YPF’s gas and power expansionApril 30, 2018
Marcos Browne, YPF’s executive vice-president of gas and energy, talks to TOGY about the expected evolution of Argentina’s natural gas and power generation sectors, and how the company plans to achieve its goals in these areas. Founded in 1922, the partially government-owned company is the largest player in the domestic oil and gas industry.
Founded in 1922, partially state-owned YPF is engaged in E&P and power generation, as well as the refining and distribution of chemicals and petrochemicals products. YPF is Argentina’s main investor and employer, second-largest exporter and its leading hydrocarbons producer.
• On Vaca Muerta’s midstream: “YPF is confident that the new production coming from unconventional gas will be able to be evacuated for perhaps the next three to four years with the Neuquén Basin’s current infrastructure, as well as the works being currently undertaken. YPF has taken the lead and has been working to eliminate a few bottlenecks in the gathering system and to take advantage of all the idle capacity at conditioning plants that for years have been used for conventional gas.”
• On gas and power: “With this new scenario in which Argentina’s gas supply will be increased, we could anchor part of our natural gas production capacity to our own electricity generation demand. Once the market is completely deregulated and power plants are free to purchase their own fuel, this vertical integration will make sense.”
• On petchem projects: “The development of Bahía Blanca’s petrochemicals pole is there for anyone to profit from and we want to be a part of that development. We are working on this and are in the process of deciding who our ideal partner should be for such a development. The demand is there, the economics make sense and the project will certainly come on stream with the strong participation of YPF, both in the supply of raw materials – natural gas – and the required capital expenditures.”
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Considering Vaca Muerta’s expected growth, how adequate is existing gas midstream infrastructure?
This is a transition period in which the market, in general, feels a high level of uncertainty regarding the requirements for development in gas treatment facilities, and evacuation and transportation infrastructure in the backbone systems. YPF is confident that the new production coming from unconventional gas will be able to be evacuated for perhaps the next three to four years with the Neuquén Basin’s current infrastructure, as well as the works being currently undertaken.
YPF has taken the lead and has been working to eliminate a few bottlenecks in the gathering system and to take advantage of all the idle capacity at conditioning plants that for years have been used for conventional gas. We have fostered the capacity expansion of the Pacific gas pipeline, we have built and expanded a new gathering pipeline from Rincon del Mangrullo to Loma de la Lata and are currently developing a new pipeline from Río Neuquén to [the Neuquén separator plant belonging to] Compañia Mega.
Over the next few years, the development of unconventional gas in the Neuquén Basin will replace the conventional gas base, which is being significantly depleted. If investments continue and the rate of capex deployment increases as we expect, there will be an increase in total aggregate production from the Neuquén Basin.
This natural gas growth will hopefully fill the idle transportation capacity in the backbone systems of the transportation network – TGS and TGN [the Transportadora de Gas del Sur and Transportadora de Gas del Norte pipelines] – and will soon start taking the place of LNG imports, especially at Bahía Blanca, since the idle capacity to transport gas out of Neuquén lies especially in the Neuba II pipeline between Neuquén and Bahía Blanca.
In summary, with the systems in place today, bottlenecks that are being eliminated, the conditioning and treatment capacity in the Neuquén Basin and current transportation capacity in the main backbone pipelines, we have the infrastructure required to absorb most of the incremental production that we will see over the next three to four years.
What challenges and opportunities does seasonal demand pose for the system in the near future?
Depending on how our and other companies’ production capacities develop in the different basins, we expect production surpluses during the summer, which will favour the reopening of exports to neighbouring countries and regional integration with Chile, and hopefully with Brazil as well, mainly via electricity flows.
We also hope that we, at the consolidated national level, can somehow manage to moderate what we import from Bolivia. Therefore, Bolivian gas will only be imported when needed during winter and imports will be reduced or even eliminated during summer, bringing about local production.
At the same time, YPF is working on the development of opportunities for underground storage facilities at several locations. With current outlooks for the minimum economic scale for natural gas liquefaction, we have even started serious studies to start considering seasonal LNG exports during summer via the Port of Bahía Blanca.
