Momentum for natural gas development in Latin America was accelerating as 2000 began, especially in the South America`s Southern Cone countries of Argentina, Brazil, Chile, Bolivia, Peru, Paraguay, and Uruguay.
By far most of the attention in the first few years of the 2000s would be on Brazil, whose economy and population, both the largest in the region, offered the greatest potential market for natural gas.
The other major market for gas, Chile, opened 2000 with prospects of its thriving economy benefiting from gas supplies from Argentina via three major pipelines laid in the last 5 years of the 1990s.
Upstream, gas was flowing or likely to flow across borders from new or potential suppliers, especially Bolivia and Peru. Argentina also was looking at increasing its exports, primarily to Brazil.
And Venezuela embarked on an ambitious effort to develop its natural gas reserves, long neglected in favor of or to help produce crude oil.
Natural gas-fired electric power generation was the target for most of this activity.
Writing in Oil & Gas Journal in 1999, Peter D. Gaffney of Gaffney, Cline & Associates, London, noted that many of the countries had come through 10 years of major change either in privatization, in deregulation, or in developing ways to encourage new investment to meet their particular requirements.
History
Latin America`s 14 countries, 9 of which produce hydrocarbons, have cultures and histories as different as the opportunities they offer the petroleum industry, Gaffney pointed out.
South of the Amazon River are five hydrocarbon producers-Argentina, Bolivia, Brazil, Chile, and Peru-and two countries, Paraguay and Uruguay, with no significant hydrocarbons.
North of the Amazon, Venezuela dominates with Colombia, Ecuador, and Trinidad and Tobago as east, west, and southwestern reflections of the major Venezuelan basins.
The region as a whole has a population of about 330 million and production of some 7 million b/d of oil and 8 bcfd of natural gas. Domestic consumption is about 4.5 million b/d of oil and about 8 bcfd of gas.
Inevitably, the majority of consumption is in the Southern Cone, where about 250 million people live. The region as a whole is a major potential market by any world standards, said Gaffney, and the Southern Cone, dominated by Brazil, is a growth engine.
Infrastructure lags
In Latin America, gas development at the turn of the century was being driven by the combined-cycle power business (Fig. 1). Gas projects could be easily matched to demand and offered obvious environmental benefits over competing fuels, he said.
Gas needs infrastructure, however, that is often expensive and takes a long time and commitment to install. Gaffney noted that it was more than 20 years between the signing of initial agreements on the Bolivia-to-Brazil pipeline and its start-up in 1999.
There are almost 100 basins in Latin America, he said, and geologists believe there remain substantial opportunities in virtually every petroleum-rich country within the region.
These include exploration of basins only lightly explored or new plays in producing basins.
With a need to attract external investment, most of the region`s governments had been able to meet industry expectations as indicated by the success of several exploration and rehabilitation rounds. As elsewhere, countries unable to adjust their terms adequately to reflect market conditions had not done as well.
Gaffney said the drive to open up all markets, not just petroleum, provided impetus to both investment activity and interest within the region as a whole.
Many investor, however, still think in terms of the past when they were about to undertake an exploration, redevelopment, or downstream project. They frequently failed to understand the weight and speed of change and seemed unnaturally distressed at the first signs of a hurdle, be it technical or legislative, he said.
Opportunities in Latin America, as in many other major investment countries in the petroleum world, were best served by those companies able to see past the first downturn and endure inevitable political and legislative changes and disappointments.
There seemed to be little doubt that the opportunities were there-in the sophisticated, deregulated, and privatized Argentine gas industry or the flexible energy supply sources in Brazil, through to the prospects in the north in the great basins of East and West Venezuela. The challenge, said Gaffney, remained to capture them.
And, he said, in no place in the region or perhaps in all the petroleum world was it more possible to see an example of small being beautiful than on the island of Trinidad.
