Will South America’s winter demand draw LNG cargoes away from Europe?

South America is now in the middle of its winter demand season. Last year the region increased its share of global LNG imports in winter, with Brazil in particular a big buyer due to poor rainfall reducing its hydropower output. The major regional buyers, Brazil and Argentina, strongly rely on spot cargoes for their gas needs. However, this year we expect the region to compete less heavily in the market than last year, as our models predict a big fall in local gas demand.

ICIS now forecasts LNG demand in South America to shrink by almost half year-on-year in June-September – the coldest months of the year, from 6.8 million tonnes in 2021 to 2.9m tonnes in 2022.

The three largest South American LNG importing countries all have different landscapes of fossil fuel and renewable resources, varying dependency on imported pipe gas and domestic production, and different energy demand mixes. The ICIS forecast models take these factors, and more, into consideration to come up with our predictions.

Brazil

Brazil, the largest LNG importer in the region, can be a good indicator of the region’s outlook. ICIS estimates the country will import 0.7m tonnes from June to September 2022 and contribute to 75% of the demand contraction in the region this winter.

On average 40% of Brazil’s total gas demand comes from the power sector. Gas demand for power mainly depends on the level of hydropower generation – especially during winter – as well as the very high growth in total power demand experienced in the past few years. ICIS has tracked an impressive 7% average annual growth rate in the past five years due to a rapid electrification programme as demand for electricity soars.

However, Brazil’s 70% dependence on hydropower can cause energy security problems in times of low rainfall. The share of hydropower generation declined to 63% in 2021 and reached a record low during the winter months. Consequently, power generation from all fossil fuels (coal, gas, and oil) doubled to replace the lack of hydro last year.

This is less likely to happen this year as precipitation has been consistently on the higher side, with heavy rainfalls since December 2021. On the supply side, domestic gas production and pipe gas imports from Bolivia both declined last year, adding to the need for LNG. This year additional offshore gas production will partially offset the impact of a 30% curtailment to Bolivian pipe gas imports. ICIS expects Brazilian LNG demand for 2022 as a whole to reach 2.7 m tonnes, two-thirds lower this year when compared to the record arrivals of last year.

Argentina

Thanks to its sizeable indigenous supply, Argentina has transformed itself into a gas-intensive economy, with gas making up more than half of the nation’s total energy consumption in the past few years. However, ICIS expects to see a 26% year-on-year drop in winter LNG imports in 2022 to 1.3m tonnes.

Argentina’s gas consumption is highly seasonal, being led by a strong heating and power demand in the residential sector during the coldest months. Without underground storage, Argentina has to rely on spot LNG imports, Bolivian piped gas and domestic production to meet peak winter demand.

During the 2021 winter, LNG imports grew 72% year-on-year on the back of insufficient production and growing gas-fired power demand to replace the much lower hydro generation brought about by a drought which started in 2020.

Compared to Brazil, the heavier rainfall this year will not significantly reduce Argentina’s need for other fuel generation, including LNG. That is because hydro generation only accounts for 17% of total power generation demand in Argentina, compared with 70% in Brazil. Though Argentina is reaching its five-year average level of precipitation this year, this will only mean less spot LNG required compared with last year – not eliminating it.

On the supply side, Argentina has been working to increase Bolivian pipe imports and domestic production. While it has managed to secure a deal on the former, the latter is limited by infrastructure capacity. Further supply increases can only come once the new Vaca Muerta gas pipeline becomes operational by winter 2023 to connect up the country’s key shale gas basin.

LNG provides great flexibility to meet seasonal needs, but the unprecedented price surge of spot LNG this year has challenged Argentina’s finances. ICIS therefore expects to see lower winter LNG imports, though some form of demand curtailment in the industrial sector could help to keep residential heating available throughout winter.

Read more about the difficulties for gas-based developing nations to drastically reduce gas consumption in this insight.

Chile and Colombia

South America’s remaining LNG importers are Chile and Colombia, although Colombia is a very small buyer taking only a handful of cargoes each year. Our forecast is for Chile’s June to September LNG demand in 2022 to reach 0.9m tonnes and Colombia to have a small increase and hit 0.07m tonnes.

Both countries are minor gas producers, reliant on neighbouring countries’ gas supply and LNG imports to fulfil their gas needs. The countries are highly exposed to gas price volatility on the international market.

ICIS has downgraded the LNG demand of Chile and Colombia by 37% year-on-year as the countries attempt to avoid buying expensive spot LNG. To balance the gas deficit during this winter, Chile will swap some of its solar power for gas supply from Argentina, while Colombia is looking to accelerate its hydropower generation.

Whilst expensive, LNG remains crucial for these four South American countries to balance their gas deficit. Each country will go through varying degrees of demand curtailment and fuel switching to allow them to drastically reduce spot cargo purchases, depending on how entrenched gas-use is within different sectors of their economies. In the current market, these South American nations are also unfortunate in having little-to-no long-term LNG.

ICIS LNG Edge market intelligence

The ICIS LNG Edge market intelligence platform tracks cargoes in real-time around the world, uses satellite data to monitor the imports and exports of global consumers and producers. A team of analysts supplement this physical data with commercial information from customs agencies and other sources to add price and volume data to voyage records.

Our Supply and Demand Forecast provides a two-year forward forecast of global trade, drawing on our historic data and analysis of future trends.

ICIS LNG Edge also provides a database of global LNG contracts, an infrastructure database, news and alert services and more. The ICIS publication LNG Markets Daily contains the latest news as well as a full range of price assessments.

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