Q&A: Excelerate Looks South for LNG Opportunities

(Argus, 28.Dec.2021) — Brazil’s unfolding market opening for natural gas could also create opportunities for LNG in the region as a complementary energy source, US energy firm Excelerate Energy believes. Vice president for South America Gabriela Aguilar talked to Argus about the new mindset for energy integration between Brazil and the southern cone, price outlooks, gas-to-power and small-scale LNG projects.

Is Brazil becoming an important destination for LNG in the world and is the trend here to stay?

Brazil is facing the worst energy crisis in the last 90 years and relies heavily on hydropower. We are seeing that demand for natural gas and clean energy will continue to grow substantially and we will have to be prepared to face those additional natural gas requirements, and as Bolivian gas production has declined.

These are some reasons why we see that Brazil is taking leadership in acquiring LNG. There are new regasification projects in Brazil, which reflects a trend in how Brazil is seeing LNG as a source of additional energy. For 2022 and 2023 we see an increase in LNG consumption. And in the long-term, for 2030 to 2040, there are different LNG projects in Brazil to support and complement existing natural gas resources.

But let us be very clear on this: Imports of LNG will never compete with domestic production. LNG tends to complement and help towards replacing more expensive or more contaminating fuels for power generation. This is a worldwide trend. Today LNG prices are high, but it is a case of seasonality. The truth is that the price of LNG used to be half that of the liquid fuels.

What are the short and mid-term plans for Excelerate in Brazil?

For 2022 and 2023 we will still need additional LNG considering the low water levels for hydropower generation in the region, but that is not just it. We have a commitment to invest in Brazil and in the region. We cannot comment much, but we are looking over and studying different regasification terminals, gas to power, and, something very important to Brazil, which is mid-scale and small-scale LNG.

Brazil has an expansive geography and even though it has a very large transportation network, this is not enough to connect all the communities and to reach power generation plants that are consuming liquid fuels. LNG has a logistic advantage to reach those places, with fewer trucks using less energy in comparison to the LPG distribution, for instance. We see trucks and the maritime industry converting their fleet into LNG, bunker LNG.

Do you think LNG prices could become a reference for the spot gas market price for Brazil in 2022?

High LNG prices will not persist. Currently we are seeing prices of around $30/mmBtu. We are seeing that those prices will be reduced substantially to the range of $20-$24/mmBtu for European LNG. That is what we see for the region, for May to August.

In Brazil, we face a very complex situation because of the new gas law. It is a huge change. The market was willing to have the option to choose where to buy natural gas and LNG. And they are facing a situation where they want to consume LNG, they are ready to consume LNG, but they see the prices at $24-$30/mmBtu.

Is this unfortunate because it is the worst moment in the LNG history in pricing to initiate a new era in the gas in Brazil. But this will not last forever.

Do you believe there will be a greater interconnection in Latin America’s natural gas markets?

Yes, but there is a different mindset than we had in the 1990s in the 1980s, when it was believed that integration would happen by building pipelines.

But the systems that we have today are not enough. We need to have more pipelines.

If Argentina wants to see the Vaca Muerta [gas field] expanded and massively developed, a pipeline will be needed, as well as for export to an LNG terminal.

I see a huge opportunity for [Brazil] having additional LNG terminals and interaction with Argentina, with Chile and with other markets with arbitrage opportunities.

Are most LNG contracts in Brazil based on spot term prices?

Brazil and Argentina were pioneers in adopting, in 2008-2009, more flexibility for spot purchases. Up to that moment everything was all set in long-term contracts. Argentina had a more structured way, making tenders at the beginning of every year. Brazil was more active in the market because of its larger volumes.

If we look along the years, the prices that these two countries got by adopting this strategy were exceptionally good compared with long-term contracts.

What we see is that they will continue following a spot purchasing strategy. Is there any room for Brazil to have long-term agreements? There could be, to secure better volumes and prices. But that will depend also on how demand evolves in the long run in Brazil.

Can Brazil be a leader or trendsetter for pricing in the future? I have no doubt about it. Brazil is an important player today already. By giving more flexibility and with the new gas law, there will be a lot of opportunities opening up to consumers.

Do you think Brazil will have its own price index for natural gas?

The more Brazil relies on flexible solutions such as using LNG not only for making up for lower [hydro] power in times of drought, the more possibilities there are of seeing Brazil become a price setter and having a price index specifically for Brazil.

That is the scenario. We need to build it and have more alternatives to hydroelectric power. Today the regional perspective for energy is unstable. You need to have long-term sources and more stable and secure energy.

Some market participants complain that your two-year lease of the Bahia regasification terminal is too short term, making LNG prices higher. Do you agree?

We are here in Brazil with this aim and commitment for two years. And that is not the end for Excelerate in Brazil. We have a lot of plans, for regasification terminals and gas to power. If Cade at some point decides to extend the term of contract or lease another terminal, of course we will respectfully participate in an extremely clear and extremely professional process.

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By Flávia Pierry