A tectonic shift in national oil and gas policy initiatives toward natural resource nationalism has gripped the producer nations of South America. Above all, Venezuela and Bolivia are asserting increased state control over national hydrocarbon resources. These nations, along with Cuba, were recently labeled the "Axis of Good" by Venezuelan President Hugo Chavez. This "Axis" seeks to raise hydrocarbon prices, increase state royalties and revenues, and maximize the share of hydrocarbon wealth deposited in national coffers to support social spending and other programs.

This has frayed relations with consumer nations. Whether or not the so-called "Axis" is "Good," from an investor and consumer perspective it looks more like an "Axis of Uncertainty." Current "Axis" policies rankle investors, jeopardize future investment and production, and arouse supply and price anxieties in consumer nations such as Brazil and Chile.

Beyond Brazil, future South American production prospects and supply reliability are darkly clouded by the new wave of energy nationalism. The resulting uncertainty is driving consumers to pursue new energy supply solutions.

The salient impacts of energy nationalization policies are already apparent:
• A crescendo of investor and consumer discomfort with Venezuelan and Bolivian investment, tax, royalty, and pricing policies, although good faith negotiations continue;
• An aggressive Brazilian campaign to boost domestic natural gas production and secure LNG and other alternative energy supplies;
• A new wave of natural gas and LNG infrastructure development and financing projects to bring new, alternative supply sources to market;
• Accelerated insertion of traditionally insular South American energy markets into the global arena.

Producer nationalism will drive Brazil and Chile toward their own consumer nationalism, requiring rapid integration in global gas markets to achieve greater supply reliability. After a decade of energy integration policies and investments, current policies threaten a period of regional disintegration and increasingly unilateral energy policy-making.

Indigenous supply insecurity

South American producers enjoy substantial gas reserves (Table 1), but the politics of energy nationalism have checked recent output and threaten to dampen investment and cause production to stagnate or decline.
Table 1: Natural Gas Reserves for
Main South American Producers
(Trillion Cubic Feet)
Country Proven Probable Possible
Argentina 19 8 
Bolivia 31 26 24
Brazil 12 6 
Venezuela 149 38 41
Source: Navigant Consulting

The governments of Venezuela and Argentina have sent tremors through South American energy markets since 1998 and 2002, respectively, as they progressively increased and intervened in natural gas taxes, royalties, pricing, exports, and investments. But the most decisive move occurred on 1 May 2006 when Bolivia made good on President Morales' campaign promise to nationalize oil and gas production and infrastructure.

The Bolivian nationalization, along with recent Argentine rumblings on potential nationalization,(1) indicate that South America's leading natural gas producer nations are collectively focused on controlling greater levels of hydrocarbon output and revenue.
• Despite Venezuela's vast reserves, the commitment of private capital to expand future production increases is uncertain, as international investors subjected to waves of tax and royalty increases followed by aggressive audits and shutdowns. Venezuelan investment and production levels have stumbled(2) and PDVSA has turned to reducing internal consumption and importing Colombian gas.(3) The proposed $20+ billion, 5 billion cubic feet per day (cfpd) pipeline known as Gran Gasoducto del Sur (GGS, or Great Gas Pipeline of the South) would be extremely expensive to build, yielding either high delivered prices in Sao Paolo and Buenos Aires or extremely low netbacks in Venezuela.(4)
• Bolivia's current supply commitments are probably reliable, but the Andean nation's ability to attract and manage future investment to expand production is in doubt. Petrobras and other private investors in the Bolivian oil and gas sector are embroiled in a mandatory 180-day (re)negotiation period (ending around October 28) related to the terms and conditions for continued operation in Bolivia and the value of expropriated assets. At this point, private sector confidence in the Bolivian program appears quite low and Bolivia's principal source of external capital and technology now appears to be Venezuela. President Chavez has announced plans to invest about $1.5 billion in natural gas exploration and production and PDVSA has signed several agreements for technical cooperation.(5) The success of this bilateral government project is questionable because Venezuela has struggled to boost its own gas output. Further, given Venezuela's competing desire to ship Venezuelan gas to Brazil and Argentina via the GGS, Venezuela's engagement in Bolivia may only be adequate to maintain current production.
• In Argentina, looming supply shortages, continued prioritization of supply for domestic markets, and proposed taxation of exports does not bode well for private investment in new production. The country expects to switch from a net export to net import position in the short-term, Chilean exports remain in doubt, and increased exports into Brazil's remote South appear unlikely. Internally, Argentina has turned to fuel oil given the shortfall in natural gas supplies for its generation fleet, much of which is state-of-the-art combined cycle gas turbine (CCGT) capacity installed as recently as the 1990s. Fuel oil consumption in Argentine power plants is nearing the maximum possible levels, posing power supply problems if power demand continues to grow.(6)

Consumer anxiety

Regional consumers are alert to the growing supply and price risks. Even as Brazil and Chile continue to (re)negotiate future supply arrangements, they simultaneously search for economic and reliable alternatives.
Since the initial Argentine gas price caps in 2002 and curtailment of Argentine exports in 2004, Chile has promoted alternative private LNG and coal supply solutions and most recently initiated investigation of the potential import of Bolivian gas-fired power. Chilean officials also continue to negotiate with Argentina and are currently analyzing the impact of Argentina's proposed natural gas export tax – needed, at least in part, to pass through the higher cost of Argentina's new Bolivian gas imports.