How do companies make investment decisions for gas developments?
When we make our investment decisions, we especially consider our target markets and specific customers, namely, to whom we will sell the gas that we will produce. Whether demand (considering each segment) will or will not be seasonal, is probably the main issue for YPF to plan ahead for its developments. Either we produce an additional 1 mcm [35.3 mcf], which can be sold evenly throughout the year at a given price, or we plan for a seasonal demand that only needs natural gas, say, six or seven months a year.
If I know that demand will cease to be evenly spread throughout the year and will begin to show seasonality, this does not mean that I should stop investing. However, if I am only going to sell gas during some months of the year, the average price during those months will have to be higher.
The economic equation can be the same for the producer that makes the investment decision if, and only if, price adjustments are free to occur within a rational and market-oriented regulatory framework. We strongly expect that a free market without intervention will lead to the achievement of this equilibrium and that winter prices will gradually converge with the import parity price of LNG.
For winter 2018, the landed price for imported LNG is expected to be around USD 8 per million Btu. If I knew that during the next 10, eight or five winters I would be paid for my natural gas at the same price of the LNG import parity, then it would be viable to carry out developments for a seasonal demand profile, even if I have to close production during summer, as huge natural gas producers are used to doing in Europe.
On the other hand, if I won’t be paid more than USD 5 per million Btu and I am only going to be able to sell gas for eight or nine months a year, then the development will not be economically viable and will not happen.
Equilibrium will gradually be reached through this interplay of how much each producer will sell and how much they will sell compared to the reserves they have to develop, which are not uniform and don’t have the same development costs in each case. It will be achieved once one has a good idea that there is a certain market with a certain volume and a price that is annualised and may be contractualised, with higher or lower risks. That will lead to us making our investment decisions year after year.
Our portfolio of projects will constantly adjust to this scenario, while we keep improving efficiencies and lowering both development costs and operating expenditures at our unconventional fields. Those costs are getting closer and closer to what we see in shale plays in the US.
This is why YPF’s strategic plan has a five-year prospect under certain assumptions that we will verify year after year, in accordance with what happens with the economy, regulations and markets. We will annually recalculate to determine the risks we are willing to take and the profitability of the developments we are planning to carry out according to what we see and expect due to market conditions and regulatory decisions.
What is the future of LNG in Argentina?
This interplay between supply and demand, regulations and the possibility that anyone can freely import LNG will also determine how that commodity will continue to play a role in the local energy economy. The two regasification terminals at Escobar and Bahía Blanca are connected to the backbone systems and operate at full capacity during winter.
Despite all that gas and the filled backbone pipelines that reach the Buenos Aires area to satisfy demand, we still use 1 million tonnes of gas oil during winter because there is not enough regasification capacity for more LNG than what we already currently process. The installation of a third terminal near the Buenos Aires metropolitan area is clearly necessary, so that gas oil, which is consumed mostly during winter, is replaced by LNG. This cannot be done because the regulation is still not ready, state incentives are not yet in place and investment decisions have not been made.
It is yet unclear how freely this system would be able to operate, but we are confident that we will have good news about new regulations being enforced pretty soon. A regulatory package has been under public consultation for the past couple of months and the Ministry of Energy and Mining is working on all comments received.
Whether or not this third plant is installed and whether the main transportation system is expanded or not will determine if a producer, be it YPF or someone else, will develop reserves to compete with possible LNG imports. About 30 mcm [1.06 bcf] of imported LNG per day could be replaced with domestic natural gas, as long as the price paid for the natural gas is comparable to the price paid for imported LNG. Payments for imported LNG are hard dollars that are leaving the country and that should be recycled into our economy to fuel local investments.
In the long term, if the market and regulatory conditions are appropriate, all these factors will together lead to domestic gas production capacity replacing imports to the two existing regasification terminals. As long as the backbone transportation systems are not expanded, a third terminal near Buenos Aires will continue to be necessary to displace diesel oil.
