(Energy Analytics Institute, Ian Silverman, 31.Mar.2019) — As part of Energy Analytics Institute’s ongoing coverage of the Latin America and Caribbean energy sectors from conventionals, unconventionals to renewables, Houston-based Refinitiv Market Development Manager Carl Larry weighs in on Peru LNG and issues it faces from increasing US natural gas volumes reaching Mexico.
Situation Overview: Natural gas-rich Peru has seen its LNG exports and market share in Mexico fall off dramatically due to an abundance of US natural gas, thanks to fracking, that continues to make its way into Mexico. As a result, Peru and more specially Peru LNG with the assistance of offtaker Shell has turned its efforts to Europe and Asia where demand for gas and LNG imports continues to increase.
What follows are excerpts from our series: LatAmNRG Q&A
ENERGY ANALYTICS INSTITUTE (EAI): Is Peru’s LNG not competitive in Mexico due to the closeness and availability of cheap natural gas from Texas? If so, how long will this be the case for Mexico? For as long as Texas has gas to export?
CARL LARRY: In regards to the strong import number from the US to Mexico, yes, I think it will be hard to displace this going forward. First and foremost, there’s too much supply in the US that needs to be moved out. The only way for producers to justify their growth will be to see profits increase and that’s only going to happen as prices rise. This leaves the US the only option; export more. We’re seeing a lot of projects coming online in regards to more LNG regasification and increasing port space, but that has mostly overlooked growth of natural gas pipelines to Mexico. So, even though we may at some point see LNG from the US to Mexico shrink, it will only be because of natural gas moving straight through pipeline. Enbridge’s Valley Crossing Pipeline is due to come online in April and should see up to 2.4 billion cubic feet (Bcf) moving across the border. I do think that as Mexico tries to revive its energy industry that all of this US flow will prompt calls for more investment in new oil projects in the US Gulf with Mexico.
ENERGY ANALYTICS INSTITUTE (EAI): Any chance Bolivia could someday export its gas to Peru for export as LNG?
CARL LARRY: I think that this is a lesson that is being learned from OPEC. Once the US starts to export, there’s little chance on stopping the trend. As we see in finance, the US is always the first choice of debt because of our credit worthiness and security. With oil, the price was more than competitive, but there was no risk. No cargoes being delayed because of pirating or civil strife. No off spec. No credit issues. We will see the same thing in the LNG exports and the competition will have issues. LNG is still more favorable in cost of production and export than it is to keep it domestically in the US, so there’s a good margin between us and the competition in terms of LNG. In other words, we have more room to give in price sensitivity. That’s going to cause issues with many countries exporting LNG. They will have to give up something to stay competitive.
ENERGY ANALYTICS INSTITUTE (EAI): Do we know why Spain’s demand for Peru’s LNG has been increasing so much in recent years?
CARL LARRY: It may be that Spain and Peru are working out an economic trade deal to keep Peru’s LNG supply strong. It’s a good thing to me to see two countries like this working on a trade deal. Hopefully it will be able to stand through any growing competition from US LNG. If I had to compare it, I think of Cuba and Venezuela. That worked out for a while, but obviously is painful now.
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