentina cuts LNG demand.
Argentina is also looking to start LNG exports soon, monetising Vaca Muerta’s gas surplus during the southern hemisphere summer, as YPF’s Tango FLNG arrived at Bahia Blanca earlier this month. The FLNG has a 0.5 Mt capacity and plans to start production in Q2 19. However, exports should largely take place in Q4 19–Q1 20 as Argentina still has some need for gas imports in its peak heating months (southern hemisphere winter).
In Brazil, we expect LNG imports to fall by 0.2 Mt y/y this year, as we expect domestic gas production to recover from last year's sluggish 0.7 bcm y/y growth. A number of new fields are starting up, and we forecast oil production will expand by 0.3 mb/d this year, supporting associated gas output. Hydro generation will likely continue to play an important but reduced role this summer in determining LNG import needs on higher Brazilian gas output. Reservoir levels stood 10.9 ppts lower y/y and 6.4 ppts below the five-year average as of 27 February. Hydro generation in January was still a healthy 4.4 TWh (12%) higher y/y while thermal generation shrank (0.8 TWh or 13% y/y), with no LNG cargoes imported during the month, in line with last year. Porto Sergipe’s Golar Nanook FSRU loaded its maiden cargo at Cameroon FLNG this week and is now heading for Brazil. The FSRU, which is expected to start testing and commissioning in H1 19, is part of an LNG-to-power project that includes a 1.5 GW CCGT scheduled to start operations in January 2020. The FSRU will import very few cargoes until the CCGT becomes operational as there is no local demand outside of the power plant. But once the 1.5 GW CCGT is operating, it will support LNG imports of 1.5 Mtpa operating at baseload.