CHAPTER 20 GAS-TO-ENERGY: STRUCTURING DOWNSTREAM PROJECTS

• Jurisdiction: Derecho Internacional

Mining And Oil & Gas Development In Latin America
(2001)
CHAPTER 20
GAS-TO-ENERGY: STRUCTURING DOWNSTREAM PROJECTS
John L. Keffer
King & Spalding
Houston, Texas, USA

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I. INTRODUCTION

Natural gas is challenging oil, both as a global commodity and as the primary business of major energy companies. This trend is particularly true in South America, where the gas markets are small in terms of total volumes handled but have shown strong growth with active upstream and downstream development. While consumption rates for South America are one-twentieth of those in the United States, Venezuela and Argentina have ranked second and fourth in terms of natural gas as a percentage of total primary energy consumption.¹ And while estimated reserves in the region account for less than 5% of global gas reserves, South America's gas use is estimated to grow at an annual rate of 7.5% in the next twenty years.² To meet this demand, many natural gas projects are being conceived and developed in South America — particularly in the downstream sector in the areas of field development, power generation, and transmission and distribution. In earlier decades, funding for these projects was likely to come from lending agencies, but thanks to trade liberalization, the opening of markets to competition, and the encouragement of foreign investment, private capital is now the dominant investing force.

This paper is intended to be an introduction to gas-to-energy projects in South America. The first section will provide a backdrop for the rising importance of gas-to-energy projects in the region by describing the continent's gas reserves as well as its production and consumption patterns. Next, the paper will analyze issues common to structuring, negotiating and documenting gas-to-energy projects. Because of the growing variety of electric generating technologies that are now available, the paper will feature a liquefied natural gas project as an illustrative example of a well-to-wire undertaking. Finally, the paper will note recent issues that have arisen in cross-border power projects in order to highlight the unique challenges that arise in implementing gas deals.

II. GAS IN SOUTH AMERICA

A. Reserves, Production and Infrastructure

In order to understand the types of natural gas projects prevalent in South America, it is useful to understand the region's reserves. Table II-A lists South America's proven natural gas reserves by country.

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Table II-A³

Country	Natural Gas Reserves in Trillion; Cubic Feet as of January 1, 1999
Argentina	24.1
Bolivia	4.3
Brazil	8.0
Chile	3.5
Colombia	6.9
Ecuador	3.7
French Guyana	N/A
Guyana	N/A
Paraguay	N/A
Peru	7.0
Suriname	N/A
Venezuela	142.5
Uruguay	N/A
Total	200.0

Total proven reserves of natural gas in the region were estimated at 200 trillion cubic feet in 1999, of which Venezuela accounted for 71.2%, with reserves of 142.5 trillion cubic feet.⁴ The remaining 29.8% of the region's proven gas reserves reside in Argentina, Brazil, Peru, Bolivia, Colombia, Chile and Ecuador — with Argentina having the most reserves and Ecuador, the least.⁵ Five countries in South America have little to no gas, either because of limited reserves or inadequate infrastructure; these gas-dependent countries are Uruguay, Paraguay, Guyana, Suriname and French Guyana.

Those countries in South America that are among the most dependent on gas tend to share abundant domestic gas resources relative to local energy demand. Indeed, the production and consumption patterns of the eight countries in South America that possess domestic gas resources tend to mirror the order of the region's proven reserves — with Argentina, Venezuela, Colombia and Brazil being the top producers and consumers from 1989 through 1998.⁶ And, despite high rates of increase in gas consumption, especially over the past decade, regional reserves-to-production ratios tend to be high, indicating excess capacity and the potential for greater exploitation of this resource. In 1998, for example, production and consumption of natural gas in the region were at about 2.42 trillion cubic feet — a reserve-to-production ratio in excess of 82 years. Table II-B lists the production and consumption patterns for South America by country.

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Table II-B ⁷

Country	Production in Trillion; Cubic Feet in 1998	Consumption in Trillion; Cubic Feet in 1998
Argentina	1.05	1.08
Bolivia	.11	.04
Brazil	.20	.20
Chile	.07	.11
Colombia	.25	.24
Ecuador	0	0
French Guyana	N/A	N/A
Guyana	N/A	N/A
Paraguay	N/A	N/A
Peru	.02	.01
Suriname	N/A	N/A
Venezuela	.99	.99
Uruguay	N/A	N/A
Total	2.69	2.67

