In 2017, I co-authored a paper on the prospects and the potential market for liquefied natural gas (LNG) in Central America and in the Caribbean. The driver was the opportunity to replace oil products with LNG, initially in the generation of electricity, while facing the challenges of a fragmented demand in small-sized markets in addition to the lack of infrastructure in terms of natural-gas transportation and distribution.
At the time, there were only two onshore conventional LNG-importing terminals in operation in Central America and the Caribbean: one in the Dominican Republic and another in Puerto Rico, with a third onshore terminal under construction in Panama. All three projects were underpinned by natural-gas-fired thermal power stations. None of those three countries had infrastructure in place for gas transportation or distribution.
Despite the logistical difficulties in supplying such small-sized markets, in the last three years an impressive evolution of the LNG business has taken place in the region, triggered by private investors and by the availability of LNG at competitive prices.
In Jamaica, for instance, there is a multimodal model: a Floating Storage and Regasification Unit (FSRU) – stationed in the sea, off the southern part of the island receives imported LNG and delivers the regasified product through a pipeline to industrial consumers, a cogeneration plant and a thermal power plant. Since Jamaica does not have the infrastructure for gas transportation and distribution, the north of the island is supplied by a small ship that carries LNG from the FSRU, in a ship-to-ship operation, and unloads it at a terminal in Montego Bay. Part of the LNG is regasified and delivered to a local thermal power station, while the remainder is fed into ISO containers and transported by lorries to local consumers. The Southern FSRU also loads another small LNG tank ship, which carries the product to a small-sized Floating Storage Unit (FSU) stationed in San Juan Port in Puerto Rico, where a small terminal carries out the regasification of part of the LNG to supply a 440 MW thermal power plant; the remainder is injected into ISO containers and delivered by lorries to industrial and commercial consumers.
Meanwhile, small liquefaction plants in Florida carry LNG in ISO containers, which are transported by conventional container ships for delivery to the Bahamas, Barbados, Puerto Rico and Haiti, where local industry wants to use cleaner, more reliable energy.
Conventional onshore terminals in Panama and the Dominican Republic have been adapted to carry out the transhipment to small-sized vessels, load cryogenic lorries and conduct LNG bunkering.
In Central America, there are pro- jects under development in Nicaragua and El Salvador, and a potential second LNG terminal in Panama.
In only three years, we have seen a significant transformation in the gas business model of a single region.
How could such a transformation apply to Brazil?
First of all, it seems clear that Brazil will continue to import natural gas during the coming decade. The government’s projections regarding pre-salt gas availability indicate an availability of 37 MMm3/day by 2023, reaching 71 MMm3/day by 2030. However, the transportation capacity of sub-sea pipelines – named Routes 1, 2 and 3 – is 44 MMm3/day, with estimated saturation by 2026–27 according to the EPE (Empresa de Pesquisa Energética). Unless a fourth and a fifth route are built, even technically viable volumes of pre-salt gas will continue to be massively reinjected due to the lack of an evacuation infrastructure.
According to the EPE, the potential gas market in the integrated gas grid would be 166 MMm3/day by 2029, which should include 24 MMm3/day of additional demand created by the New Gas Market policies, as well as consumption of thermal power plants with maximum dispatch of 80 MMm3/day. The demand will drop by half if thermal power plants are dispatched in a flexible manner and if no additional demand is created with the New Gas Market.
With relatively modest projections for the supply of pre-salt gas, the saturation of the three drainage routes, and considering the uncertainties related to the availability of Bolivian gas, Brazil could become even more dependent on imported LNG.
By 2023, five import terminals should be in operation, three of which will be operated by private entrepreneurs and the other two by Petrobras. Another two or three terminals are being developed by private investors in various regions of the country.
Second, the availability of LNG at lower prices in the spot market could boost new cabotage, bunkering and container-delivery businesses by road, sea and river.
Lower oil prices and an oversupply of LNG also indicate the possibility of long-term contracts with prices indexed to Brent and Henry Hub that are more favourable than in the recent past. And considering that the current market is more favourable to buyers, the return of negotiations of minimum and maximum prices could occur in case the oil price or Henry Hub soar in the long term.
In the short-term market, it has been widely announced that Argentina has bought approximately 1.2 million tonnes of LNG, with delivery in winter 2020, at an average price of USD 2.87/MMBtu, delivered at the Escobar terminal. If we add regasification, transportation and clearance costs, the regasified LNG reaches the city gate of Buenos Aires at prices below USD 4.0/MMBTU.
In Brazil, electricity auctions with maximum inflexibility of 50% undoubtedly favour the growth of LNG supply to power plants rather than domestic associated gas, because producers of associated gas that do not have a very extensive c gas portfolio would have greater difficulty handling the flexibility of power plants with the need to guarantee a continuous flow of oil, which is their primary business.
LNG prices are expected to in- crease in the next 12 months because the low price environment of 2019–20 discouraged investment in production. But higher prices could lead to increased production of shale gas in the United States, driving the rebalancing of global demand and supply and a new cycle of lower prices. The uncertainty in Brazil regarding the availability of Brazilian and Bolivian gas definitely favours the development of new LNG business models in the country, provided that LNG prices continues to be competitive in the marketplace.
Note: this article was originally published in Portuguese on the Brasil Energia website in August 2020 and was translated into English for the November 2020 edition of the Chamber's Brazil Business Brief
About the author:
IEDA GOMES is a councillor at the Brazilian Chamber. She is a non-executive director of international companies in the sectors of energy, manufacturing, services and infrastructure. Ieda is also a senior advisor at FGV Energia and visiting fellow at the Oxford Institute for Energy Studies.