No movement without demand

Argentina

Jorge de Zavaleta, executive director of Argentina’s Chamber of the Chemicals and Petrochemicals Industry, talks to TOGY about gas production trends in the country, how the chemicals and petrochemicals sectors could be impacted by the full development of Vaca Muerta, and what must be done to achieve lower gas prices in the country. The chamber was founded in 1949 to represent domestic chemicals and petrochemicals players.

• On sector competition: “The only way to compete in petrochemistry is by having reasonable natural gas prices. We will never have the prices the United States has due to that country’s volume and efficiency and because it is hundreds of miles ahead of Argentina.”

• On supply and demand: “Vaca Muerta has everything to be a success, but the magic word is demand. We have to change the paradigm. Until now, the issue was supply. It is true that we need supply because we are currently importing gas, but with our consumption behaviour, we don’t have enough demand during six months of the year.”

Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Jorge de Zavaleta below.

What is the biggest challenge Argentina’s government is facing regarding the energy industry?
We have Vaca Muerta, which is a huge challenge that I think the government and Minister of Energy and Mining Juan José Aranguren have solved quite well with the gas price pathway. Today, the El Orejano gasfield is producing 3 mcm [106 mcf] of gas per day, and that is just a small amount compared to Vaca Muerta’s potential. If you look at all the rest of the projects there, gas production could see a phenomenal explosion, which is what everyone is noticing now.
I think that the government has solved the price question very reasonably. The price incentive, which is the difference between the price at which companies sell their gas and USD 7.5 per million Btu, will gradually decrease in time. It is better than importing gas.

How has Argentina’s natural gas potential shifted over time?
In 2007, 2008 and 2009, we didn’t have this EIA [US Energy Information Administration] report about unconventional resources. At that point, we were extremely worried, because the country’s oil and gas reserves were declining.
The great change came when talks about unconventionals emerged. Until that time came, we asked ourselves what we could do. In 2008 or 2010, when we did not know of the existence of unconventional resources, Argentina was in an extremely complex situation, because we were running out of reserves and we had a whole infrastructure in place, such that we ended up having idle pipeline capacity.
In conventional natural gas, we also have Tierra del Fuego, which is doing very good offshore work. That area has a lot more in reserves than we knew at the time. You have Carina and Vega Pléyade now. Furthermore, there are other fields that can be developed. Some offshore areas have just been submitted for a bidding process.

How should Argentina address its issues with gas supply and demand?
Argentina’s major problem is natural gas. We need natural gas because it is 50% of our energy matrix and we have to import it. The road we must travel is huge. Now, when you are planning an investment, you need to think about who is going to buy that natural gas. The problem we have is that our gas consumption is seasonal. It is about 105 mcm-115 mcm [3.71 bcf-4.06 bcf] in summer and 155 mcm-160 mcm [5.47 bcf-5.65 bcf] in winter.
We have to work on gas demand or find a way to handle this, because if Neuquén starts producing 120 mcm [4.24 bcf] per day, what will we do with imports from Bolivia? We have a contract with that country all year long. I think we should have natural gas storage available to overcome those changes in demand.
We must also start working on demand during summer. One option is to find more consumption for all this, for instance, petrochemicals and electricity. You cannot build a liquefaction plant to only export four months per year on the spot market because you will never repay the investment.
The new challenge we have is finding the demand. This is what everyone is wondering about. Tecpetrol is developing Fortín de Piedra and suddenly that area will produce 5 mcm [177 mcf] per day, then 10 mcm [353 mcf], then 15 mcm [530 mcf], then 20 mcm [706 mcf]. We need to find room for that probable excess of supply, or we should store it.
This is where we must think about what we want to do with our energy. Oil goes to the transport sector and that doesn’t worry me so much. Natural gas is ideal for electricity, heating during winter, the petrochemicals industry and as a transportation fuel as CNG.

