INSIGHT: Argentine chems face gas cuts a year after YPF takeover

03 July 2013 16:34 Source:ICIS News

By Al Greenwood

HOUSTON (ICIS)--Winter has arrived in Argentina, and despite last year's nationalisation of energy producer YPF, the country's petrochemical industry has already contended with cutbacks in natural-gas supplies, an event that now happens annually.

Nor has the takeover provided Argentina's chemical industry with additional feedstock, which the country will need to expand its capacity and take advantage of ethane feedstock.

For several winters, the government has cut back natural gas to industrial users so it can ensure supplies to homeowners, who use the fuel to heat their houses.

It was not too long ago that Argentina had more than enough gas to meet local demand. It was not until 2008 that Argentina became a net importer of natural gas, according to the US Energy Information Administration (EIA).

Argentina's path from a gas exporter to an importer began in 2001, in response to the country's financial crisis, said Jose Valera, a partner at Mayer Brown.

Before the crisis, the Argentine peso was pegged to the US dollar on a one-to-one ratio, Valera said. After the crisis, Argentina broke the peg, and the peso's value fell to one-quarter of the dollar.

The Argentine government also froze consumer prices for electricity and natural gas, a move intended to provide relief during the country's economic crisis.

As a result of the price cap and the devaluation, consumers were paying just a quarter of the pre-crisis price of natural gas.

That discount remained frozen for years, and it had profound effects on the nation's gas market.

The low prices for energy caused demand to spike, Valera said.

And because prices were so low, natural-gas producers in Argentina had no economic incentive to risk capital for exploration, he said. Consequently, production took place only in the fields discovered prior to the financial crisis, he said.

Producers could have recovered some of their costs by exporting gas to neighbouring countries. However, the government adopted another policy that prohibited gas exports as long as local demand was unmet, Valera said.

Gas output reached a peak of 51.6bn cubic metres in 2006, according to the Argentine Energy Secretariat. By 2012, it had fallen by nearly 15% to 44.1bn cubic metres.

Meanwhile, demand increased by 4.7%/year during the past decade, according to the publication iProfessional, which quoted Argentina's secretary of energy, Daniel Cameron.

The country's regasification facility started operations in the Bahia Blanca petrochemical hub that same year, allowing imports of LNG.

"You saw in a very short seven-to eight-year period, Argentina went from exporting natural gas to having to import natural gas," Valera said.

Imports reached 4.60bn cubic metres in 2012, up from 3.93bn cubic metres in 2011 and 1.69bn in 2010, according to the Energy Secretariat.

The imports are ruinous to the country's treasury, since the country is buying LNG at $15-18/MMBtu and selling it to consumers at massively discounted prices, Valera said. Some consumers paid about $2/MMBtu.

The government has taken some dubious steps to increase gas production.

It introduced the Gas Plus programme, which allowed producers to sell gas at a higher fixed price, but only if the companies submitted a development plant and followed through on investment commitments, Valera said.

If the producer failed to meet those commitments, it could be subject to sanctions, Valera said. Moreover, the programme still capped gas prices.

Last year, the government nationalised YPF, appropriating most of the stake owned by Spanish energy producer Repsol.

The government defended the takeover by accusing Repsol of under-investing in energy exploration and production.

But a year under government control has not stopped the decline in energy production. First-quarter natural-gas production fell by 3.7% year on year, according to YPF.

With natural gas production remaining inadequate, the government once again began restricting supplies to industrial customers in early May, the newspaper La Nacion reported.

"Unfortunately, the usual pattern is being repeated," said Jorge Buhler-Vidal, director of Polyolefins Consulting.

It may be expecting too much for the government to reverse Argentina's declining gas production after only a year. After all, it took several years for Argentina to become a net importer of gas.

But despite the country's substantial shale-gas reserves, estimated as the second largest in the world, Argentina will not likely become a net exporter of gas anytime soon.

