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Global Gas Update

Thanks to high regional prices, South America emerges as key US LNG market

July 27, 2016 -- By J. Robinson, Charles Newbery

High regional gas prices in South America, most notably Argentina, are attracting US exports of domestically produced LNG, with more than 70% of landed cargoes arriving on the continent so far this year, according to new data compiled by Platts Analytics' Eclipse Energy.

The average FOB price of cargoes shipped to South America through May was $3.42/MMBtu, new DOE data shows. At that price, South America has offered the most profitable destination for US exports compared with Europe, the Middle East and Asia where US volumes, less the cost of shipping, have yielded an average price of $3.00, $2.87 and $2.69/MMBtu, respectively.

The higher price paid for US LNG in South America comes as regional gas markets, particularly in Argentina, are experiencing elevated prices.

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Under the recently elected conservative government of Mauricio Macri, Argentina’s domestic gas prices have risen by as much 500% this year.

In an effort to stem the decade-long decline in gas production, the Argentine president cut domestic subsidies in December allowing consumer prices to rise to $5.20/MMBtu. Macri also extended a $7.50/MMBtu incentive price for output from newly drilled wells.

Last week, Argentina’s government vowed to keep natural gas prices flat through the balance of the year amid a revolt from consumers over increases as high as 1000% on their utility bills.

Macri’s administration hopes that higher wellhead prices will revive production in older fields and stimulate new production, particularly in the Vaca Muerta Basin where large untapped volumes remain locked in shale and tight gas reservoirs.

Argentine gas production dipped to a low in 2014 at 4 Bcf/d, a 20% decline from record production that reached 5 Bcf/d in 2004.

In March and April the first and second US cargoes to arrive in South America landed in Brazil, spurring expectations that the South America’s largest consumer market could become a dependable buyer of US LNG.

Since April, all eight US cargoes exported to the region have landed in the Southern Cone nations of Argentina and Chile.

The unexpected slowdown in US LNG imports by Brazil comes as the tropical nation experiences its weakest gas market in nearly four years.

In first-half 2016, demand for thermal power in Brazil declined precipitously as improving hydrological conditions and a worsening economic climate reduced the need for thermal power.

From January to June, LNG imports were down nearly 54% compared with the same six-month period last year. From February onward, Gasbol imports from Bolivia fell by over 11% compared with the same 5-month period in 2015.

While rising reservoir levels, which topped out just below 60% in early April, have reduced the need for more-costly thermal power, weak economic conditions this year have also contributed to an overall slowdown in electricity demand.

In May, industrial producers — the largest consumers of natural gas in Brazil — saw output decline by nearly 8% on the year, according to data from the Brazilian Institute of Geography and Statistics.

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