There, over the preceding 20 or more years, a series of modest-sized plants to use gas had been developed. The nation by 1999 had become the largest producer of methanol in the world and a significant regional producer of several other gas-based or gas-utilizing products.
Forces for change
In another analysis of the Southern Cone, Prabhas Panigrahi and Xavier M. Grunauer of Dresdner Kleinwort Benson Research, New York, noted in Oil & Gas Journal that South America had proven oil reserves of 129 billion bbl and proven gas reserves of 265 tcf, or 10% of the world`s total oil equivalent reserves.
Although Latin America and the Southern Cone as a whole were fairly balanced in their production and consumption of oil and gas, said the authors, countries such as Brazil and Chile found themselves in deficit.
The primary reason was that the high-growth economies of Brazil and Chile possessed insufficient indigenous reserves and production capacity. This required imports by the two countries, which were expected to reach 500,000 b/d of oil and 1.565 bcfd of gas by 2000.
Brazil and Chile, perennially in need of gas, were surrounded by rich gas fields in Argentina, Bolivia, and Peru. Poor economic integration in the region and lack of supply infrastructure, said Panigrahi and Grunauer, forced natural gas to play a secondary role to less energy-efficient and less environmentally friendly crude oil.
In the last few years of the 1990s, however, formation of regional trade blocks such as Mercosur and the Andean Pact promoted gradual elimination of cross-border tariffs. This, in turn, encouraged the construction of large pipelines to ease transfer of large amounts of natural gas across national boundaries.
The availability of natural gas in what the authors termed the energy-starved region of the Southern Cone would boost natural gas consumption and change the energy landscape of the region in the first few years of the 2000s.
Three catalysts were expected to restore the region`s energy balance and foster growth in natural gas demand: (1) economic liberalization of the regional economies, (2) liberalization of previously state-owned oil monopolies, and (3) construction of large cross-border pipelines, easing direct exports of natural gas.
Underdeveloped gas market
Despite the Southern Cone`s population, which nearly equals that of the US, the authors noted its natural gas consumption had been modest: less than 3% of worldwide gas demand, compared with US share of about 29% of the world total.
When the Southern Cone was compared to other regions of the world, the picture was much the same and appeared even more exaggerated when natural gas consumption was benchmarked with the gross domestic product of other regions of the world.
Not only was the region generally low in energy consumption, they said, but also the proportion of natural gas in the overall energy mix was small. The Southern Cone`s largest economy, Brazil, for example, had in 1999 a gross domestic product (GDP) of $803 billion, a tenth of the US, but only 1% of the US`s gas consumption.
Despite this meager contribution of natural gas to the Southern Cone`s economic growth, Panigrahi and Grunauer said the long-term demand trend was encouraging. The region consumed 2.1 tcf of gas in 1990, 3.1 tcf in 1997, and an estimated 3.3 tcf in 1998.
This translated into an average growth rate of 5%/year over 1990-98, higher than the region`s average GDP growth of 2.2%/year. At yearend 1999, the long-term growth forecast for the Southern Cone, according to Dresdner Kleinwort Benson economists, was 3.3% GDP growth for 2000.
Driving natural gas demand in the region were:
- Liberalization of the hydrocarbon industry.
- Future electricity generation to be fueled by natural gas, particularly in Brazil.
- Continuing switch of industries from fuel oil to more-efficient natural gas.
- Growth among the gas-to-petrochemical industries.
- Higher penetration of residential markets.
- Growing use of compressed natural gas as an automotive fuel, driven by environmental concerns.
Fast-track liberalization
In the last few years of the 1990s, said Panigrahi and Grunauer, there were dramatic changes in economic liberalization.
Development of several trade blocks such as Mercosur (with members Argentina, Brazil, Uruguay, and Paraguay and associate members Chile and Peru), and the Andean Zone (Bolivia, Peru, Ecuador, Colombia, and Venezuela) eased cross-border trade by reducing tariffs and fostered growth throughout the region.