Bolivia recently forced Brazil into the same boat as Chile. In response, Brazil has mounted an aggressive development and investment campaign to secure alternative supplies. Petrobras also canceled plans for the 530 million cfpd expansion of the 1.1 billion cfpd GasBol pipeline from Bolivia to Brazil, leaving little doubt about Brazil's unwillingness to rely on Bolivia for future supply.

Impatient demand

Over the last decade, heavy reliance on new gas-fired generation programs in Brazil, Argentina, Chile, Colombia, and Venezuela has anchored significant new gas production and pipeline investments. These, in turn, have supported growing volumes of regional natural gas trade.

Considered as a whole, Brazil and the Southern Cone (Argentina, Chile Bolivia, Paraguay and Uruguay) have traditionally managed a rough trade balance in natural gas (Figure 1).

In recent years, total production and demand in Brazil and the interconnected countries of Brazil and the Southern Cone enjoyed a supply-demand balance – of just above 6 Bcf/d.

That will soon change as rapidly growing gas demand – especially in the large Brazilian, Argentine, and Chilean markets – plus the prospective hit to production from energy nationalism could yield a large and growing regional supply gap by the start of the next decade.

For this same group of countries, a recent study commissioned by the region's multilateral energy commission Organización Latinoamericana de Energía (OLADE) calls for base case demand of about 10 billion cfpd in 2010 and 14 billion cfpd in 2015. The principal drivers will be:
• Brazilian industrial demand growth and increased dispatch of Brazilian thermal generation assets as demand growth begins to strain the country's hydro generation capacity toward the end of this decade (as it also did around the beginning of this decade). Demand has grown at a compounded annual growth rate of 11% and 19% for industrial consumption and power generation, respectively; (7)
• After destroying approximately 20% of its GDP in the four years prior to 2003, the Argentine economy has recovered at an annual average rate of 9% over the last three years.(8) This has returned robust industrial and power generation demand for natural gas. Most recently, Argentina has been forced to delay bidding for construction of two additional gas-fired power plants it needs to avoid electricity shortages by 2007/2008 and will require a new commitment of 700 million cfpd of Bolivian gas to proceed;(9)
• Continued dynamism in the Chilean economy will cause ever greater levels of power demand from the country's sizeable fleet of natural gas-fired generators. As of June, 2006, about 33% of the country's installed generation capacity (12GW) is fueled by natural gas. Additionally, industrial and mining demand for natural gas has increased from nearly zero in 1994 to about 50 Bcf per year in 2004; 17% of Chile's total consumption.(10)

Coming up Short

Before considering nationalization in Bolivia, a set of official forecasts called for only about 9 billion cfpd of regional supply by 2010 and 11 billion cfpd by 2015.

Given the OLADE demand forecast of 10-14 billion cfpd for the region in 2010-2015, the net result will be a regional gas supply deficit that could range from 1.4 billion cfpd in 2010 to 2.4 billion cfpd in 2015 (Figure 2).
But the situation may be worse than official projections suggest. Nationalization in Bolivia and perhaps Argentina(13) presents real risks of stagnant or declining output.

Table 2: Demand and Production
Volumes (Bcf/d)
 2010 2015
Total Demand 7 10.3 13.5
Production  
Bolivia  1.9 2.4
Argentina  4.4 4.6
Chile 0.1 0.1
Brazil 2.5 4.0
Total Production 8 8.9 11.1
Source: Navigant Consulting

The combination of prospective regional gas shortages, Bolivia's current efforts to increase export prices, Argentina's looming gas deficits and export taxes, and the high transport cost associated with the 3,728-mile GGS pipeline, all imply that South America's indigenous gas supply soon will be either inadequate or expensive – or both.

Critical solutions, urgent timing

The key consumer countries of Brazil, Argentina, and Chile will need a new supply solution in the coming years and the logical choices will be LNG and Brazilian production. Both solutions are needed to address the rapidly expanding supply gap expected in the 2009-2015 time-frame.

LNG and new gas production lead times suggest that LNG could provide relief in the 2009-12 time-frame, with new gas production likely to become available in 2012-15.
• Atlantic Basin and Middle Eastern LNG capacity available to supply new regasification projects in Brazil and Chile will be tight until at least 2008. Significant new liquefaction capacity is planned to come online in 2008 to 2011 (Figure 3). This is consistent with the 3-4 year lead times needed to develop, finance, and construct LNG regasification terminals.
• The lead time may range from 6 to 9 years for the new Brazilian effort to accelerate investment in natural gas production and bring new fields online.

