South America’s LNG Dash

An unfortunate combination of bad policies and bilateral rivalries has pushed South America’s regional energy integration dream out of reach, at least for now. Over the past two decades, regional leaders promoted schemes to link South America’s natural gas producers with consumers through an international pipeline network. That multi-billion-dollar dream has given way to a series of LNG regasification terminals, as Brazil and Chile – and to a lesser extent, Argentina and Uruguay – realize that they must look to other continents for reliable gas supplies. Regasification will serve to meet the short and mid-term needs of importers, although the high cost of LNG could prevent it from taking a long-term hold in the continent.
With the region’s most promising gas reserves, Argentina, Bolivia, Peru, and Venezuela were supposed to lead the push to integrate South America’s energy industry. But nationalization in Bolivia has restricted investments in natural gas E&P, and Venezuela is just starting to focus on its gas potential. Peru, meanwhile, has opted to export its gas in liquefied form outside South America rather than set aside its political grudges and sell to Chile. And Argentina can barely supply its own citizens, as its policy of fixing energy prices following the peso devaluation earlier this decade stunted investments, and sent demand skyrocketing.
Argentina and Uruguay were hit hard by the region’s natural gas crisis during the southern hemisphere’s colder than usual 2007 winter. Although the populace was largely protected from gas shortages, local industry was not. Although they need to increase gas supplies, the countries are still recovering from their economic crises and will have difficulty coming up with the financing to develop infrastructure and secure LNG supplies. Argentina is likely to lift the freeze on natural gas prices after this year’s elections, which should help increase its domestic gas production and eventually relieve pressure on Uruguay and Chile.
Chile and Brazil have been hit hardest by the gas shortfall. The two importers heavily bought into the idea of regional integration, building thousands of megawatts of gas-fired generators that now sit idle or operate on expensive diesel. This means power prices are high, and in Chile the threat of power rationing looms.
As a result, the two countries are developing regasification plants that will be operational before the decade is out. And Brazil is mulling plans to build four additional import terminals.

But imported LNG is more expensive for Brazil and Chile than regionally produced natural gas. Brazil pays $4.70 per million Btu for Bolivian gas and will likely pay something close to Henry Hub rates for LNG. Only Chile is building a permanent regasification terminal for its heavily populated central region. Brazil is developing two flexible floating terminals, and Chile’s second regasification plant, to be located near the northern mining region, is a floating terminal.