Concurrently, most state-owned oil and gas companies in the region, driven by economic liberalization and a need to attract foreign capital and technology, underwent some degree of free-market transformation as well.
Argentina was ahead of the curve, they said, with outright privatization of its oil and gas industry in 1993. This transformed the money-losing state-owned monopoly into one of the most cost-competitive petroleum companies in the world.
Venezuela, with huge reserves, having attracted numerous foreign partners and investments in production, could continue to attract significant foreign capital and technology through its Apertura plan involving production sharing.
Bolivia chose strategic investment and capitalization, and Peru embarked on a piecemeal divestment of its oil and gas assets. If Peru`s government could attract sufficient international interest for development of its Camisea project, substantial change would be in store for the dynamics of the natural gas industry in the region.
The authors noted that, with the completion of several pipelines set for late 1999 and 2000, Peru`s Camisea would be the only large natural gas reserve of the top five in the region that would not be linked to major industrial centers in the region.
A latecomer to the liberalization trend was Brazil, with its oil and gas industry in 1999 and early 2000 still undergoing substantial change toward free-market liberalization.
With the effective demonopolization of state-owned Petroleo Brasileiro SA (Petrobras), the regulatory body National Petroleum Agency (ANP) quickly moved to open Brazil`s large hydrocarbon potential to exploration and production by foreign interests.
As a result of ANP`s aggressiveness, the country`s web of import restrictions and subsidies would likely give way to transparent import price-parity terms by 2001.
Panigrahi and Grunauer said that, despite a few regulatory and fiscal problems having dissuaded large joint-venture participation with Petrobras, the government was committed to removing the hurdles and attracting foreign capital.
By mid-2000, two more rounds were to follow the first-round auction of June 1999.
Especially benefiting from the growing foreign interest in Brazil`s hydrocarbon sector were oil and gas production, particularly from the rich hydrocarbon reserves of the deepwater Campos basin, and integrated (natural-gas-to-electricity) energy projects.
Brazilian gas demand
Panigrahi and Grunauer said that the Southern Cone`s future natural gas demand growth would likely be influenced most by electricity generation, in which hydropower would yield market share to gas-based combined-cycle generation.
Natural gas accounted for 22% of South America`s energy consumption, compared with North America`s 27%, Europe`s 21%, and the developed world`s average of 25%. But, this was misleading, Panigrahi and Grunauer said, because Venezuela, Argentina, and Bolivia contributed heavily, while Brazil and Chile-two high-growth economies-were severely underrepresented.
Gas penetration of national energy markets in South America ranged from 53% in Argentina to 4% in Brazil. The disparity reflected varying availability of natural gas.
Argentina`s abundant reserves and production, for example, contributed to the development of its natural gas industry.
Brazil`s natural gas industry, on the other hand, had been undeveloped because of inadequacy of its reserves and indigenous production. The situation was aggravated by the absence of pipelines to transport natural gas from rich reserves in adjacent countries.
Growth in indigenous production and pipeline imports, however, would enable gas to move into Brazilian markets, especially power generation.
By 2004, 5%/year growth in electricity generation would translate into about 12%/year growth in natural gas demand in Brazil.
With several pipeline projects expected to connect the natural gas reserves of Argentina and Bolivia-and later Peru and possibly Venezuela-to Chile and the industrial south of Brazil, the region would undergo substantial growth in natural gas consumption (Fig. 2).
With Argentina`s gas use already high and unlikely to grow more than 4-5%/year during 2001-03, the key drivers of growth in the region were likely to be Brazil, at 25%/year over 2000-05, followed by Chile at 12%/year.
Projects
The most prominent of South America`s cross-border pipelines starting up or under construction early in 2000 was the 3,000-km Bolivia-to-Brazil (BTB) project connecting the gas-rich Santa Cruz area fields to the industrial hub of São Paulo.