Valera said some subsidies still remain at the consumer level, while the prohibition on exports persists. This limits the extent to which producers can recover their investments.

To keep scarce dollars from leaving the country, the Argentine government has also adopted severe currency-exchange controls, which restrict how many US dollars can leave the country, Valera said. As a result, it is difficult for international producers to send money out of the country as US dollars.

Argentina also lacks the skilled labour needed to develop its shale resources and the infrastructure needed to ship the water necessary for hydraulic fracturing, he said.

Valera noted that companies face numerous impediments importing the equipment necessary for shale-gas production, a challenge described by the publication El Inversor.

Inflation is high, which makes shale-gas operations expensive. And, as Valera described it, "you have a government that is not the best example of one that follows the rule of law".

And the takeover of YPF has made outside companies wary about investing in the country, Valera said.

However, YPF needs these companies as joint-venture partners to provide the funds to develop its vast reserves of natural gas, Valera said.

To illustrate the need for money, YPF itself has proposed a $32.6bn capital-expenditure plan for 2013-2017. That comes to an average of $6.5bn/year.

So far, Argentina has received tepid response from companies interested in investing in the country.

Among the deals recently announced, ExxonMobil plans to spend $250m to study the formations in the Vaca Muerta.

Chevron may spend $1.5bn on shale projects.

Dow Chemical signed a memorandum of understanding with YPF to develop shale gas for an undisclosed amount.

Buhler-Vidal doubts that Argentina will raise the money under the current administration.

"It is unrealistic to expect that there will be substantial investment while the current administration is in power," he said. "With a new president by late 2015, the clock could start running and by the early 2020, the situation could be reverted or at least on the way to a substantial improvement."

Petrochemical producers have started planning under the assumption that the cutbacks will occur and natural gas will be in short supply. They now schedule maintenance and shutdowns during the winter, Buhler-Vidal said.

To make up for lost production, companies run their plants at the highest possible rates during the rest of the year, Buhler-Vidal said.

Constrained natural gas production affects the petrochemical industry in several ways. It deprives them of a fuel; it deprives them of feedstock methane needed to produce C1 chemicals; and it deprives them of ethane, the predominant ethylene feedstock for the country's crackers.

Methanex had relied on Argentine methane to supply feedstock for its four methanol plants in Punta Arenas, Chile. The company is now moving two of those plants to Louisiana because it could no longer secure enough methane from Argentina.

Among ethylene producers, Dow Chemical operates two ethane crackers in Argentina's petrochemical hub in Bahia Blanca, with a combined capacity of 700,000 tonnes/year, according to ICIS plants and projects.

These crackers, in turn, feed Dow Chemical's four polyethylene (PE) plants.

Over the years, the winter-time cuts in gas supplies have disrupted Dow's PE production levels from time to time, according to a statement from the company. So far this year, the cuts have not presented a risk to the market supply of Dow's PE to Latin America.

Nonetheless, Dow and other producers will be unable to expand capacity as long as natural-gas production is constrained in Argentina, Buhler-Vidal said.

Dow itself expects no growth in ethylene capacity before 2017.

This comes even though Argentine demand for PE exceeded production in 2012, said Buhler-Vidal. He based his finding on statistics from the Camara Argentina de la Industria Plastica (CAIP), a plastics trade group.

The unlikelihood of ethylene expansion is especially pernicious, because Argentine crackers already rely mostly on ethane as a feedstock.

In the US, ethane has given the country's petrochemical producers a cost advantage against much of the world, which relies on higher priced naphtha.

Low-cost ethane has created a chemical renaissance in the US. As of March, the American Chemistry Council (ACC) estimated that companies are pursuing 97 projects valued at $71.7bn.

These include new PE plants being pursued by ExxonMobil, Formosa Plastics and Chevron Phillips Chemical.

The additional capacity will exceed US demand, and producers will likely send the excess resin overseas.

The primary market they are targeting is Latin America.

By Al Greenwood