In Argentina, gas is an emerging threat for refiners: Fuel for Thought

When Gas Natural Fenosa and Metrogas, two leading natural gas distributors in Argentina, launched a campaign in May to get motorists to convert their cars to run on gas, it didn’t surprise the energy industry.

The “Switch to Gas” campaign highlights the ease of converting cars to compressed gas, or CNG, and filling up at a stations nationwide, plus the lower carbon emissions. The clincher is that CNG is 50% cheaper than gasoline, according to the distributors.

CNG has been used as by cars and taxis in Argentina for years, and the fleet is at 1.7 million, or 16% of the 10.7 million cars on the streets, according to industry data.

But distributors have shied away from promoting CNG since 2007, when shortages hit as production slid from a peak of 143 million cu m/d to what would become a 16-year low of 113.7 million cu m/d in 2014. This left the country with a 25% deficit.

Now Argentina’s gas fortunes are improving, led by the development of giant Vaca Muerta shale play, and this has shifted the industry’s concerns from shortages to a looming glut in the warmer months when residential demand for heating subsides.

HUNTING FOR BUYERS

Gas producers are hunting for markets to increase demand and sustain Vaca Muerta’s production growth.

“We can’t think of gas only for traditional consumption” like heating, said Pablo Bizzotto, executive vice president of upstream at state-run YPF, the country’s biggest energy company.

Cars pose potential for growth in demand. The recent surge in oil prices has pushed more motorists to make the switch, with conversions up 39% to 50,000 in the first five months of 2018 from about 35,900 in the year-earlier period, according to data from Enargas, the national gas regulator.

This is hitting refiners, as the conversion of every 100,000 cars to CNG reduces gasoline demand by around 600 b/d, according to industry data.

CNG accounted for 5.7% of total gas consumption in 2017, compared with 39% for power plants, 28% for industry and 22% for homes, according to Enargas.

If the CNG market were to double, its gas consumption would reach 16 million cu m/d, helping to absorb an increase in Vaca Muerta output, according to Pedro Gonzalez, vice president of the Chamber of CNG Retailers.

Buses and trucks could follow, stealing away diesel sales from refiners.

A SENSE OF URGENCY

Refiners may struggle to fight back, given the recent surge in the prices of their products - and the urgency for the gas sector to widen sales.

The Energy Ministry expects gas output to reach between 174 million and 200 million cu m/d in 2030, up from 123 million cu m/d in 2017.

If demand doesn’t keep pace, producers may have to plug wells for part of the year, curbing profits after huge investments in drilling - and deterring new investment.

This has instilled a sense of urgency to find more gas consumers.

“We have to do this in the short term because we have seen assets that have come on very aggressively and with very good results,” Bizzotto said.

YPF and Dow Chemical’s El Orejano field, for example, is producing 5 million to 5.5 million cu m/d from 40 sq km of the 30,000 sq km of Vaca Muerta, while Tecpetrol’s Fortin de Piedra has surged in production to 8 million cu m/d in just one year, and is on track to reach 16 million cu m/d in 2019, or 12% of national production.

Even so, there are challenges for getting buses and trucks to switch to gas. First, it’s expensive. Bus companies, for example, must convert their vehicles and set up on-site filling stations, a deterrent, said Carlos Casares, a director of Enargas.

A help could come if bus and truck manufacturers were to start making or marketing gas-run vehicles locally, but they won’t do so until they know they can sell them, he said.

EXPORTING GAS

Exporting gas and using it as a domestic power fuel makes more sense, as this would help resolve the wide fluctuations between summer and winter demand for gas in the residential sector, said Nicolas Fulford, director of global gas and LNG at the energy consultancy Gaffney, Cline & Associates.

Argentina has pipelines to deliver a total of 20 million cu m/d to Brazil, Chile and Uruguay, and they are starting to operate again after a decade of little to no activity Fulford said Argentina can push back LNG regionally, such as by replacing imports into Brazil and Chile. But if it wants to compete globally, it has to bring down its development costs.

That makes using gas as a motor fuel not a bad way to start expanding consumption, and as a power fuel and for petrochemicals, no matter the challenges.

“These are long-term projects,” YPF’s Bizzotto said, “but we have to plan for them as the new gas projects come online in Vaca Muerta.”