The 1.06 bcfd capacity pipeline began moving gas at limited rate in 1999 and would largely fill Brazil`s demand for natural gas over 2000-03. Even assuming moderate demand growth, BTB would increase throughput from about 200 MMcfd in July 1999 to at least 800 MMcfd by 2003.
Panigrahi and Grunauer said that a planned pipeline would move gas further to Enron Corp.`s electricity generating plants in Cuiaba and the industrial city of Porto Alegre.
An existing pipeline that exported gas from Bolivia to Argentina could reverse flow and feed the BTB pipeline from northern Argentine gas fields.
In addition, given the tremendous growth potential of the Brazilian market for natural gas, several pipelines tapping Argentine gas were being evaluated.
Prominent among them were the Buenos Aires-Montevideo pipeline to be built by a BG PLC consortium, which would likely be extended to São Paulo by 2005.
Pipeline projects from Argentina to Chile were at advanced stages. The Methanex and GasAndes pipelines were completed in the 1990s. Two other pipelines, Gas Atacama (connecting the Noreste producing area of Argentina to Mejillones, Chile) and NorAndino, completed in 1999, boosted the supply of Argentine gas to Chilean industries.
Panigrahi and Grunauer said there had been some concern that Bolivian reserves might be unable to meet the potentially large long-term growth in demand for gas in Brazil.
Under this situation, the gas pipeline exporting 177 MMcfd of gas from Bolivia to Argentina could reverse flow and move close to 1.4 bcfd of Argentine gas to Bolivia. Should this happen, the San Jorge area gas fields of northern Argentina could be tapped to export gas to Brazil via Bolivia.
In addition, given strong demand growth from Brazil, there were several pipelines planned, such as Uruguaiana, expected on line in late 2000, and an Argentina-Uruguay pipeline, which, after crossing the Plata River, might connect Buenos Aires with both Montevideo and São Paulo.
As Table 1 shows, assuming healthy long-term economic growth, various other gas pipelines could give rise to about 4.5 bcfd of gas transported across national boundaries by 2005, at an estimated investment of $3.5 billion.
Panigrahi and Grunauer concluded that this would be a giant step in fostering energy integration in the region.
Venezuelan supply
As important as Brazil would be in driving gas demand for the Southern Cone, another country-Venezuela-would likely figure as prominently in the supply picture of all South America.
As 2000 began, much of the petroleum world, along with observers of Latin American politics, were watching events unfold in Venezuela under a new president.
Among other efforts, Hugo Rafael Chávez Frias began a public effort to reorient Petroleos de Venezuela SA (PDVSA) from its historical bias for oil and toward a greater emphasis on developing the country`s vast gas reserves.
Writing in Oil & Gas Journal, Uisdean R. Vass and Ruben Eduardo Lujan of Macleod Dixon, Caracas, stated that the aggressive development of Venezuela`s huge natural gas resources was one of the highest-priority objectives of the administration of Chávez.
For almost 2 years, Chávez insisted that he would do everything necessary to facilitate growth of the gas and petrochemical sectors, among other industries.
At mid-year 1999, Minister of Energy and Mines (MEM) Alí Rodríguez Araque announced that PDVSA`s new business plan for 2000-09 envisioned Venezuelan gas production at roughly 14.5 bcfd in 2010. This level represents an increase of slightly less than 2 bcfd over the previous 10-year plan.
In 1999, Venezuela was producing about 6 bcfd.
Western demand
Venezuela`s proven reserves of natural gas stood in 1999 at 146 tcf, the sixth largest in the world. It was estimated that a further 45 tcf and 36 tcf represented, respectively, probable and possible reserves.
As Fig. 3 shows, however, most of Venezuela`s gas reserves were associated with oil; only about 9% of the total is nonassociated gas.
In addition, Vass and Lujan pointed out, most of Venezuela`s gas reserves were in the eastern half of the country. Venezuela had two separate gas pipelines-one in the west and the other in the east.
The planned joining of the systems would represent a major infrastructure project. Venezuela had about 5,000 km of gas pipelines, with a capacity of 2.6 bcfd.
