A PIPELINE PROJECT DUE FOR completion late in 1999 symbolized, as did no other, the energy integration under way in Latin America and the fundamental changes in transportation regulation that had driven major projects from Mexico to Argentina.
The 3,150-km gas pipeline from Bolivia to eastern Brazil was to be fully installed by October 1999. Size and scope of the financing, engineering, and construction made the project representative of several key pipelines built or commissioned in the 1990s and, at the same time, exceptional.
Other projects, primarily to move natural gas from Argentina to its neighbors, reflected the energy integration under way in Latin America`s Southern Cone.
In addition, no change in governmental strategy and practice so represented the future of Latin America as that which had been under way in Mexico since 1995.
The integration legacy
Latin American governments in the 1990s turned to privatization and deregulation in their quests for economic growth, employment and tax revenues, and deficit reduction.
An analysis by Price Waterhouse`s Latin American Energy Group in 1998 showed that, as the decade`s end approached, progress had been made toward privatizing the energy sector, particularly in the Southern Cone.
This was true although progress was slower in some industry segments than in others. And rippling effects of the financial crisis in Asia cast a cloud of uncertainty over some of the more ambitious and costly projects.
Nevertheless, mergers and strategic alliances in the region had redefined company roles, said the consultancy group. As these new firms and partnerships searched for added value, an integrated energy industry emerged.
Among the major privatizations:
- In Argentina, state firm Yacimientos Petroliferos Fiscales SA (YPF), with a 50% share in both upstream and downstream markets, was privatized early in the decade.
Gas del Estado, which had held the gas transport and distribution monopoly in Argentina, also was privatized at that time. Deregulation of markets prompted increases in production and investment.
- In Bolivia, the government divided state firm Yacimientos Petroliferos Fiscales Bolivianos into two companies, one for exploration and production and the other for transport. Fields were opened to foreign investment, and refining was deregulated.
- In Brazil, privatization was sweeping. Privatization of all electric utilities yielded about $55 billion. Petroleo Brasileiro SA (Petrobras) opened oil fields to international investment, prequalifying ARCO, BG plc, Conoco Inc., Chevron Corp.,ExxonCorp.,andRoyal Dutch/Shell.
Brazil`s refining business ceased to be a government monopoly. CEG and Riogas also were privatized, along with Comgás in 1999.
- Chile became the first country in the region to privatize and deregulate its energy industry. It has benefited by installation of three major cross-border gas pipelines with Argentina. As a result, it made major strides in reducing air pollution, especially in Santiago.
- In Colombia and Ecuador, state oil companies were unlikely to be privatized, according to Price Waterhouse. But they had carried out joint ventures with companies in the private sector to develop oil and gas fields.
In addition, Colombia began to privatize its electricity sector with the sales of Condesa and Engesa (the distributors and generators in Bogota) for $2.1 billion, as well as gas-distribution services.
- In Peru, Petróleos del Perú SA was privatizing by spinning off or selling its principal assets. The leading companies in the electricity sector also were being prepared for privatization.
The disruption in progress for development of Camisea gas and condensate field was handled with speed as the country immediately put participation in the project up for bid. In addition, 1998 saw completion of the smaller but technologically important Aguaytía gas and electricity-generation project.
- In Venezuela, private companies won participation rights and were developing oil fields in conjunction with subsidiaries of Petróleos de Venezuela SA (Pdvsa).
Fig. 1 illustrates the pipeline schemes and joint-venture structures behind them that, in 1998, led to first flow from the Zuata area of the Orinoco heavy-oil belt by the Pdvsa-Conoco joint venture Petrozuata.
Energy integration
In its study, Price Waterhouse noted that what had been happening in Latin America`s Southern Cone could be fully understood only in the context of global energy trends.
Gas from North Africa and the former Soviet Union supplied Europe. Moreover, individual producer countries (Norway and the U.K., especially) provided major portions of critical gas supplies to most consuming countries (Italy, Spain, France, and especially Germany).