Supply reliability leads the investment agenda

With a total price tag of $23 to $24 billion, Brazil's and Chile's new LNG and natural gas investment campaigns are designed to provide timely supply solutions, and will also spawn new midstream delivery infrastructure requirements.

The following programs are being pursued parallel to and independent of Venezuela's GGS project and upstream investments in Bolivia.
• In Brazil, Petrobras recently doubled its investment budget across the natural gas supply chain – including exploration and production, LNG, and pipelines – to $22.4 billion for 2007-11 (including $4.5 billion projected for private "partner" investments). Also included in the budget are plans to build about 700 million cfpd of LNG receipt facilities. Petrobras is considering special LNG tankers with onboard storage and regasification capacity for additional flexibility;(15)
• Chile already has one LNG receiving terminal under development, a $400 million project to be operated by BG(16) and Suez is considering a smaller, $85 million LNG project investment.(17) Another, but less likely, supply option under consideration is the proposed US$1 billion, 930-mile pipeline from Pisco to Tocapilla with a capacity to bring 350 million cfpd of Peruvian gas.(18) Related investments of $200 million by 2010 are expected for downstream local distribution infrastructure.

Petrobras has budgeted aggressively, but the magnitude of development, financing, and construction requirements needed to rapidly develop a large portfolio of interconnected LNG, gas production, and midstream delivery assets in Brazil could overtax Petrobras capital and human resources.

Footnotes
1 Kirchner Defendio la Inversión Estatal. La Nación. June 23, 2006. http://www.lanacion.com.ar
2 Between 1998 and 2004, Venezuelan gas output actually declined 5% on average (based on EIA data).
3 Colombia and Venezuela are now building the crossborder Gasoducto Transcaribeño to first supply Colombian gas to Venezuela, but eventually to reverse flow and provide Venezuelan gas to Colombia and Panama. The 140 mile, 26-inch pipeline will have an initial capacity of 150 MM cf/d.
4 This may shed light on Bolivia's recent inclusion in the GGS consortium and its economically inconsistent efforts to sell gas to Argentina gas for $5/MMBtu and renegotiate the Brazilian price at $8. It would appear that Caracas and La Paz are planning to route Bolivian gas to Argentina, Bolivian gas-fired power to Chile, and Venezuelan gas to Argentina. Natgas pipeline to save US$40mn a month. July 12, 2006. Oil and Gas News, BN Americas
5 The government of Venezuela committed $600 million to the development of two projects for industrial applications of natural gas. Technicians in Venezuelan are carrying out the feasibility studies for these two projects and the results of their efforts will be transfered to the Bolivian energy company YPFB. (YPFB arranca la industrialización del gas natural. Los Tiempos. June 14, 2006. http://www.lostiempos.com). Additionally, PDVSA's R&D subsidiary Intevep, will provide training to 200 Bolivian technicians for the development of technology used and education to 250 Bolivian students at the technical school of Venezuela's state petrochemicals firm Pequiven. (PDVSA, YPFB sign 6 energy accords, earmark US$1.5bn spending – Bolivia, Venezuela May 29, 2006. BN Americas).
6 Cammesa to buy 1.5Mt of fuel oil from Repsol YPF, PDVSA – Argentina. June 21, 2006. El Cronista Comercial.
7 Ildo Sauer. Desenvolvimento do Mercado de Gás Natural no Brasil. May, 2006. Petrobras
8 Oferta y demanda globales, a precios de 1993: variación porcentual respecto a igual período del año anterior. INDEC. http://www.indec.mecon.ar
9 Dos desafíos sin estrategias detrás. July 12, 2006. La Nacion.
10 Comision Nacional de Energia. Chile. NCI Calculations.
11 OLADE. Latin American Demand Forecast, Base Case. 2006.
12 All production numbers are from the 2005 International Energy Outlook (EIA, U.S. Department of Energy) except Brazil's (Petrobras 2006 Business Plan).
13 In his latest trip to Europe, President Kirchner of Argentina reemphasized that his government intends to regain control of hydrocarbon exploration and production – building upon his record of renationalization in other sectors. Under Kirchner, Argentina is repurchasing Aerolineas Argentinas (the national airline) from private investors and taking control of the national water company from French operator Suez. (Source: Diario La Nacion, June 12, 2006.)
14 Global LNG Model. Navigant Consulting, Inc.
15 Petrobras. Plano de Negócios 2007-2011. Julio 5, 2006.
16 BG to begin LNG plant ops in 2008 – Chile. March 31, 2006. BN Americas
17 Suez evaluating US$85mn LNG terminal for SING – Chile. July 3, 2006. BN Americas
18 Carlos Ormachea. Natural Gas Supply in the Southern Cone. August, 2005. Tecpetrol.