Considerable demand for gas existed in the west. Major customers for gas included the Complejo de Refinación Paraguana (which included the Amuay and Cardon refineries), the El Tablazo petrochemical complex, and major electric utilities.
On the other hand, the authors stated, there existed virtually no commercial production of nonassociated gas in Venezuela.
Of Venezuela`s 6 bcfd of gas production, more than 70% was used for gas injection, gas lift, operations fuel, or other operations-related purposes. About 30% went to the domestic market where the main users were power generators (32%), petrochemical plants (21%), and steel and aluminum producers (21%). Residential demand was 5% (Fig. 4).
Natural gas accounted for approximately 20% of Venezuelan electricity generation, said Vass and Lujan, with hydroelectric sources supplying more than 70%.
Although gas prices were subject to regulation by MEM, it was possible for producers and industrial customers to agree to higher prices in the case of medium to long-term sales-if MEM approved.
Although most Venezuelan gas was associated with oil production and used in operations, they said, these other factors accounted for the relatively small size of the Venezuelan domestic market for gas:
- The legal regime for gas had been chaotically unclear.
- Prices for gas had been regulated for decades at rock-bottom levels.
- Gas sales were subject to a royalty of 16.66% and an income tax of 67.7%.
- Venezuela had developed significant hydroelectric power.
- Until early 1999, transportation and storage of gas were considered state monopoly activities; private equity capital was excluded, and markets didn`t develop.
- Venezuelan industry in general had remained relatively undeveloped, and the petrochemical industry, a major potential customer for gas, had not grown vigorously.
- The electric power sector was lightly regulated, state-dominated, and stagnant, with decaying infrastructure and heavily subsidized prices.
Apertura
Before Jan. 1, 1976, the Venezuelan oil industry was managed on a concession basis, said Vass and Lujan, under which private companies explored for and produced hydrocarbons, paying royalties and tax to the government.
After nationalization, PDVSA acquired all of the rights of the former concessionaires. Under Articles 1 and 2 of the Nationalization Law, known by its Spanish acronym Loreich, PDVSA had been granted monopoly rights over exploration, production, transportation, storage, refining, exporting, and retailing of all hydrocarbons.
PDVSA, however, had been formed and run as a commercial enterprise, even though it had a single shareholder-the state, through the MEM.
Vass and Lujan said that by the 1990s, it became plain that PDVSA lacked the capacity, on its own, to take advantage of its massive business possibilities.
Thus began the process of apertura (opening), which led PDVSA to seek international-and to a lesser extent, national-partners to develop offshore dry gas as LNG (Cristobal Colón); explore for and produce light and medium crudes (the exploratory rounds); to produce, transport, and upgrade heavy crude from the Orinoco oil belt (Petrozuata, Sincor, Cerro Negro, and Hamaca projects); to reactivate nonproducing or underproducing oil fields (the first, second, and third marginal fields reactivation rounds and the Boscan project); to carry out major outsourcing projects such as Pigap I and II (gas injection), the Maracaibo water injection project, the Jose terminal (oil storage and shiploading), and Accro III & IV (NGL extraction), among others.
In addition, PDVSA and new private players generated a vast market for all kinds of oil-related equipment and services.
During the bitter election campaign of 1998, however, former Pres. Caldera`s oil policies came under attack from Chávez on grounds that the apertura discriminated against Venezuelan firms and would drive down world oil prices without benefiting the overall Venezuelan economy.
Critics demanded development of gas, petrochemicals, and Venezuelan refining.
As the 1990s drew to a close, said Vass and Lujan, it was clear the Venezuelan gas industry needed wholesale reform, with the goal of fostering an investment model that would include foreign private, domestic private, and state players.
Administration policy
On assuming office, Chávez appointed a high-level gas project team, which undertook to review many of the world`s advanced gas legal systems, including Argentina, Canada, the US, Norway, Spain, Mexico, Trinidad and Tobago, and Colombia.