In North America, the U.S. imported much of its gas from Mexico and Canada. Major projects to increase supplies from Canada were well under way. And Japan received fuel from several other countries in Southeast Asia.
At the same time, Price Waterhouse noted, stand-alone oil, gas, and electricity companies had restructured to become entities that sell energy with added value.
In Latin America, the same process was well along.
Argentina, Bolivia, Colombia, Peru, and Venezuela, with large hydrocarbon reserves, sought new markets. Brazil, Chile, and Uruguay had unsatisfied energy demand and lacked natural gas. Early, they had to use more-expensive, less ecologically desirable fuels.
The solution to the needs of both groups was simple: integration. Private-sector companies, in a very short time, managed to achieve what governments discussed for years without results.
Although, for some years, Argentina imported gas from Bolivia by pipeline and Venezuela supplied areas in northern Brazil, the starting point for this new era of integration was the start-up of the oil pipeline between Argentina and Chile in 1995.
In addition, Argentina and Venezuela exported oil to Brazil, becoming, respectively, the first and third largest suppliers of crude to that country.
And, although the idea was shelved as uneconomical, for a time there was even talk of an oil pipeline between Venezuelan fields and Florida.
Gas movements
Argentina, Bolivia, and Peru were to provide gas for a pipeline network supplying Chile and Brazil, where gas accounted for less than 10% of energy supply.
Argentine connections
This network began to take shape through the construction and operation of three gas pipelines from Argentina to Chile.
The 287-mile, 24-in. Gasoducto GasAndes, from La Mora, state of Mendoza, Argentina, to Santiago, was built and commissioned in 1995-97.
Another pipeline to meet Chilean demand with Argentine natural gas began construction in September 1998 and was to be complete by 2000.
Gasoducto del Pacífico was to transport natural gas from Loma de la Lata in Argentina`s Neuquén Province, to Talcahuano, in Region VIII in the south of Chile.
Natural gas was to be supplied to the cities of Concepción, Talcahuano, Los Angeles, Coronel, Penco, and Lirquen. An extension was to go to an industrial plant in Mininco in Region IX (Fig. 2).
Gasoducto del Pacífico shareholders are TransCanada International SA (TCI), Calgary (30%), Gasco (Chile, 20%), El Paso International (U.S., 21.8%), ENAP (Chile, 18.2%), and YPF (Argentina, 10%).
TCI was project manager for design and construction and system operator upon start-up. At start of construction, the company was NOVA Gas International, the international arm of NOVA Corp., Calgary, which in 1998 merged with TransCanada PipeLines Ltd.
Total investment in Gasoducto del Pacífico amounted to $317 million (U.S.), divided between investment in Argentina ($127 million) and Chile ($190 million).
This amount excludes $44 million allocated to supply industrial customers and $14 million for housing and industrial and commercial distribution in Region VIII.
The pipeline was to run 537 km between Loma de la Lata (Argentina) and Talcahuano (Chile). The length in Chile between the Cordillera de Los Andes and Talcahuano is 241 km; the rest is in Argentina.
An additional 102 km of branch lines was to supply other towns and industrial customers in the region.
Construction in Argentina was to be completed by August 1999. In Chile, construction was to be completed in October 1999.
Projected demand for natural gas in Concepción, Talcahuano, Penco, Los Angeles, and other main cities in Región VIII and to Mininco in Región IX in the south of Chile was as follows:
- 1999: 1.2 million cu m/day.
- 2005: 4.5 million cu m/day.
- 2010: 7.1 million cu m/day.
- 2020: 9.0 million cu m/day.
At start-up, the pipeline was to transport close to 1.5 million cu m/day of natural gas.
Still another line, Gasoducto Atacama Cia. Ltda., was a 300-MMcfd natural-gas pipeline from Argentina to northern Chile.
It was a joint venture of four companies, including major shareholders CMS Energy Corp., Detroit, and Chilean power generator Endesa.