Will the petrochemicals sector see a significant expansion from the development of Argentina’s abundant gas resources?
Companies in the US are now making a profit with a backhoe. Just imagine, with gas sold at USD 2.90 per million Btu and polyethylene sold above USD 1,000 per tonne, excellent margins would be generated to repay investments and stakeholders. There is no way in which this scheme cannot work.
All the US petrochemicals companies have a clear view of things, and the sector sees the situation so clearly because it missed the train in the gulf coast. The companies started to operate the petrochemicals complexes in 2017 that should have been started in 2014. The sector lost billions of dollars of revenue.
Argentina is not Germany or Texas. The rules change here every once in a while, but one must pay close attention to things, because you have to press the button at the right time to make a profit.

What products could the domestic petrochemicals sector produce with locally sourced gas?
There are two ways of doing petrochemistry. Natural gas is 85-90% methane. Methane petrochemistry involves methanol, urea and a couple of other things. It is pretty basic.
Neuquén’s unconventional gas has an ethane content that is twice what conventional gas has. With ethane, you can produce ethylene, and with that, you can get into polyethylene, which is the most widely used and best-priced plastic in the world.
Then you also have propane. The world is flooded with propane. We do not know what to do with all that propane. Propane could be used to produce propylene, which has phenomenal petrochemistry. Then you have butane and NGLs, which are used in naphtha crackers.

How would Argentina’s petrochemicals compete in the international market?
We do not compete against the Europeans because they have a different structure and work on oil derivatives. They have invested a lot and therefore have huge capacity. We compete with Saudi Arabia, the US and China, which is investing a lot.
The only way to compete in petrochemistry is by having reasonable natural gas prices. We will never have the prices the United States has due to that country’s volume and efficiency and because it is hundreds of miles ahead of Argentina. If we do things in, more or less, the right way and manage to have a price of USD 4.50 or USD 5 per million Btu, physics helps us, since US petrochemicals imports to the region need to be loaded onto a ship, and the ship must reach South America. Also, regarding domestic demand, we have tariffs to help us.

How is the domestic energy matrix developing?
In the case of the nuclear power plant, 1 MWh needs USD 130 to repay investment. With natural gas at USD 5 per million Btu, you can produce electricity at USD 55-60 per MWh. The US is replacing coal with natural gas because it has abundant gas resources.
To do this, Argentina would need to increase the volume of its natural gas production. This is a paradox. Vaca Muerta requires volume to be competitive. The day you start having a lot of activity, the costs will decrease and you will have large volume, which is what the Americans did.
Regarding wind energy, while in Europe wind turbines are operating at 32-36% of capacity, wind turbines in the south of Argentina are working 55% of the time. Furthermore, photovoltaic power is becoming increasingly more competitive, which is positive.
Hydroelectric works must be done because they fulfil a social function as well. They prevent floods, and enable water management and irrigation. You shouldn’t focus on money in those cases. Perhaps producing hydroelectricity costs USD 120 per MWh, but you cannot compare that with USD 55 per MWh for gas-based electricity, because one entails a machine and the other fulfils a social function.

What would happen if all these resources were to be developed at the same time?
If we massively deploy wind farms and solar fields, we could face a huge problem, because we have no one to sell this energy to. We need to start working on demand and develop an energy matrix with renewables and natural gas.
For natural gas, petrochemistry could demand many millions of cubic metres; I believe it could reach up to 40 mcm [1.41 bcf] per day if projects are built. You also have to produce electricity to be able to do other inexpensive things, so the country is competitive in electricity.
We are moving towards a paradigm change and we are entering a stage in which we will all have to be aligned and working on generating demand. The only way that gas could be cheap in Argentina is by having enough volume. If there is not enough volume, this gas will continue to cost around USD 6-7 per million Btu. At that price, it would be very difficult to repay petrochemicals investments.

How do you think the market will develop over the next five years?
We have to resolve many things. We have a taxation system that is too expensive, complex and cumbersome.
Vaca Muerta has everything to be a success, but the magic word is demand. We have to change the paradigm. Until now, the issue was supply. It is true that we need supply because we are currently importing gas, but with our consumption behaviour, we don’t have enough demand during six months of the year.

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