December 2017 – @alvaroriosroca – Recently, the Gas Exporting Countries Forum was held in Santa Cruz, Bolivia, where many topics were debated and two of them deserve analysis.
The first is related to demand that the planet further boost technological development and promote regulation that encourages the use of natural gas and displaces coal and petroleum by-products in electricity generation. In the transport segment with LNG, petroleum derivatives are moved by maritime transport, fleets of trucks and buses and heavy machinery. Light vehicles will move quickly to electric vehicles.
Natural gas is the energy of the 21st century, which will help decarbonize the planet and will be the transition element to other types of energy. The above, for being an abundant, clean energy with developed infrastructure and price competitive.
It is on this competitiveness that we want to raise the second issue. In the declaration of the gas exporting countries of Santa Cruz it can be read: “to find a more equitable approach to the risks distribution on the subject of gas price mechanisms, linked to oil and its derivatives, to ensure a fair price for natural gas, taking into account its advantages in terms of energy efficiency and environmental premiums”. In the following lines we will try to interpret this statement.
An endless number of natural gas transactions are carried out at an international and regional level based on price markers such as oil and its derivatives and which had a reason to be in the past. Let’s analyze this with the two most important contracts in the Southern Cone.
In the Bolivia Brazil contract (20 years ago), gas prices were linked to several types of Fuel Oils, because the main objective was to replace these in electricity generation. For the contract between Bolivia and Argentina, the same model was used due to the fact that part of the electricity generation is still made with oil derivatives, due to the natural gas shortage crisis.
This situation has changed and is changing radically in the Southern Cone with the arrival of LNG, with more gas produced offshore in Brazil and shale in Argentina and recently the irruption of wind and solar energy with very low costs. If the market works and promotes competitive transactions and integration, a kind of gas marker HUBS should be created in both Brazil (Sao Pablo) and Argentina (Buenos Aires). In these HUBS locally produced gas, Bolivian gas and LNG should compete.
Bolivian gas and gas produced in Argentina and Brazil will have to compete with LNG produced in shale plays in the USA (production costs, liquefaction, transportation to Brazil and Argentina and regasification). Natural gas buyers, who are obviously looking for lower prices, will be able to use LNG as a kind of top limit to negotiate locally produced gas and gas imported from Bolivia. The marker could be the Henry Hub for example in replacement of the Fuel Oils. The same case for Chile.
The fairest price for natural gas in the Southern Cone, should leave from market transactions and where buyers choose options that best suit them. The competition will be gas with gas.
* Current Managing Partner of Gas Energy Latin America.