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SOUTH AMERICAN ENERGY MARKETS WEEKLY ROUNDUP (July 31-August 7): Repsol YPF sees Brazil as a good market for expansion

July 31, 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.

Friday, July 31, 2009

SPAIN-BRAZIL/EXPANSION

Repsol YPF sees Brazil as a good country to grow in the future, Miguel Martinez, Repsol YPF general director, was quoted as saying in Buenos Aires business daily Cronista Comercial. “If you corner me with the question, I would say that Brazil is where the future of the company lies,” said Martinez, adding that the Spanish major is seeking to reduce its ownership in Gas Natural and its Argentine subsidiary, YPF. The Repsol YPF director blamed lower oil, gas and refining margins for the group’s 58% fall in the first half of the year in net income (€889 million) from a year ago.

COMMENT: After expanding with gusto in Latin America in the 1990s, Repsol YPF has been quietly exiting in recent years markets such as Argentina and Bolivia due to increased government intervention in energy markets. Even though Repsol YPF has played down its long-term plan to reduce risk in some Latin American countries, it has expanded into other markets such as the Middle East and Northern Africa. Brazil also appears to be the new hope of the company taking into account the huge oil and gas potential of the Santos Basin.

ARGENTINA/GAS WELLHEAD PRICES

In the face of massive layoffs in the energy industry and sagging output and reserves, the government of President Cristina Fernandez de Kirchner has agreed with the oil and gas producing provinces to raise long-overdue wellhead prices, which have been frozen for the past eight years, reports Buenos Aires daily Clarin. Under the new agreement, the wellhead price of gas will rise to $1.90 compared with $1.60/MMBtu and in 12 months to $2.60/MMBtu charged to gas generation plants. “It is no longer the case that gas [wellhead] prices are frozen as they were for eight year,” said Jorge Sapag, governor of gas-rich Neuquen. “Gas is an expensive commodity.”

COMMENT: Despite the hike in wellhead prices, they are still well below those charged by countries such as what Bolivia charges Argentina. On July 20, the price of gas quoted by Henry Hub was $3.41/MMBtu. One of the big unanswered questions is if new wellhead prices will pave the way for upstream investments. If the 1990s are anything to go by, when Argentina had clear investment rules and companies were eager to enter the country, energy companies were not too enthused about upstream investments to prove up reserves. If in good times there was little investment, what has changed? Very little, unfortunately.

ARGENTINA/GAS AND POWER SHORTAGES

Low temperatures forced power usage on July 23 to rise by 387MW to a record 19.566GW from 19.179GW a day earlier, according to Argentine spot power market operator Cammesa. High consumption had to be covered by imports from Brazil (622MW) and Paraguay (84MW). Taking into account that Argentina’s industrial output contracted by 10.7% in the first half of the year versus a year ago, according to independent think tank FIEL, the lack of power and gas is an exceptionally worrying sign that shows that Argentina’s energy situation has got far worse.

COMMENT: It is pretty incredible that it was the economic recession and lower industrial production that made it possible for Argentina to plug the power-gas shortfall on both days. Before 2003-04, when Argentina’s started to scale back exports to countries such as Chile and Brazil, the country used to supply its thermal plants with diesel/heavy fuel oil during the winter months so that households could heat their homes with gas. Today, however,  it has to supply its thermal plants with liquid fuels during the whole year. A CAMMESA official told SAEM that Argentina has a constant deficit of 4 million cu m/day and during consumption peaks in winter, it may be as high as 12 million cu m/day

VENEZUELA-SPAIN/ENERGY COOPERATION

Venezuela and Spain have signed six agreements that will strengthen energy cooperation between the state-owned PdVSA and Repsol YPF, according to state-owned news agency ABN. Some of the most important agreements signed by both countries was to carry out prospection at Junin 7 Block in the promising Orinico Oil Belt as well as the creation of a joint venture, Petroquirequire. Another part of the agreements involve that sale for $100 million of Repsol YPF’s exploration assets of Barrancas Block to PdVSA.

COMMENT: The agreement between both countries is only an attempt by Spain to make better an already bad situation. Despite the politics and President Hugo Chavez’ ramblings, Venezuela’s prodigious oil and gas wealth are a big lure for energy companies such as Repsol YPF. There is an old saying in Latin America that there is “no evil that can last a hundred years.”  It means that since most human cannot live a century,  the pain they inflict cannot last that long either.

PARAGUAY-BRAZIL/ITAIPU POWER PURCHASE AGREEMENT

The new Itaipu agreement will oblige Brazil to pay Paraguay $360 million/year versus $120 million previously for power it purchases from the 1.4GW hydropower plant (see South American Energy Markets Weekly Roundup, July 24-31), reports Rio de Janeiro daily O Globo.  Paraguay dailies such as ABC Color report that one of the pitfalls of the 1973 treaty was Brazil’s exclusive right to acquire the excess power that its neighbor did not use. “…today, 36 years after the signing the agreement, Paraguay consumes about 8% of the installed capacity of the plant [1,243MW on March 3 at 7.16PM],” ABC Color writes. This clause does not also permit Paraguay to sell power from the hydropower plant, which supplies about 20% of Brazil’s power consumption needs, to countries such as Argentina.

COMMENT: Paraguayan President Fernando Lugo, who had promised on the campaign trail that he would demand that Brazil accept a new power purchase agreement concerning Itaipu, has won an important concession from its neighbor. Taking into account that Paraguay is one of the most corrupt countries in the world, according to Transparency International, one wonders in which pockets the extra$240 million will end up in. Despite the new treaty, Brazil will continue to dictate terms at Itaipu.

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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