Brazil's natural gas industry and that of its neighbors in the Southern Cone, such as Argentina and Chile, have labelled gas the 'fuel of the future'. The question is whether that future has finally arrived for the region, and which Wood Mackenzie explores in our latest multi-client study "Growing Pains: Identifying opportunities in an increasingly inter-dependent and dynamic Southern Cone Gas Industry".
The discoveries of the massive multi-billion barrel pre-salt oil and gas fields offshore Brazil in the last decade led many, including state-owned behemoth Petrobras, to believe that by 2015, Brazil would become a gas exporter. Today, Brazil is pumping more than 1 million barrels per day of oil equivalent of oil and gas from the pre-salt. That's good but, in a reflection of Petrobras' struggles, gone are the days when we thought Brazil would produce 5 million barrels per day.
Instead, Brazil relies heavily on imports, with half of its gas supply coming from Bolivia and three floating LNG regasification units. In 2014 and 2015, Brazil had to sign additional short-term contracts with Bolivia to supply its drought-stricken power sector. With three LNG-to-power projects, which will add 4.5 GW of generation to the grid, due to come online before 2020, LNG imports have had to pick up the slack.
The industry today finds itself in an uncomfortable position – gas demand has grown 10% per year since 2010, with the 2012-2015 drought driving that demand growth in the power sector. This has simply masked the impact of the struggling Brazilian economy, slowing policy development, and Petrobras' project delays on long-term gas demand.
Recovering reservoir levels will boost hydroelectric generation, on which Brazil depends, and will eventually normalize power needs for gas. At the same time, more than 25GW of new hydro and renewables capacity is being built; this will complete by 2018. According to our models, in this weak market, gas demand could drop 30% to 40% in a normal hydro generation year from 2015′s record levels.