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SOUTH AMERICAN ENERGY MARKETS WEEKLY ROUNDUP: How much gas reserves does Peru really have?

June 21, 2009

South American Energy Markets (SAEM) now publishes a weekly roundup of the top-five stories including analysis affecting energy markets in the region with links. The roundup includes all the major web dailies of South America and other websites that write about the region’s energy markets. SAEM Weekly Roundup appears on Mondays and is published by noon London time.

Monday, June 15, 2009

PERU/PROVED GAS RESERVES

After the ministry of energy and mines announced this month that Camisea’s (Block 88) and adjacent Pagoreni’s (Block 56) proved reserves rose by 23.3% to 17.4Tcf from 14.11Tcf after Gaffney, Cline and Associates (GCA) had certified the reserves on request by Pluspetrol (operator) of Argentina, critics are now claiming that the reserves were “inflated” on purpose, reports Lima daily La Republica.  While it is not exactly clear in the article, former Energy Minister Carlos Herrera Descalzi appears to suggest that GCA had lowered reserves from both blocks by 21% to 8.795Tcf.

COMMENT: Anyone who has been following this ongoing debate between those who claim that Peru has enough future gas reserves to supply the domestic market and those that claim the contrary, the La Republica article is a good example of the confusion surrounding the issue. Pluspetrol commissioned the certification from GCA to show that there are enough reserves but that has now apparently been cast into doubt.

The target of the groups that believe Peru does not have enough reserves is the $3.8-billion Peru LNG project, which will have online in 2010 South America’s first-ever liquefaction plant. The situation is distressing from a number of standpoints since large-scale projects are emerging without any assurances if there will be enough gas to supply them.  One of these is a recent announcement by Kuntur Transportadora de Gas (see brief below), which plans to build a $1.5-billion pipeline to the south of Peru, announced that it is asking energy regulator Osinergmin to approve transportation tariffs of $2.96/MMBtu. Osinergmin is expected to decide the matter in October.

If one speaks to some of the petrochemical projects planned in Moquegua department by groups such as Petrobras and SK Corp of South Korea, their greatest concern is if there will be enough gas to supply such plants. Another factor that can also throw a monkey wrench to such plans is the political climate. Will Peru, the darling of foreign investment in Latin America, be overtaken by nationalist sentiment as has been the case in Bolivia and Argentina? This is one important variable and risk factor that investors will have to take into account when making multi-billion-dollar investments in the south of the country. But if Peru can prove up reserves soon this will help to take away some of the ammunition that the skeptics are throwing at the government.

PERU/GAS SUPPLY

Kuntur Transportadora de Gas (KTG), the company that has won a concession to build a 1,085km pipeline to the south of the country, announced that 86% of the demand in the south of the country is uncertain. The lion’s share of the future demand from the the$1.5-billion Gasoducto Andino del Sur pipeline will be thermal plants, which are seen consuming 63% in 2015 and 71% by 2020 of gas from the pipeline.  The government is drafting plans to promote gas usage by future thermal plants but the crux of the problem still lies in supplies. This was expressed recently by SK Corp, which announced plans to build a $3-billion polyethylene plant that would require 80 million cu ft/day.  SK Corp director, K. J. Kim, told SAEM that supplies were the big question mark.“Pluspetrol will hold a [private gas] tender in the end of the year,” he said. “Taking into account the [ongoing] debate in Peru about gas supplies, this is one of the biggest challenges [concerning the construction of the plant].”

COMMENT:  One of the matters that is worrying KTG is if soaring demand to Lima will take away gas supplies from the southern pipeline. The only way that Peru can calm all sectors and opinions is by proving up reserves. However, short-sighted energy policy that aims to supply the market with cheap gas ($1-$2/MMBtu wellhead prices) spells disaster.

We saw the same matter happen in Argentina: inexpensive gas led to greater consumption, which in turn did not fuel investments because wellhead prices were so low. If Peru wants to resolve its future gas problems, it must put some backbone in its energy policy and take a longer picture. It must stop trying make everyone happy and fuel gas consumption for short-sighted political gains.

plano1

The 1.085km route of the Gasoducto Andino del Sur

BRAZIL/ECONOMY & GAS CONSUMPTION

Brazilian Finance Minister Guido Mantega sees the Brazilian economy growing by 1% in 2009 and by 4% and 5% in 2010 and 2011, respectively, reports Rio de Janeiro daily O Globo. That compares with 5.1% growth in 2008 and 5.7% in the previous year, according to IBGE. Brazil officially entered into recession when it reported for a second-consecutive quarter a contraction of 0.8% in the first quarter versus the previous one. It is the first time that Brazil’s economy is in recession since 2003. Mantega said that the countries that form part of Bric (Brazil, Russia, India and China) will spearhead  growth after the global economic crisis ends. “Bric will lead economic growth in the next years,” he said.

