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Highlights

Appetite increasing for LNG-to-power projects in Latin America

Ecuador seeking 375,000 mt of LNG/year with potential upsize

Receiving indicative HH offers at $10-$12/MMBtu delivered to end-user

Houston — The government of Ecuador is aiming to issue an LNG tender by the end of October seeking offers from parties that are able to supply LNG, as well as a small-scale floating LNG terminal and LNG-to-power infrastructure, as the country aims to enhance supply security in its hydro-based energy economy, Ecuador's Minister of Energy and Non-Renewable Natural Resources Carlos Perez Garcia has told S&P Global Platts in an interview.

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The timing for prospective importers could not be more favorable, as a record number of LNG export projects continue to reach FID without the traditional long-term contract amortization profile, ensuring plentiful flexible supplies in the years to come and increasing investor appetite for LNG-to-power projects across Latin America.

But the challenges faced by Ecuador are significant, including gas supply infrastructure deficits, highly subsidized downstream markets and the disadvantages of diseconomies of scale.

The successful bidder would supply at least 50 million cubic feet/day, the equivalent of 375,000 mt of LNG/year, over 10 years starting before the end of 2020, Garcia told Platts on the sidelines of the Gastech conference in Houston last week.

The government is already in discussion with potential bidders including LNG traders, portfolio majors and European utilities, and has received indicative offers based on the US Henry Hub that would result in delivered prices to the end users, largely in the power sector, in the range of $10-$12/MMBtu, he said.

"What we are guaranteeing is the purchase of the energy," Garcia said. "We would conclude back-to-back contracts with the downstream consumers [that would guarantee cash flows across the supply chain]."

GAS DEMAND UPSIZE

Ecuador would seek to upsize the volume of the LNG supply contract depending on demand growth. The 50 MMcf/day would almost bridge the current deficit between Ecuador's gas consumption of around 95 MMcf/day and domestic production of around 30 MMcf/day.

Ecuador will also be issuing a tender within three-four months seeking developers for a 500 MW combined-cycle power plant project, with an expected startup by 2022. After the completion of the first plant, another tender would be issued for a second 500 MW combined-cycle power plant.

The government's gas demand estimate does not however account for potential consumption from the transport, concrete and ceramic industries, which is likely to emerge, driven by government policies aimed at replacing oil products with cleaner and more efficient alternatives.

Around 90% of Ecuador's power generation is sourced from renewables, largely from hydro, but also solar and wind energy.

LATIN AMERICA LNG-TO-POWER

Latin American LNG imports helping mitigate seasonal variations in hydro output

LNG-to-power projects have proven quite popular throughout Latin America and the Caribbean because of a combination of widespread legacy fuel oil-based power generation and limited domestic energy resources, said Ross Wyeno, North American Gas Team Lead with S&P Global Platts Analytics.

These projects have found a market in countries such as Jamaica, Puerto Rico and Brazil, where the upcoming commissioning of the Golar Porto Sergipe FSRU and 1,516 MW Porto de Sergipe I power plant is expected to increase LNG's penetration into the Brazilian market.

"Not only has LNG become a viable alternative to fuel oil in Brazil, but also a cheaper gas source, underpricing and displacing pipeline imports from Bolivia," Wyeno said.

From the perspective of investors, these LNG-to-power projects represent an important demand sink for long-term contracted LNG supply, as flexible export volumes continue to rise.

"Many dynamic LNG suppliers are now in the business of developing downstream markets, which satisfies their own need to sell LNG and helps reduce fuel costs for the buyers," Wyeno said. "Therefore, these deals can represent a long-term value proposition for both the buyer and the developer, assuming they can cover their fixed supply and transport costs," he added.

INFRASTRUCTURE AND SUBSIDIES

However, the challenges facing Ecuador's gas ambitions are significant. Unlike other emerging LNG importers such as Pakistan, Ecuador's initial import and distribution infrastructure would need to be developed by private investors.

Some of the LPG pipelines could be adapted to be able to transport the regasified LNG to the power plants, but much of the LNG would still need to be transported from the terminal by truck, Garcia said.

Small-scale infrastructure and truck deliveries would significantly increase the cost per unit of the LNG delivered to the power utilities, and this is particularly challenging given the highly subsidized nature of Ecuador's fossil fuel market.

Around 99% of Ecuador's power generation industry is state-owned and fossil fuels including LPG, gasoline and diesel are highly subsided. A 15 kg LPG cylinder costs around $1.60 in Ecuador's domestic market, versus $15-$18 in the international market, Garcia said.

"The subsidy is significant, but this is a politically sensitive matter and the government will have to analyze the feasibility of reviewing these subsidies," he added.

Another alternative would be to build a subsea pipeline from north Peru to the Amistad gas field in Ecuador's Gulf of Guayaquil.

"This would be the most logical option," Garcia said, but the supplier is unable to guarantee supply of more than 30 MMcf/day, which would leave Ecuador short of its gas demand requirements.

-- Abache Abreu, abache.abreu@spglobal.com

-- Edited by Wendy Wells, wendy.wells@spglobal.com