Gas shortage chokes Argentine chemical industry

27 October 2010 17:17  [Source: ICB]

Based solely on politics, decisions about natural gas are crippling Argentina's chemical industry - and relief seems far off

Rex Features

Wintertime natural gas shortages have become a regular occurrence in Argentina, often severely hampering the region's chemical industry, with many companies even adopting the strategy of scheduling technical stops at facilities during this time.

The country's natural gas woes are part of the lingering fallout from its 2002 economic crisis and subsequent recession. During that time, prices for natural gas were frozen, leading to increased demand while discouraging investment or production expansions.

Elected in 2003, President Nestor Kirchner, for political reasons, made sure to keep natural gas to households much cheaper than under normal circumstances, creating a situation where some cynics say Argentines don't lower the heat when the house gets too warm in winter, they just open a window.

And the austral winters of Argentina have been getting progressively worse since 2004.

According to Argentina's Institute of Energy (IAE), natural gas reserves in Argentina have declined from 777,609m cubic meters (m³) in 2000 to 378,862m m³ in 2009 - a reduction of 17.2 years of reserves to 7.8 years. Natural gas had been so plentiful in Argentina that it was used to fuel autos. Argentina's gas production has fallen by 7.3% from 143.1m m³/day in 2004 to 132.6m m³/day in 2009. According to the 2010 BP Statistical Energy Survey, between 2006 and 2009, gas production dropped by 10.3% in Argentina - much more than the 4% global average for that period.

While international consultancy BMI Global predicts that gas production will increase gradually, from an estimated 43bn m³ in 2010 to a peak of 46bn m³ in 2012-2013, it is forecast to slide to 33.8bn m³ by 2019. Demand growth of 24.13%/year is projected by BMI, which will mean that by 2019, net imports of natural gas are expected to rise to 20.8bn m³.

After Kirchner's term was up in 2007, his wife, Cristina Fernandez de Kirchner, was elected as Argentina's president, and she continued the natural gas policies begun by her predecessor.

But while natural gas prices are kept artificially low for use in homes and commercial establishments such as shops and restaurants, industry must pay the going rate (see price comparison table overleaf). "The difference between the import price and the price paid by consumers is subsidized by the state," says Jorge Buhler-Vidal, director of the US-based Polyolefins Consulting.

"About 10% [of natural gas] is imported but this represents a third of the total cost because gas imports cost four to five times more than what is paid to local producers," Alieto Guadagni, Argentina's former energy secretary, told reporters in September.

The Kirchner administration sees the subsidies as a method to gain popular support, "but it has backfired because consumers that have natural gas service realize they have to indirectly pay for it in higher taxes and questionable service," adds Buhler.

By mid-July, most plants in the Bahia Blanca Petrochemical Complex, such as those run by MEGA, PROFERTIL and Solvay Indupa, all Argentine, as well as Dow Chemical of the US, had to stop because of natural gas restrictions. According to Argentina's Foundation for Electrical Development, the nation's power consultancy, the natural gas sector has caused an estimated loss of 1.5bn pesos ($382m) for major industries this year.

"Residential and commercial power takes precedent over industrial power"
Robert Bauman, president, Polymer Consulting International
No natural gas for industry means no ethane, the feedstock for many polymers, including polyethylene (PE), polyvinyl chloride (PVC), polyester and polyethylene terephthalate (PET). The only domestic producer of PE in Argentina is Dow, with 600,000 tonnes/year of capacity.

Outages at the PE plant in Bahia Blanca, as well as a shortage of saline-free water were major contributing factors in the $350m (€250m) in sales Dow lost in the second quarter this year.

Hydro is another factor in Argentina's natural gas puzzle: roughly 16-20% of the nation's electricity is from hydroelectric power. When there is a drought, which happened in 2007 and again this year, more natural gas is diverted to home use. "Any disruption in hydroelectric or other power sources will correspondingly adversely impact ethane availability for petrochemical use," says Robert Bauman, president of US-based Polymer Consulting International. "Residential and commercial power takes precedent over industrial power."

During July, Dow had to import ethylene to help alleviate the shortages.

While Dow and others, such as Argentina's Petroquimica Cuyo and Petroquimica Ensenada, have expansion plans, "they will not be carried out until there is an assurance of consistent feedstock supply," notes Bauman. "There can be no ethylene expansions without more ethane, which requires much higher prices."

And even if prices were to increase, "it would take time to develop the infrastructure to deliver the gas to Bahia Blanca," adds Bauman. "As PE and PVC demand increases, exports will decline and imports will be needed to meet demand requirements selectively."

Meanwhile, the decline in PVC production resulted in weak demand for feedstock chlorine, which caused a decrease in the availability of caustic soda, chlorine's coproduct.

"The low prices that the Kirchner administration allows for local producers discourage them from investing locally, while the three times higher prices that are paid for Bolivian-sourced natural gas encourage producers to invest over there instead," says Buhler.

While low prices discourage producers from investing in Argentina, the government has made attempts to provide relief. The liquifiednatural gas (LNG) facility at Bahia Blanca built in 2008 supplies 400m m³/day, and another LNG facility is planned near the Parana de las Palmas river.

"However since the LNG ship would exceed the allowable size in the river, it would anchor 200km [124 miles] offshore and LNG would be transferred to a smaller ship and transported through the River Plate into the Parana," says Buhler. This facility is scheduled to be completed by May 2011, and is expected to supply 500m m³/day.

An additional regasification project is planned for Punta Alta, near Bahia Blanca. Estimated to cost $150m, the joint project would be between Enarsa, Argentina's natural gas regulator, and Venezuela's state-owned oil company, PDVSA, and could be in operation by 2013.

Since private investors are not showing much interest in investing in a regasification plant in Argentina, one could be built in Uruguay, notes Buhler. "Argentina would purchase half of the imported fluid and ship it through the pipeline originally built to export natural gas to Uruguay," he says.

In March, Argentina launched its $314m, 37.7km natural gas pipeline across the Strait of Magellan. The pipeline will initially supply 5m m³/day, and Enarsa estimates that it will eventually transport 24m m³/day.

At the ribbon-cutting ceremony, President Fernandez de Kirchner said the pipeline was Argentina's "most important gas project in the past 32 years."

Additionally, Argentina is in negotiations with Bolivia regarding the construction of another gas pipeline, and has started talks with Chile. Argentina used to have a surplus of natural gas and would export it to Chile, but when Argentina's supply began to shrink, it cut off the shipments. Chile responded by building a 10m m³/day LNG facility to keep itself supplied. Now Argentina is in negotiations to import Chile's LNG.

The country is also looking towards alternatives for power. Argentina has turned to nuclear energy, with a plan to have 15% of the country's power supplied by atomic sources, up from 6% currently, say official estimates. One nuclear reactor is scheduled to be completed by September 2011 and two more are planned for operation by 2025.

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