In April 1999, the government was able to obtain a an enabling law from the Venezuelan Congress that gave the president fast-track authority to legislate on defined areas via decree. Such decree laws required no further approval by Congress.
Among many other important items, the enabling law gave Chávez power to issue a new Organic Gas Law (OGL) that became Venezuela`s controlling authority over the gas business and legally superior to all previous laws.
Early, the new Venezuelan government decided to create a legal regime that would liberalize the exploration and production of nonassociated gas and would govern the pricing, transportation, storage, distribution, commercialization, and exporting of all gas, whether associated or not.
Although still being drafted as 2000 began, following are some of the anticipated principal provisions:
-A new license system for exploration and production of nonassociated gas reservoirs. MEM would regulate upstream operations. There would be no required national oil company involvement.
The sector would be open to international private, domestic private, and state participation, the state to retain ownership in place of all gas in situ. Vertical integration of the gas business from wellhead to burnertip would be discouraged, at least on a regional basis.
- A pricing system for gas to allow an adequate return to investors at all stages of the business.
- Improved fiscal terms. All players operating under the oil and gas law would generally be subject to a 34% income tax, the rate to be effectively lowered in many instances because tax credits would be available for new investments.
Moreover, the state would reserve the right partially or totally to waive income tax on gas projects where shown to be justified.
- Clear, firm, and fixed "rules of the game" for producers, transporters, distributors, gas brokers, and exporters in a system resembling that of Argentina.
- A new independent government body, the National Gas Agency, to regulate midstream and downstream. This body would likely function similarly to its Argentine counterpart, Enargas.
- Encouragement of exports of gas, whether by pipeline or as LNG.
- Provisions to ensure significant Venezuelan corporate and capital participation in the new gas business with further provisions favoring Venezuelan suppliers.
Vass and Lujan stated that, shortly after enactment of the OGL, new regulations would provide a more detailed legal framework for distinct issues of major importance, such as pricing, licensing, and rules.
Whatever the regulatory framework, they said, associated gas would remain key in development of Venezuela`s oil production. Gas injection was so critical a feature of the Venezuelan oil industry that it would inevitably continue to generate major economic activity in its own right.
For example, the El Furrial injection project, Pigap II, and Accro III and IV were of this variety. Further major associated gas outsourcing projects were likely because PDVSA found it necessary to invest so much in production infrastructure, said Vass and Lujan.
Operational developments
Various pipeline projects within Venezuela were being considered (Fig. 5).
One of them was the project to unite the eastern and western pipeline systems. Another would pipe gas from the eastern oil fields to the island of Margarita.
The latter project would require construction of a 200-km pipeline, with about 60 km subsea. Further, an expansion of domestic distribution systems was planned for major cities, such as Valencia, Maturin, Maracay, and Barinas.
Many of the midstream and downstream gas assets of PDVSA Gas SA, such as pipelines and distribution systems, needed expansion, refurbishment, or maintenance.
PDVSA Gas was to seek the means to attract private capital to assist in carrying out these tasks, with the objective of providing private investors with full equity in the projects.
It was also probable, Vass and Lujan said, that certain areas with high likelihood of holding dry-gas reserves would be put out for licensing, probably on a project-by-project basis rather than as a licensing round.
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Trenching for the Bolivia-to-Brazil pipeline progresses near Roboré, Bolivia, in late 1998. After more than 20 years of planning, completion of the 3,000-km, 1 bcfd system in 1999 tied a major South American producer and the region`s largest market and represented progress toward regional integration that would accelerate in 2000 and beyond. Photo courtesy of Halliburton Co.
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Pipelaying for the Bolivia-to-Brazil pipeline, shown here along Brazilian right of way, used an automated welding process that, according to supplier Halliburton Co. reduced the standard welding time by one-third. Photo courtesy of Halliburton Co., Dallas.
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