The 914-km, 20-in. pipeline in 1998 began transporting gas from gas fields in Argentina`s Neuquen basin to an electric power plant the partners were building at Mejillones, Chile (Fig. 3).
Total cost of the pipeline and plant was initially estimated to be about $750 million.
The pipeline route includes a variety of challenging terrains, according to CMS.
The line was to cross the Andes at Paso de Jama, reaching a maximum altitude of about 5,000 m. It also crossed two rivers-Rio Vilama and Rio San Pedro. In Chile, it was to traverse the Atacama desert.
GasAtacama secured contracts for 160 MMcfd of gas. Of that total, 127 MMcfd would be shipped to the 740-MW combined-cycle plant the group was building at Mejillones.
The Mejillones plant came on stream in early 1999.
A portion of the 127 MMcfd of gas shipped to Mejillones was to be transported farther south to a 350-MW plant Endesa was building at Taltal, Chile. The 160-mile Gasoducto Taltal extension was expected to cost $30 million.
On the eastern side of Argentina, Gasoducto Cruz del Sur SA, a 50-50 venture of BG plc and Pan American Energy LLC in 1998 let a frontend engineering and design contract to Intec Engineering Inc., Houston, for the Buenos Aires-to-Montevideo pipeline project. Pan American Energy is a joint venture of Amoco Corp. 60% and Bridas Corp. 40%.
The trunk line from Colonia, Argentina, to Montevideo was to be a 160-km line of 18-in. OD pipe, with laterals to feed several cities. The laterals consisted of 200-km of 3-18 in. OD pipe.
The project also included metering stations, pressure-reduction stations, city gates, and a compressor station.
Brazilian demand
Gasoducto Cruz del Sur was one of several projects, planned or under way, to move Argentine gas in the direction of Brazil, whose annual economic activity and therefore energy-demand potential dwarfed those of the rest of the Southern Cone nations.
Argentina, Bolivia, and Peru each had plans to provide gas to Brazil. Some seemed to overlap but in fact were complementary; none of these countries had sufficient reserves to meet Brazil`s demand.
The most ambitious project intended to supply the Brazilian market was to be completed and flowing natural gas during third quarter 1999.
In August 1997, work began on the 3,150-km, 32-in. pipeline from Rio Grande in Bolivia to Sao Paulo and along the Brazilian coast to Porto Alegre (Fig. 4). The $1.9 billion project was financed in two sections: Construction of the Bolivian-Brazilian section to Sao Paolo was completed in late 1998; installation of the remainder of the line to Porto Alegre was to be complete by October 1999.
Interest holders in the Bolivian section are Transredes 51%, Enron Corp. 17%, Shell International Gas Ltd. 17%, Petrobras Gás SA (Gaspetro) 9%, and BTB 6%.
Transredes consists of Enron 25%, Shell 25%, and Bolivian Pension Funds 50%. BG plc, El Paso Natural Gas Co., and BHP Petroleum Pty. Ltd. equally own BTB. Gaspetro is a company of the Petrobras system that was formed to develop activities connected with natural gas.
The Brazilian section of the pipeline is owned by Gaspetro 51%, BTB 29%, Transredes 12%, and Enron and Shell 4% each.
Gas Transboliviana SA (GTB) operates the Bolivian side of the pipeline and is effectively controlled by the Shell-Enron consortium.
Operating the Brazilian side of the project is Transportadora Brazileira Gasduto Bolivia-Brazil SA (TGB) with slightly less than 80% of the total project.
Initial nominal capacity on the line was to be 30 million cu m/day. Initial contracts called for delivery of 9 million cu m/day growing to 18 million cu m/day by 2008.
The Bolivian section is 557 km from Rio Grande to Puerto Suarez. In Brazil, the line runs through Corumbá, crosses the states of Mato Grosso do Sul, S„o Paulo, up to the city of Campinas, and on to Paraná and Santa Catarina states, reaching the capital of Rio Grande do Sul state, Porto Alegre.
