Latin America

Published at 14:32 29 Aug 2019 by

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

Political turmoil has dominated Latin American headlines in the last month, increasing uncertainty around how much LNG imports in the region will decline. We peg imports at 5.1 Mt in Q4 19-Q1 20 (-0.6 Mt y/y). Argentina’s oil producers have announced reductions in Capex and the government’s diminishing solvency makes us question its ability to continue funding gas production subsidies at the Vaca Muerta. However, we believe the country will more than ever look to monetise its emerging gas surplus during the southern hemisphere summer with pipe exports into Chile, lowering LNG needs there. Despite the legal standstill with pipe developers being resolved, Mexican LNG takes will remain necessary due to issues around gas system balancing, while persistent declines in Brazilian marketable production and Bolivian pipe imports will also support LNG takes.

Will the cash cow tango?

Argentina’s renewed economic and political woes threaten production growth at Vaca Muerta, which could be the source of much-needed foreign income. The unanticipated defeat of President Mauricio Macri in the primary elections of 11 August prompted the Argentinian peso to plunge by 25% against the dollar in the following days. The possibility of a return of interventionist policies such as pricing and currency controls as well as questions around the government’s solvency to meet payments of dollar-denominated production subsidies for Vaca Muerta pose a growing risk to the development of its prolific shale resources. The Neuquina basin, where Vaca Muerta is located, has been the driver of gas production growth this year, with output up by 1.4 bcm (9% y/y) in the first seven months of 2019.

However, slower drilling and the postponement of new developments could be around the corner. The government imposed a temporary 90-day freeze on oil product prices from 16 August to limit the impact of the peso’s plunge on consumers and accelerating inflation. The mechanism fixed the exchange rate at 45.19 pesos to the dollar, vs the market rate of 58.02 pesos to the dollar on 28 August. Such a measure is poised to reduce associated gas production, with Argentina’s top producers YPF and Pampa Energia having already announced cuts to Capex. Additionally, social unrest since 23 August has also stopped production at Argentina’s largest oil field Cerro Dragon. Local government workers demanding to be paid have blocked oil workers from accessing the field. Associated gas output from Cerro Dragon accounted for 6% of Argentina’s total 4.5 bcm gas output in July.

Concerns are also mounting around the Argentinian government’s ability to continue paying subsidies for gas production at Vaca Muerta, for which there is a price floor for gas at 7 $/mmbtu in 2019 and 6.5 $/mmbtu in 2020. Budgetary pressures caused by the subsidies already led earlier this year to a cap on both the existing level of subsidies and on new production (see Monthly: Latin America, 28 February 2019). However, we do not think any major decision on gas subsidy changes will be made before general elections take place in end-October.

Argentina’s gas production growth is likely to slow from the y/y rates recorded earlier this year. We still expect the country to want to—more than ever—monetise some of its production, particularly as we enter the southern hemisphere summer, when Argentina runs at a gas surplus. On 27 August, Argentina authorised gas exports into Chile on a firm basis between 15 September to 15 May 2020 for a maximum of 10 mcm/d. This differs from last year, when exports into Chile where on an interruptible basis and actual flows averaged 4.3 mcm/d. We forecast Chilean LNG imports in Q4 19-Q1 20 to decline by 0.6 Mt y/y on quicker piped imports from Argentina, while Argentina will not import cargoes, much like over Q4 18-Q1 19.

Tango FLNG is scheduled start exporting LNG in September, following commissioning in June. We expect the facility to begin ramping up from September, to roughly export one cargo every one to two months until the beginning of the southern hemisphere winter season in 2020.

Still in the market

Following two months of suspense, an agreement brokered by the Mexican president was finally announced on 27 August on the arbitration case between the Mexican government and developers regarding contracts for new pipes. Although there has been no confirmation as to when the 2.6 bcf/d Sur de Texas-Tuxpan (STT) will begin to flow gas into Mexico, we currently assume first flows will take place in October (see Monthly: Mexico - Suspense…, 26 August 2019). The start of operations on STT will mean a substantial drop in LNG imports into Altamira, although some cargoes will still be tendered after STT starts due to lack of storage in Mexico and continuing need for supply to balance the pipeline system. We forecast Mexican LNG imports in Q4 19-Q1 20 to total 1.6 Mt (-0.4 Mt y/y). This assumes the Wahalajara pipeline system, which is planned to substitute flows at Manzanillo, will only begin flowing gas in late H1 20.

Despite some growth in pre-salt gas output, shrinking marketable production in Brazil on quicker gas reinjections into wells and continued drops in Bolivian pipeline imports will mean LNG takes in Q4 19-Q1 20 should be mostly flat y/y at 0.6 Mt. The current bearishness in the global gas markets will also support greater LNG takes, with Petrobras recently confirming LNG was now cheaper than Bolivian-sourced gas.

Despite an increasingly bearish global gas outlook promising cheap LNG, growing pipeline imports and domestic production should gradually substitute out Latin American LNG takes into 2020. We expect Q2 20-Q3 20 LNG takes to drop by 2.3 Mt y/y, driven by declines in Mexico and Argentina, although both carry significant risk for softer LNG declines than forecast owing to underperformance in supply growth from pipelines and local production.

LNG imports by country, Mt
Source: Others include Dominican Republic, Puerto Rico, Colombia, Uruguay and Jamaica. Q1 '17 to Q2'19 are actuals.
Source: Bloomberg, Kpler, Energy Aspects

 

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