Brazil’s natural gas industry and that of its neighbors in the Southern Cone, such as Argentina and Bolivia, have labeled gas the “fuel of the future.” The question is what needs to happen to make that future a reality. A new study prepared by Wood Mackenzie underscores that the Southern Cone natural gas industry is at a pivotal stage of growth. Critical to its success will be an annual investment of up to US$25–$30 billion per year, much of it coming from foreign companies across the value chain.
In addition, the implementation of flexible bilateral and multi-lateral commercial arrangements between different countries will be just as crucial in order to balance the region. Without the annual investment and commercial arrangements, Wood Mackenzie emphasizes that the Southern Cone’s gas sector will certainly not be able to sustain the future growth story and there will be more losers than winners.
Eric Eyberg, director of Wood Mackenzie’s Latin American Gas & Power Consulting team in Rio de Janeiro, explains, “Aside from the annual investment required, our study has found that, rather than a series of individual country solutions, bilateral and multi-lateral approaches are vital for the success of the gas sector in the Southern Cone region. Without countries like Brazil, Argentina, and Bolivia having a seat at the table to agree on a unified approach, it will ultimately be a losing strategy for all. They are not going to get the flexibility they need to balance the many uncertainties and volatility facing the region's gas market as a whole.”
Wood Mackenzie’s report sets the scene for the countries facing the most uncertainty, Brazil, Argentina, and Bolivia:
The discoveries of the pre-salt oil and gas fields offshore Brazil in the last decade led many to believe that, by 2015, Brazil would become a gas exporter. Those expectations have fallen short and, instead, Brazil is heavily reliant on imports. Half of its gas supply comes from Bolivia and three floating storage and LNG regasification units.
“Today, Brazil’s gas industry is struggling as the country has suffered an economic, political, and energy crisis coinciding with the oil and gas industry ‘Lava Jato’ corruption scandal,” notes Eyberg. “Three dry years of low rainfall and limited hydro power contributions have driven gas demand growth but have completely masked the impact of the struggling Brazilian economy, slow policy development, and Petrobras project delays. We predict a 30–40% drop in demand for gas from 2015’s record levels when water levels return to normal. This could occur as early as 2017 or 2018, depending on the weather. Once this unmasking occurs, everyone is going to be in for a shock as the impacts begin to be felt across the gas sector.
“Today’s industry weakness, however, does translate into an unprecedented number of investment opportunities in gas distribution, power, infrastructure, and upstream, highlighted by Petrobas’ US$58 billion divestment program."
Despite Argentina’s tight gas, shale oil, and shale gas potential, Wood Mackenzie believes that natural gas self-sufficiency is not a realistic goal for the country. Eyberg notes: “High capital requirements, local supply chain needs, and unfriendly policy challenges. Our projections suggest that, after a short-lived increase in supply to 2017, the ensuing drop in conventional production (-12% per annum to 2035) will be hard to compensate for. However, we do estimate that more than US$150 billion in CAPEX will be required over the next two decades for unconventional development alone, 85% coming from outside the state oil and gas company, YPF, presenting a golden opportunity for North American unconventional players.”
With uncertainty and volatility expected from Brazil and Argentina, flexible bilateral and multi-lateral commercial arrangements with Bolivia will be necessary to balance supply in the region. Eyberg says, “Bolivia, the swing supplier, will need to manage its key export markets in a coordinated fashion, with the future of the industry on the line for all three countries.”
Eyberg concludes: “When the dust settles, what is clear is that a multi-lateral approach is critical to the future of the Southern Cone’s gas industry – that and an annual investment influx of up to US$25–$30 billion.”