The Emergence of Global Gas Markets: Latin America
The Latin American natural gas market has historically been marginal in terms of the world stage. However, the discoveries of large basins of shale gas both locally and in the United States have been shifting the natural gas landscape in Latin America. In the final blog of our five-part series on gas, I will take a look at the emergence of global gas markets in Latin America.
In the past, Trinidad and Tobago was the only country in Latin America who exported natural gas internationally, mainly to the United States. The rise of domestic gas production in the United States, estimated to hit 69.4 Bcf/d in 2014 according to the Energy Intelligence Agency (EIA), will force Trinidad and Tobago to shift the export of liquefied natural gas (LNG) to other countries. Fortunately, the market for LNG is growing worldwide with six regasification terminals already opened in Chile, Argentina, and Brazil (see Figure 1).
Argentina’s Energy Independence
Further pressure could be put on Trinidad LNG exports to Latin America as those countries start developing their shale gas fields. Argentina, the largest natural gas producer and consumer in South America, became a net importer of natural gas in 2008. However, analysis by EIA indicates that Argentina has the third largest amount of technically recoverable shale gas in the world at 773 Tcf. Extraction of this gas could make Argentina a natural gas exporter and would likely mean larger exports through pipelines to countries such as Chile and Uruguay. Many shale gas projects, particularly for the Neuquén Basin, are currently under review or in development and Argentina already produces over 230 Mcf/d of unconventional natural gas. The Argentinian government is doing their part to boost shale production by raising prices to produces to $7.5/MMBTu in order to encourage production in shale gas.
Countries such as Brazil, Chile and Uruguay stand to gain from Argentina’s development as their need for natural gas has typically been supplied through LNG import and some pipeline flow from Argentina. The relationship between Argentina and Chile, which has been rocky at times, could improve as both countries look toward joint ventures to develop shale gas basins that lie across both countries.
Sitting next door to the now gas rich United States has created unique circumstances for Mexico. Mexican gas prices are tied to prices at Henry Hub, which saw prices fall to a 10-year low with the influx of domestically produced shale gas. The resulting drop by 32 percent of Mexico’s wholesale natural gas price has seen demand in Mexico rise to record highs, particularly as Mexico is relying more and more on gas-fired power generation. This has forced Mexico to cut supplies. According to the Mexico Steel Chamber, in some plants, gas supply was reduced by 40-50% of what was originally agreed. With the influx of natural gas production worldwide, it is somewhat curious that Mexico is suffering such a dramatic shortage. These shortages could be resolved by 2014 as there are a number of pipeline extensions and capacity upgrades underway to increase the supply.
Importing natural gas from the United States is not Mexico’s only option. According to the EIA, Mexico has an estimated 681 Tcf of technically recoverable shale gas resources, which was the fourth largest examined in the study. Despite this large opportunity for unconventional gas, Mexico’s production has dipped in recent years largely due to the diverging costs of oil and natural gas which encouraged exploitation of the former.
Figure 2: ICE DA Henry Hub Gas Price, Graph Produced in ZEMA
All of Latin America will be impacted by the natural gas market over the coming years. Development of major shale gas deposits in Mexico, Argentina, Brazil and the United States will likely keep gas prices down globally. Those countries with large basins could export large quantities of gas to other markets either through pipelines or LNG terminals. However, for oil rich countries, the high price of crude will likely keep oil as the focus for exports as it will bring more wealth to government coffers.