By Arthur Deakin
News Americas, WASHINGTON, DC, Friday. October 15, 2022:It cannot be denied that the world’s inflationary pressures and future economic prospects are directly related to energy-related geopolitics. In early October, OPEC+ signaled their support for a higher oil price by cutting production by 2 million barrels per day, a clear defiance of America’s demands to keep production steady. OPEC+ claims they are seeking to avoid a supply glut if a recession comes, while the US has accused them of siding with Russia. Tensions are rising.
With Russia’s discounted oil and LNG being diverted to Asian buyers and its gas supplies to Europe falling by 80%, global energy markets have been forced to shift and recalibrate. To replace declining Russian energy supplies, Europe has accelerated its renewable energy deployment and increased its net LNG imports – up to 65% during the first eight months of 2022. Most of the additional LNG shipments have coming from the United States, who have been able to redirect existing shipments due to flexible contracts. The US is now operating near export capacity at approximately 84 MTPA (million tonnes per annum), although new projects will increase its base capacity by 39% by 2025.
The US LNG additions will coincide with a major expansion of Qatar’s North Gas Field, bringing online a combined 70 MTPA by 2025 and adding 19% to global LNG supply. Despite these additions, the LNG market will remain structurally tight until at least 2025. Renewable energy and energy storage are not being added fast enough to meet rising global energy demand and declining Russian exports of LNG. energy, which accounted for almost 40% of Europe’s energy supply in 2021. Latin American countries with significant gas reserves have noticed this trend and are preparing to become LNG exporters, a major opportunity for both companies and for investors.
Given the complexity and extensive capital required to export LNG, only two countries currently do so in Latin America: Peru and Trinidad & Tobago. Peru LNG, the consortium responsible for the country’s exports, increased its LNG shipments by 70% in the first half of 2022—shipments to Europe alone saw a 46-fold increase. To ensure a steady flow of export revenue, the Peruvian government appears to have rejected the renegotiation of the Camisea consortium’s contracts and encouraged them to export at full capacity of 4.4 MTPA. As the government tightens the supply of natural gas to the local population, there are no planned increases in LNG exports to Peru.
Trinidad and Tobago, on the other hand, saw LNG exports decline by 2% in the first five months of 2022. Trinidad is struggling with declining gas reserves due to mature gas fields, unattractive fiscal conditions and shadow discoveries in neighboring countries. In a bid to revive its collapsing industry and encourage participation in its next tender, the government proposed an increase in the Investment Tax Credit for energy companies and a reduction in the Supplementary Petroleum Tax (SPT), for new wells drilled in shallow water. T&T’s future prospects, however, remain grim. Unless sanctions against Venezuela are lifted, or a major gas discovery is made, both of which are unlikely, Trinidad will see its oil and gas industry continue to decline. Trinidad’s LNG exports have fallen over 50% since 2010.
Trinidad’s decline, along with Peru’s focus on the domestic market, creates opportunities for new players to enter the LNG export market. Guyana and Suriname, the region’s emerging superstars, may have 13.2 and 10.8 Tcf (trillion cubic feet) of natural gas reserves, respectively, based on AMI’s preliminary estimates. Their small local demand means there is plenty of excess gas that can be exported via ships or pipelines. Both countries have direct routes to Western Europe and Northern Brazil.
In Suriname, US-based Phoenix Development Company has partnered with the Suriname Port Authority to develop a $1.2 billion LNG liquefaction plant and export terminal with a planned output of 4 MTPA. Its CEO said they are fully funded until the Final Investment Decision (FID) and they will use natural gas that would otherwise be flared as their source of supply.
In Guyana, where total estimated recoverable resources have exceeded 11 billion barrels of oil equivalent, LNG exports could reach nearly 5 MTPA. This volume alone could replace 4% of all Russian gas going to Europe in 2021.
In nearby Mexico, President Andres Manuel Lopez Obrador (AMLO) is considering eight LNG export projects, one of which is already under construction. Mexico’s strategic advantage over Suriname and Guyana is that it has a much more developed hydrocarbon industry, an existing pipeline infrastructure that brings cheap natural gas from the Permian Basin, and a direct route to Asia, which is expected to account for nearly 70% Increase in LNG demand by 2040. The country’s most advanced project is Sempra Energia’s Costa Azul plant on the west coast, which is expected to start delivering 3.2 MTPA of LNG by 2024. In an ideal scenario for AMLO, where all approved and proposed projects become a reality, Mexico could add 50 MTPA of added capacity to the LNG market. This would make it the world’s fourth largest LNG exporter.
To avoid putting the cart before the horse, there are a few things to consider. More broadly, LNG projects require large amounts of capital and complex expertise, two things that are hard to find in emerging markets — especially when a recession is looming and the US Federal Reserve is rapidly raising rates. More specifically in Suriname, the country has not yet received an FID (Final Investment Decision) for any of its hydrocarbon exploration. Although this is expected to happen in 2023, the decision has been repeatedly postponed and reflects TotalEnergie’s reluctance to fully commit to the country. Suriname’s tighter fiscal terms related to oil revenue-sharing agreements (compared to its neighbors), as well as multi-year double-digit inflation, debt defaults and political patronage, have also contributed to an uncertain outlook.
In Guyana, oil is already flowing, but the amount of associated gas discovered has been largely hidden. If gas materializes, foreign investors will have to drive a strict local content policy and a relationship-driven political environment. Mexico developers, in particular, will not be able to develop projects without a formal partnership or an approval from a state-controlled entity. Time is also an issue. LNG plants take at least four years to become fully operational and may overlap with new administrations. Not only will these projects face increased competition from other LNG assets in Canada and the US, but they will also face increasing renewables supply and falling oil demand. To move forward with these assets, it is essential to make these assets “transition ready”, allowing them to operate and transport lower carbon fuels such as hydrogen and biofuels.
Before the pandemic, energy experts were concerned about oversupply of gas and stranded LNG assets. Now, developers and governments are rushing to build LNG import and export terminals with little or no regard for costs. How long will this take? It is difficult to say. What is guaranteed is that renewable capacity and energy storage will expand significantly, EV adoption will continue to grow, and energy efficiency will reduce energy demand. Only the most strategic fossil fuel assets will survive this transition.
EDITOR’S NOTE: Arthur Deakin is Director of AMI’s energy practice, where he helps companies expand in Guyana and the wider Latin American region through market intelligence and analysis. Whether it’s conducting due diligence on local partners, sizing the market, or finding the most attractive risk-adjusted opportunities, AMI has led over 3,000 Latin American market studies since 1993 and has 20+ project experience jurisdictions in America.