Diameters from Campinas will range from 16 in. to 24 in.
Initially, the line was to have three compressor stations: at Yacuses (Bolivia), CampoGrande, and Penápolis (Brazil). When the line was fully flowing at 30 million cu m/day, 16 compressor stations were to be operating, four in Bolivia.
The pipeline was to have two control centers, at Santa Cruz de la Sierra in Bolivia and in Rio de Janeiro.
Mexican transportation changes
Regional governmental attitudes towards energy transportation changed in Latin America. And the change was more striking in Mexico than in any other Latin American nation, given popular views of energy as a national patrimony.
A member of the Energy Regulatory Commission (Comisión Reguladora de Energía-CRE) writing in Oil & Gas Journal reviewed the fundamental changes that had taken place in Mexican natural-gas transportation after the 1995 passage by the Congress of Mexico of the law that created CRE.
The law mandates that the five-member commission achieve a competitive, efficient, safe, and sustainable gas industry, allowing the country to make the transition to an open market from a monopoly by Petróleos Mexicanos (Pemex), the Mexican national oil and gas company
Situation before CRE
Until 1995, said Commissioner Raul Monteforte, Pemex controlled all segments of the gas industry in the country (Fig. 5).
Exploration and production, as well as the firsthand sales of both oil and gas, were exclusive prerogatives of the Mexican government through the 60-year-old Pemex.
The government controlled gas processing, gas imports, and gas transmission through the national pipeline network. Furthermore, Pemex`s monopoly included system extensions, branches, and connections even if the users built them.
Additionally, Pemex was involved in gas distribution within population centers. The most important users were state petrochemical companies and the national electric utility.
Small clusters of private distribution companies survived for decades in this environment, said Monteforte, particularly in northern Mexico.
But these companies endured many problems related, on the one hand, to investment, technical development, and growth and, on the other, to contracts, payments, and supply relationships with Pemex.
By 1995, investment in the Mexican gas industry was so low that infrastructure lagged behind the needs of the economy.
At the same time, services were restricted and unreliable. As a result, inadequate fuel mixes prevailed, and there were frequent reliability problems and widespread inefficiency.
Clearly, said Monteforte, restructuring of the industry was needed.
In 1995, the Mexican government launched gas reform based on defined energy policies and legal changes. Strategic considerations and a clear diagnosis of energy priorities lay behind this reform process.
Fig. 6 shows how this reform envisioned Mexico`s natural-gas industry under the new regulatory regime.
Gas reform aimed at solving problems and bottlenecks and at promoting consumption and related investments. Topping the list of priorities were such vital energy goals as fuel substitution and use of cleaner fuels.
The legal and institutional reforms focused on creating a solid platform for private investment in gas transmission, distribution, and storage. This comprehensive reform required a new regulating authority with power and autonomy for regulating existing public and private monopolies, as well as the new participants in a wholly transformed market.
Regulatory framework
These changes altered the long-term vision of the gas industry. Activities reserved to Pemex concentrated on supply. The midstream and downstream segments of the industry are completely open to the private sector.
The national pipeline network, while remaining under the control and ownership of Pemex, became subject to new regulations, including mandatory open access, general terms and conditions of service, and regulated rates.
Moreover, the number of privately owned transmission pipelines was expected to increase, said Monteforte.
Distribution is performed totally by private companies entitled to make their own supply arrangements and undertake their own commercial activities.
Based on the Law of the Energy Regulatory Commission, CRE led in development of the new gas industry. The commission decides by majority vote with all resolutions being public and created a complete set of legal instruments to accomplish its mission:
- The Natural Gas Regulation embodies the main tenets of regulated services, as well as the permit regime for gasrelated activities.
- The directives (or orders) on prices, accounting, and geographic zones, and the technical standards for the gas industry are also powerful regulatory tools.