In spite of the rough correspondence between production and consumption by country, considerable movement of natural gas occurs between countries in South America. Currently, for example, Argentina exports gas to Brazil, Chile, Paraguay and Uruguay, and Bolivia exports to Brazil. Most of this gas presently moves by pipeline, and major efforts are proceeding to expand gathering, transmission and distribution capacity in order both to promote and support the projected growth in natural gas demand. The cross-border pipeline projects that have been completed or under construction in South America are primarily gas transmission lines, which link gas-rich Argentina and Bolivia with markets in their neighboring countries, primarily Brazil and Chile.⁸ By 2010, it is estimated that over 7,000 kilometers of pipelines will be built in the region, involving an investment of over $5 billion dollars.⁹ Notably, more than 50 percent of the ongoing pipeline construction activity is in South America and Asia — areas that currently account for less than 15 percent of the world's gas consumption.¹⁰ Figure II-A illustrates the gas pipelines in South America that exist or are proposed, planned or under construction as of 1998.¹¹

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Gas Projects

Generally speaking, the marketed consumption of gas in South America can be grouped into six categories: field use, transport use, residential use, commercial use, utility electric generation and industrial use.¹² In 2000, South America saw the development of various gas projects that targeted each of these six end-uses. A sampling of reported projects in the region is included in Table II-C, and the projects are grouped by country.

Table II-C ¹³

Country	Gas Project
Argentina	> > Power plants; • Italy's Enel SpA invests $370 million to build and operate two power plants in the Cordoba and Tucuman provinces. These combined-cycle gas-fired power plants will produce almost 500 MW of power.; > > Pipelines; • Transportadora de Gas del Mercosur and Transportadora de Gas del Norte rolled out a $225 million pipeline linking Argentine natural gas fields to southern Brazil.; • A consortium builds a $140 million pipeline (Gas del Sur) across the Platte Estuary into Montevideo. It will deliver 6.0 million cubic meters of gas per day.; > > LPG plant; • TotalFina's Argentine unit Total Austral and co-investors in the Cuenca Marine Austral I consortium have opened a $70 million LPG plant in Tierra del Fuego.; > > Gas treatment plant; • Pan American Energy is constructing a gas treatment plant in Salta (northeastern Argentina).; > > Natural gas liquids processing plant; • Compañía Mega constructs $173 million natural gas liquids processing plant.; > > CNG project; • Number of CNG stations grows at rate of 10% per year.
Bolivia	> > Power plants; • Intec Engineering manages EPC contract for construction of 1,350km pipeline from Bolivia to Northeastern Argentina. Pipeline is expected to cost over $700 million and will supply a 3,000-MW power generation facility in Misiones and two 500-kV transmission lines to export power to Brazil.; > > Pipelines; • Gas Oriente constructs over 90% of the $230 million pipeline to Cuiaba, Brazil.; > > LPG bottling plants
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• Bolivian government moves to privatize 21 LPG bottling plants owned by YPFB.; > CNG; • Government working to provide incentives for CNG use.
Brazil	> Pipelines; • Copergas and PB-Gas build 360 km pipeline between state capitals of Paraiba and Pernambuco for $34.3 million.; • $16.2 million pipeline built to move gas from the Benefica fields to Petrobras' main industrial unit in Guamare, Rio Grande do Norte.; > Natural gas processing plants; • A consortium of Toyo Engineering Corp. and Setal SA of Brazil won a 67 billion Yen order for natural gas processing plants from Petrobras.; > Natural gas fueling stations; • Fuel companies in Brazil spent over $4.4 million in 2000 to construct 12 new natural gas fueling stations in the state of Minas Gerais.; > Ethylene and polyethylene complex; • ABB and Consorcio Rio Eteno e Rio Polimeros Ltda. signed a letter of intent to develop a greenfield gas chemical complex near Rio de Janeiro. The agreement covers the design and construction of ethylene and polyethylene facilities.; • Rio Polimeros consortium begins construction of its Gas-Chemical Pole in Duque de Caixas, Rio de Janeiro state. This $1 billion complex will be the first pole to produce petrochemicals (polyethylene) using natural gas rather than naphtha.; > LNG terminal and regasification plant; • Petrobras and Shell signed agreements for the creation of a joint venture for the construction of a LNG import terminal and regasification plant in the state of Pernambuco.; > Power generation; • Brazilian government begins program to roll out 49 power plants in the next few years, most of which will be fueled by natural gas.; • Enron 450-MW power plant in Cuiaba, Brazil begins to receive supply from Rio-San-Miguel-to-Cuiaba pipeline.; • AES Corp builds a 600-MW power plant in Uruguaiana, Brazil which will consume 2.8 million cubic meters of gas per day from Argentine pipelines.; • Repsol-YPF and BP Amoco announced plan to build a 520-MW gas-fired power plant in Pecem in the state of Ceara. The plant will initially use

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