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Latin America weighs LNG appetite as US exporters seek commitments

Latin American LNG buyers said issues around pricing, demand variability and risk make them hesitant to sign long-term supply contracts, a bad sign for U.S. exporters already bracing for fewer tanker shipments to Mexico when new pipelines come online later this year.

The comments described the global market for LNG as new U.S. natural gas liquefaction and export projects start up and another group of developers seek buyer commitments to support construction. Speakers made the comments at the CWC World LNG and Gas Series Americas Summit in Houston on March 22.

For most of the time since Cheniere Energy Inc. began exporting LNG from its Louisiana terminal in February 2016, Latin America was the biggest importer of its volumes, by region, with countries including Mexico, Brazil, Argentina and Chile bringing in the chilled gas to feed power, residential, commercial and industrial demand.

In November 2017, Asia pulled ahead, based on data compiled by S&P Global Platts Analytics. In the future, the Asian continent is expected to pick up more of the slack in financing new U.S. liquefaction capacity, as buyers in Latin America rely more on pipeline gas and growing domestic production to meet demand. LNG imports there will be more on a spot or short-term basis, executives said.

"In Central and South America, it is difficult to assume the risk of long-term, take-or-pay contracts with fixed quantities," said Juan Oliva Vasquez, Latin America head of gas and fuels for power provider Enel Chile S.A. "In general, the metrics of generation has a relevant component of hydro capacity. That means gas consumption is very variable. It has big volumes or little volumes, depending on how dry or how wet it is in particular years."

He added, "These particular conditions are very difficult to manage with long-term contracts."

In Mexico, in particular, many of the LNG cargoes are being brought into their receiving terminals under spot or short-term arrangements. Executives from the region see that trend continuing. Adding to the variable nature of LNG demand there, Mexico expects LNG's role in electricity generation to diminish as pipeline gas flows increase, the chief of the fuel supply division of Mexico's state-owned electric utility Comisión Federal de Electricidad said.

"Definitely, LNG is not going to be part of the base in Mexico once the pipelines come online," said Guillermo Turrent, CEO of CFE Energía.

That has raised questions over what Mexico will do with its LNG receiving terminals when utilization falls. Turrent said he believes the Manzanillo terminal on Mexico's Pacific Coast will be a "prime candidate" for conversion to an export terminal, with new pipeline infrastructure to supply a steady amount of feedgas. The export discussion in Mexico has also focused on a proposal involving Sempra Energy that calls for converting the Energía Costa Azul receipt terminal south of San Diego to an export facility.

While the dynamics may be a bearish sign for U.S. LNG, imports of U.S. gas overall are forecast to continue to thrive, thanks to the pipeline flows.

"It is a blessing we are right next to perhaps the biggest and cheapest source of natural gas in the world," Turrent said.

Meanwhile, for U.S. LNG exports, Asia is setting up to be the key market for the future. Ye Yishu, president of the gas and power marketing unit of China National Offshore Oil Corp., or CNOOC, said at the conference that China is expected to remain a significant off-taker of U.S. LNG. Long-term contracts will be part of the mix. He said CNOOC is talking to several of the second wave U.S. export developers about supply opportunities.

While Yishu would not disclose who CNOOC is talking to, or what terms it is looking for, he did say CNOOC prefers to use oil indexation for pricing contracts, though it can sometimes accommodate Henry Hub pricing because of its large demand needs. He questioned whether the liquefaction cost estimates of the second wave projects, arguably the developers' biggest selling point, are sustainable.

"Some of the numbers are even lower than those of the first wave [of] U.S. LNG projects," Yishu said. "I found this to be quite unbelievable."

Harry Weber is a reporter for S&P Global Platts, which like S&P Global Market Intelligence and S&P Global Platts Analytics, is owned by S&P Global Inc.