- The commission requires technical standards that follow internationally accepted practices to ensure high technical capability, safety, and reliability in all segments of the industry.
In this way, said Monteforte, Mexico should be able to make the industry`s behavior conform closely to the generally accepted standards of those in nations with mature gas markets.
- Finally, CRE regulates the industry through issuance of permits that contain a number of specific obligations, and of specific orders, depending on each case.
Application of gas regulations had farreaching effects on Mexican gas markets. The granting of definitive permits under the new regime confirmed the importance of these effects: Local distribution companies obtain these permits only after they comply with regulatory requirements.
Regulations apply to Pemex`s monopoly to grant the permits for gas transmission and first-hand sales. The permit regime also targets private transportation as a public service and transportation for selfuse: transportation by private firms that own pipelines as part of their business strategies, for example.
Monteforte said the CRE retained many other tools to support development of the domestic gas market. These include enforcement of the regulations, supervision of such crucial aspects as safety, efficiency, orderly transition to the new regime, and fairness in the provision of services.
The commission also has the power to inspect facilities and to arbitrate in controversies.
Market development
Competitive bidding for geographic zones became an important and novel process in Mexico.
The CRE completed international competitive bids in all Mexican cities.
Further bids were to be taken for geographic areas in the north and center of Mexico, including some of the main population centers and industrial sites.
Eventually, a bid was to be issued for the southern city of Merida, consequent to the coming on line in 2004 of the Mayakan pipeline across the Yucatan peninsula (Fig. 7).
In March 1997, Comisíon Federal de Electricidad (CFE), Mexico`s national electric utility, awarded a contract to build, own, and operate the Merida pipeline project to a consortium comprising TransCanada PipeLines (TCPL; 62.5%); Merida Pipeline Ltd., an affiliate of InterGen (32.5%); and Gutsa Construcciones SA de C.V. (5%).
The Energía Mayakan pipeline was to receive natural gas at Ciudad Pemex, in the state of Tabasco, and deliver it to several power plants in the states of Campeche and Yucatán in Mexico`s Yucatan Peninsula and to other customers along the pipeline. The pipeline was to deliver gas to power plants being converted from fuel oil.
The project commenced construction in February 1998; initial deliveries were to flow by September 1999. TCPL said the Energía Mayakan pipeline would be about 700 km long with an initial capacity of 7.4 million cu m/day, increasing to an ultimate capacity of 10.5 million cu m/day.
Total initial investment in Energía Mayakan was expected to be $260 million, growing to $276 million by 2004.
With the conversion of about 655 MW of power generation to natural gas and the construction of plants with a total of 855 MW of natural-gas-fired power generation capacity, TCPL said, this project would provide a clean, low-cost energy alternative to fuel oil and diesel, help meet CFE`s demand for an efficient fuel-transportation system, and provide employment for skilled workers and laborers during construction and operation.
The first compressor station and gas conditioning and measurement facilities were to be installed at the reception point of the pipeline at Ciudad Pemex by September 1999 with the rest being completed during the life of the project.
Bid, permit processes
Bid winners for urban local-distribution-company contracts tended to be powerful consortia with direct and indirect participation by Mexican companies in different stages of the distribution systems.
The effects on economic activity and jobs were strong and positive.
The bid process was competitive: The best proposal meeting the highest possible standards at the lowest prices (regulated income per unit) won the bid.
The CRE evaluated bids based on technical and economic criteria stated in bid documents. These criteria were based on sound engineering considerations, the safety of the proposed systems, and the relationship between system design, costs, volumes, minimum coverage, customer base, and investment viability, among others.
The process culminated with the granting of a permit for 30 years and the concession of exclusivity inside the geographic area for 12 years.
Gas transmission also was subject to the permit regime.
