Growing pipeline imports and domestic production continue to curb LNG demand in Latin America, adding to the super bearish sentiment gripping global gas markets. In Q3 19, we peg Latin American LNG at a hefty 1.3 Mt less y/y. Argentina will lead the declines as Vaca Muerta output grows, while the ramp up of Mexico’s Sur de Texas-Tuxpan in late July/early August would begin to substitute LNG imports. That said, there are significant timing risks on Sur de Texas-Tuxpan, as CFE has requested arbitration on the current transportation service contract, and this could delay first pipeline flows and require Mexico to take additional LNG. Aside from such limited upside risks, LNG demand in Latin American will continue to shrink—by 0.8 Mt y/y over Q4 19–Q1 20.
In line with our expectations, Latin American LNG imports shrank in May by 0.1 Mt y/y. Combined takes in Argentina and Chile dropped by 0.5 Mt y/y, while Mexican imports were flat y/y at 0.6 Mt as imports at Altamira continue to be needed to backfill demand until the 2.6 bcf/d Sur de Texas-Tuxpan pipeline starts to flow gas. Meanwhile, Brazil took 0.2 Mt more y/y, partially offsetting declines elsewhere. Warmer weather encouraged more power sector gas burn to meet strong power demand, while high rates of gas used for reinjection into oil wells and processing units continue to erode gains in Brazilian gas output.
Argentina’s Vaca Muerta basin continues to post healthy y/y output gains, supporting brisk pipeline exports into Chile, reducing LNG sendout and pipe imports from Bolivia. Although IAPG output figures are not available for May, April statistics indicate total output gained by 0.1 bcm y/y to 3.9 bcm. Aside from Argentina’s financial woes, which has led to a cap on gas production subsidies (see: Latin America Monthly, 28 February 2019), infrastructure bottlenecks also pose a downside risk to domestic output growth. Insufficient transport capacity to demand hubs has forced producers to shut producing wells, though the issue is slowly being addressed. Earlier this month, Transportadora Gas del Sur (TGS) inaugurated the first part of a 60 mcm/d pipe that will cross 30 producing areas in the Vaca Muerta when finalised in 2021. A proposed line will then connect and transport gas to the demand hub of Buenos Aires. Additionally, Argentina will tender next month to develop a 15–18 mcm/d pipeline to take gas from Vaca Muerta to Bahia Blanca, where the Tango FLNG liquefaction terminal is located.
Mild peak winter weather so far in the southern hemisphere has allowed Argentina to continue exporting pipeline gas to Chile and cut imports from Bolivia (the latter have fallen y/y each month since June 2018). We expect combined Argentinian and Chilean LNG imports to fall by a hefty 0.9 Mt y/y in Q3 19, leading the wider regional fall. In Q4 19–Q1 20, Argentina will import no LNG, as was the case in Q4 18–Q1 19, while Chilean LNG takes will shrink by 0.5 Mt y/y as it prefers pipeline imports from Argentina.
|Fig 1: Argentina gas production, bcm||Fig 2: Argentina gas imports and exports, bcm, y/y|
|Source: IAPG, Energy Aspects||Source: Enargas, Energy Aspects|
In Brazil, meanwhile, domestic gas production is not performing as well as expected. Underperforming oil output in the pre-salt systems in Q1 19 has led us to lower our Brazilian oil growth forecasts for 2019, from 0.25 mb/d to 0.16 mb/d, which indicates weaker growth in Brazilian associated gas output. Latest ANP data available for April indicates associated output from Rio de Janeiro pre-salt grew by 0.2 bcm y/y, while Sao Paulo pre-salt output was mostly flat y/y. Total domestic gas output was up by 0.1 bcm y/y, but the gains were eroded by greater amounts of gas being reinjected into wells (+0.2 bcm y/y). Given production weakness, we expect LNG imports to fall only marginally—by 0.2 Mt y/y in Q3 19 and by 0.1 Mt y/y over Q4 19–Q1 20.
Assuming a ramp up in Mexican pipeline imports as the 2.6 bcf/d marine Sur de Texas-Tuxpan pipeline begins flowing gas by late July or early August (our base case), we expect Mexican LNG imports to be gradually substituted by pipelines. Significant flows via Sur de Texas-Tuxpan seemed imminent until CFE filed an arbitration request on 24 June against project developers TC Energia and IENova looking to renegotiate the current transportation service contract. As CFE is still to issue ‘proof of acceptance’ of Sur de Texas-Tuxpan’s in-service date, the pipe cannot yet begin operations. It is unclear if CFE will use approval as leverage in the contract dispute. Should Sur de Texas-Tuxpan be delayed, LNG imports into Altamira would be necessary. Considering that CFE has tendered for cargoes to arrive to Altamira through end-July, for each additional month that Sur de Texas-Tuxpan is delayed, Altamira’s LNG imports would add 0.2 Mt to our base case forecast. That scenario, based on no further Sur de Texas-Tuxpan delay, includes a 0.5 Mt y/y fall in Mexican LNG takes in Q3 19 and a 0.6 Mt y/y fall in Q4 19–Q1 20.
While there is some limited upside risk to our forecasts on Latin American LNG imports, any y/y increase in LNG demand is likely to be short-lived, as pipeline imports and domestic production will continue to erode LNG’s share in the supply mix.