COMMENT: What does Brazil’s humble economic growth in 2009 and greater expansion in 2010 and 2011 mean for gas consumption? One matter is for certain – it does not raise a very encouraging picture for Bolivia, which exported on average 30.917 million cu m/day last year. Petrobras gas and energy director, Maria das Gracas Foster, said recently that the economic crisis has forced Brazil to have a surplus of 20 million cu m/day. This was confirmed by a plunge in gas imports from Bolivia (see table below) due to lower gas consumption by industry and thermal power plants. According to gas association Abegas, industry consumed 27.6% less gas in April to 19.255 million cu m/day versus 26.585 million cu m/day a year ago, while thermal plants have seen a reduction of 70% to 4.007 million cu m/day.

If Brazil has such a big gas surplus when the economy shrinks by 0.8% as happened in the first quarter, how much could consumption grow if it expanded by 1%? Taking into account that Brazil has more gas than it needs, imports from Bolivia will probably not exceed this year 24 million cu m/day, the minimum stipulated in the take-or-pay of the 1999-2019 gas purchase agreement . This will spell hard times for Bolivia, which received last year about half of its export earnings from gas.

If the Brazilian economy starts to expand by 4%-5% annual rates, it will mean higher imports from its western neighbor. However, Brazil’s gas output and consumption have grow rapidly as we saw last year. Gas production rose by 28,25% to 34.5 million cu m/day from 26.9 million cu m/d in 2007, while consumption rose by 17.75% to 65 million cu m/day from 55.2 million cu m/day.

While it is clear that Brazil needs Bolivian gas to plug demand, the question is how much will it need from its neighbor.

Gas imports by Brazil from Bolivia during October 2008-April 2009 in millions of cubic meters per day

Month                            Volume

October……………….31.194

November……………29.496

December…………….25.583

January……………….20.407

February……………..20.083

March…………………19.858

April…………………..20.979

Source: Agencia Nacional do Petroleo

ARGENTINA/ENERGY SHORTAGES

Eight former energy secretaries met with Argentine lawmakers to warn them about the country’s ever-worsening energy situation. Jorge Lapena, who served as energy secretary during 1986-88, told SAEM that Argentina could avert a crisis “in 7-8 years” if it took onboard its recommendations.  One of the matters that Lapena would change if he were appointed energy secretary would be to draft a new hydrocarbons law and assure energy companies that Argentina will respect contracts signed with energy companies. “If you look at a map of Brazil and the Malvinas (Falkland Islands) there is a lot of exploration going on,” he said. “If we look at offshore Argentina it is almost negligent.”

Below is a video clip in Spanish with Daniel Montamat, former energy secretary (1999-00) and YPF president (1987-89).

COMMENT: This is the second time this year when the eight energy secretaries have come out in public to raise concern over the energy situation. The first time was in April at the Faculty of Engineering of Buenos Aires, when their appearance was canceled, apparently from government pressure, at the last moment.

The proposals by the energy secretaries is sensible. It asks for greater incentives to energy companies to explore and invest in infrastructure projects. More effective regulation is also mentioned in the proposal. One of the most important of these is changing the hydrocarbons law, which dates to 1967. The law is “confusing and outdated,” according to Lapena.

Argentina has already lost its self-sufficiency in gas and oil will soon follow. When this happens, Argentina’s balance-of-payment problems will start to turn ugly. Statistical agency INDEC announced that the fiscal surplus had tumbled in May by 85% to 914.4 million pesos ($247 million) from 6.026 billion pesos a year ago.

The government of President Cristina Fernandez de Kirchner does not appear to be worried about the situation since she does not believe the country is suffering from an energy crisis in the first place. Such a short-sighted stance shows that matters will not change on the government energy policy front anytime soon.

BOLIVIA/TRANSREDES

It only took a few days for YPFB Transportadora (formerly Transredes) head Guido Angulo to be sacked after he accused the president of the state-owned energy company, Carlos Villegas, of mishandling and alleged corruption in Transredes’ nationalization when he was hydrocarbons minister last year, writes Santa Cruz daily El Mundo. Angulo had accused his former boss of “overlooking” a $200 million debt when YPFB paid $250 million to Shell and Ashmore Energy International to purchase the transporter. Villegas denied Angulo’s accusations and said that YPFB paid $50 million more in order to avoid going to international arbitration.

COMMENT: YPFB is a miniature picture of the political and economic problems Bolivia faces: mismanagement, corruption allegations and a lack of qualified personnel and transparency. Already the disgraceful exit of YPFB’s former head Santos Ramires at the end of January was a big blow to confidence.

The very problems that Bolivia’s energy sector underwent during the 1990s and early 2000s due to “neoliberal” policies are threatening to undermine it again. If one studies closely the opening-up of countries such as Bolivia in the previous decade, it would be naive to claim that privatization and deregulated markets were problem-free. The issue at hand, I believe, was the lack of a long-term comprehensive energy policy, proper regulation and qualified people to overlook the sector. Bolivia faces the same challenges and threats today but under a new government.

So sit back, read the stories from the local media on embattled YPFB with a grain of salt. What you see behind the news is a much scarier picture of  the threats facing Bolivia: political bickering, lack of transparency and politicking especially during an election year – the seeds of Bolivia’s energy sector’s present and future turmoil.

These briefs can be reprinted as long as the source is cited.

If you have any feedback on today’s articles, or if there are energy industry stories you think should be covered, or need research assistance, please contact etessieri@latamreport.com.

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