The CRE evaluated the technical and economic parameters that ruled the pipeline industry to ensure safety, reliability, quality services, and competitive rates. Transportation permits were valid for 30 years, with no exclusivity. The CRE might grant several permits for the same route or permits for two competing routes serving the same markets. It did so in the case of Palmillas-Toluca and Jilotepec-Toluca, where Tejas Gas competed against NOVA-NGC. This form of competition precluded any possible vertical integration with the distributor in Toluca.
The CRE could also grant permits to self-users alongside an open-access transmission pipeline. Vertical integration was generally not allowed; its presence would depend on special and justified circumstances.
Pipelines could not deliver gas to endusers inside franchise areas, only to other permit holders (that is, distribution companies and self-users holding permits). Hence physical and commercial by-pass was allowed, subject only to minimum volume requirements.
The permit application had to include full definition of route and capacity.
Mandatory open access and the possibility of capacity release were two significant aspects of the transportation segment of the industry. Rates were regulated according to the principle of maximum yield per unit of gas (maximum regulated income).
The regulations required consistent standards for operations and transactions in the pipeline industry. These included capacity booking, nomination procedures, flowing-gas standards, and, generally, business practices such as contracting and billing. These standards were gradually to follow those implemented by the U.S. Gas Industry Standards Board.
The case of PGPB
The transportation permit of Pemex Gas y Petroquímica Básica (PGPB) was fundamental to the new gas industry in Mexico, said Monteforte (Fig. 8).
Until 1995, the PGPB monopoly provided bundled services including gas deliveries sold and transported by PGPB as a sole supplier. Balancing the system was entirely in the hands of the monopoly, and operation rules and standards were discretionary and arcane.
Contracts were often whimsical and unreliable, and rates would hide almost everything, from cross-subsidies to indirect costs, under a unique volumetric concept.
The new regulations require PGPB to obtain its transmission permit, subject to the maximum rate regulation in the country. In 1998, therefore, the national pipeline network became subject to mandatory open access, obliged to transport third-party gas.
Services were unbundled, and users had to book for capacity and nominate their gas deliveries while taking responsibility for injection and withdrawal of their own gas. As a result, new, complex balancing procedures and detailed, documented operation rules took effect and included in the PGPB permit.
A definition of capacity covered availability parameters and utilization factors for every combination of routes. Rate calculation followed a methodology that considered capacity-distance charges and was subject to the caps set forth by the pricing directive.
Most significantly, as a vital document in that permit, the General Terms and Conditions of Service (GTS) framed the provision of services and the contracts themselves.
Simultaneously, first-hand sales are regulated according to the principles of nondiscrimination, contract transparency, consistency, and supply reliability, described in the General Terms and Conditions for the First-Hand Sales of Natural Gas. Eventually, trading was likely to become a separate and competitive activity.
Complying with the regulations turned out to be a major challenge to PGPB as well as to the commission. This was due to the requirements imposed by the CRE, said Monteforte, as well as the rigidity and some lethargic practices at PGPB.
North American market
Mexico`s open-access program was a major undertaking covering more than 11,000 km of interconnected pipeline. The objective, said Monteforte, was to configure an open and seamless system integrating third-party contracts and nominations into the schedule of pipeline operations.
This differed from establishing open access and unbundling services in, for example, the U.S., with its huge maze of advanced interstate and intrastate pipelines and well-established distributors and long-standing users.
Given the specific circumstances, providing effective open access was potentially more manageable in Mexico due to centralization and to the smaller number of participants. Other difficulties, however, including technical inadequacy and resistance from the monopoly, were possible for the same reasons.
The process also stood out, said Monteforte, because PGPB was adopting GISB standards for crossborder transactions as a result of the interaction with U.S. pipelines, while its GTS included similar standards for domestic transactions.
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Two subsea pipelines, under construction in 1998, carry upgraded Petrozuata crude oil 6.9 km to a single point mooring for tanker loading. Photo courtesy of Conoco Inc., Houston
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Right of way for Gasoducto del Pacífico traverses rugged terrain in shadows of the Andes Mountains.
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