Brazil demand may stay high, but Argentina’s will diminish

WHAT US LNG exports to Latin America hit a 37-month high

WHY The surge was because of supply disruptions, seasonal demand, plentiful US supply

WHAT NEXT The surge will taper off as the regional gas balance changes

 

United States LNG exports to Latin America and the Caribbean climbed to their highest level in more than three years in June, but analysts say the current pace of imports is unlikely to last.

The surge had been driven by an unusual combination of supply disruptions, seasonal demand and plentiful US cargo availability. However, some of the factors behind the high are likely to persist.

US LNG exports to the region reached about 48.84bn cubic feet (1.38bn cubic metres) in June, up about 55% from May and the highest monthly total in more than three years.

The increase reflected a rare convergence of events rather than a structural jump in Latin American LNG demand. Dramatically reduced gas supplies from Trinidad and Tobago, stronger winter demand in Argentina, higher imports by Brazil in large part because of hydro shortages and growing US export capacity all combined to boost shipments.

 

Trinidad and Tobago  

The biggest single factor was weaker regional gas supply.

Trinidad and Tobago has long been one of Latin America's main LNG producers, supplying markets across the Caribbean and South America. But declining upstream gas production has left the country's Atlantic LNG complex operating well below its historical capacity, reducing the availability of regional LNG.

The situation was made worse by planned maintenance at Atlantic LNG's Train 4, temporarily taking a significant amount of production offline and creating a gap that US suppliers were well placed to fill.

That maintenance-related disruption should prove temporary. Once work is complete, production is expected to recover. However, restarting liquefaction capacity will not solve the industry's deeper problem if there is feedstock.

Trinidad is pursuing several options to increase supply, including new offshore developments, better use of existing reserves and plans to import gas from Venezuela's Dragon field. But those projects face financing, regulatory and infrastructure hurdles, while Venezuelan gas remains vulnerable to political uncertainty and sanctions-related complications.

As a result, Trinidad's LNG output could improve over the next few years but is unlikely to return to the levels seen during the country's peak production years without substantial new gas developments.

 

Brazil is a significant driver

Brazil was the second major driver of June's surge.

The country became the largest Latin American destination for US LNG during the month, with imports from the United States rising by more than 400% compared with May.

Brazil's electricity system depends heavily on hydropower, making LNG imports highly sensitive to rainfall and reservoir levels. Lower hydroelectric availability, combined with higher power demand, increased the need for gas-fired generation and boosted LNG purchases.

Unlike many LNG importers, Brazil's demand can change sharply from one season to the next. When rain does not fill reservoirs, hydroelectric output drops, gas-fired plants run more often and LNG imports rise.

That pattern has repeated itself several times over the past decade, making Brazil one of the world's most volatile LNG buyers.

Although rainfall is expected to improve at least seasonally, reducing import requirements, longer-term uncertainty remains. More variable weather patterns because of climate change and continued expansion of wind and solar power are increasing the need for flexible backup generation, meaning Brazil is likely to remain an important swing buyer in global LNG markets. This is rather than returning permanently to very low import levels.

 

Argentina’s role

Argentina also contributed to June's increase.

The southern hemisphere winter regularly pushes up gas demand as colder weather increases heating consumption. Although domestic production has risen rapidly from the Vaca Muerta shale formation, the country still relies on LNG imports during peak winter demand to balance the market.

US LNG shipments to Argentina rose by more than 300% from May as seasonal demand increased.

Unlike Brazil, however, Argentina's longer-term outlook points in a different direction.

Continued growth of gas production in Vaca Muerta could steadily reduce the country's dependence on imported LNG. In fact, if development continues as planned, Argentina could eventually become a regional gas supplier, reshaping LNG trade across South America.

The surge also reflects changes on the US supply side.

US LNG exports continue to grow as new export capacity enters service. With additional liquefaction projects ramping up, more cargoes are becoming available for international markets.

The commercial structure of US LNG also makes it particularly attractive for Latin American buyers. Many US cargoes are sold under flexible contracts rather than destination-restricted agreements, allowing them to move quickly to whichever market offers the strongest demand.

Geography provides another advantage.

Shipping LNG from the US Gulf Coast to the Caribbean or South America takes significantly less time than voyages to Europe or Asia, lowering transport costs and allowing suppliers to respond rapidly when regional buyers require spot cargoes.

 

Europe

Global market conditions also played a role.

US LNG has flowed heavily to Europe since the continent sought alternatives to Russian pipeline gas. But cargo movements vary according to prices and demand across global markets.

In June, stronger Asian LNG prices and shifting trade flows reduced Europe's pull on marginal cargoes, increasing flexibility in the market and leaving more US supply available for nearby destinations in Latin America.

Taken together, the surge has thus largely been a supply-balancing event rather than the start of a permanent transformation in regional LNG trade.

Some drivers are already likely to unwind. Maintenance at Trinidad's Atlantic LNG facility should end, while improved rainfall in Brazil would reduce demand for imported LNG.

Others, however, are more enduring.

Trinidad's declining gas production is unlikely to reverse quickly, while US LNG export capacity is expected to continue expanding over the coming years. Those structural changes should allow the US to maintain a larger role in Latin American LNG markets than it held historically, even if monthly export volumes retreat from June's exceptional levels.

The result is likely to be a middle ground. Latin American imports of US LNG may fall as temporary supply disruptions ease and hydroelectric conditions improve, but they are unlikely to return fully to previous patterns.

The region should remain an attractive nearby market for US Gulf Coast exporters, while Brazil continues to act as a flexible buyer and Argentina's expanding shale gas industry gradually reshapes the region's longer-term gas balance.

This article is from Newsbase, an IntelliNews sister company that provides essential intelligence for the elite energy sector. Sign up for a free trial of one of our family of publications here.