We will be able to export natural gas surpluses once the economy of small-scale gas liquefaction reaches the point where it is heading. We still don’t see a favorable situation in which this can occur, but technological developments and the worldwide evolution of everything related to gas liquefaction and transportation seems to be moving in that direction. Thus, in 10 years, if one has a surplus of 10 mcm [353 mcf] per day during the summer that is not received by Chile or Brazil, small-scale liquefaction might be an option. We are studying the moment when this will become economically viable.
YPF’s five-year plan emphasises the company’s growth as a power generator, moving from the fifth-largest in the country to the third-largest. How will the company achieve this objective?
Since 2016, we have focused on thoroughly exploiting YPF’s electricity generation business, building on a very solid platform established around the power plants that we had been operating for many years.
Due to Argentina’s economic crisis and the declaration of the electrical emergency in late December 2015, we saw an opportunity to make the business grow to unlock the value of an operation hidden within the notion of YPF as only an oil and gas company, taking advantage of our existing platform, experience and a skilfull and enthusiastic team ready to accept the challenge. Bringing that business into the light, benefiting from circumstantial opportunities and developing projects in a very agile manner with the appropriate partners allowed us to take advantage of a unique opportunity to develop generation capacity.
We achieved significant growth in our electricity generation capacity in a short period of time, with the incorporation of projects that included both thermal and renewable energy projects. This allowed us to establish an asset and infrastructure portfolio ready to generate electricity, and contributing to the supply of our country’s demand and requirements.
All this took place in a context of improved generation efficiency, thanks to technology that was incorporated after many years of neglect and an adverse economic environment. By developing sources of financing that are alternative to those YPF uses for its upstream and downstream business, and off-balance sheet structures, we managed to get the resources we needed for this, without affecting resources for our main business.
Today, YPF EE [YPF Energía Eléctrica] has a much more significant position in the market, with the possibility to continue growing and capitalising on all the experience acquired through all the projects that were incorporated.
How do you expect the market to continue developing?
With this new scenario in which Argentina’s gas supply will be increased, we could anchor part of our natural gas production capacity to our own electricity generation demand. Once the market is completely deregulated and power plants are free to purchase their own fuel, this vertical integration will make sense.
Argentina is a developing market and we hope the country will once again take off, economically speaking. If GDP grows, it will imply an increase in electricity demand, leading to a need for power generation that will continue rising steadily over time. There will be competition regarding whether demand is met through renewable or thermal capacity, but the intermittency of renewable energy will call for a continuous need for backup with thermal capacity, and thus, further business and investment opportunities.
What role do partnerships, such as the one you have with GE, play in your objectives?
We initiated a strategic partnership with GE in the projects that we undertook under Resolutions 21 and 287, namely Loma Campaña II in Neuquén and YGEN in Tucumán. Working together was a very interesting learning experience for both companies.
The reasons behind our partnership include our potential as a platform in Argentina, a unique knowledgeable execution team, YPF’s own natural gas that is at our disposal, our proximity to the markets, understanding of regulations, access to strategic location and transmission infrastructure, and knowledge of this market. All of this is complemented by a top technology supplier, GE, which has adequate technology for virtually any application, with competitive costs and experience in installing and mounting power plants all over the world.
With the goal of being more competitive and efficient, this partnership adds a lot of value to YPF. Once capitalised and financially structured as planned, the company will be left with substantial know-how and human capital for an unparalleled and continued development.
How do renewable energies fit into the development of the domestic power sector?
Renewable energies have a role to play and they are promoted in Argentina by the renewable energies law, which establishes the gradual incorporation of renewable energies in the country’s energy matrix. Under this framework, solar, wind and biomass resources will be dispatched as they become available. The power system used to be planned by the federal government, but renewable energies are providing dynamism and a spot market in the country that did not exist for years.
Today, electricity from renewable energies takes precedence over power from other sources, leading the rest of the system to operate differently in terms of self-regulating and meeting demand. Each time a wind turbine rotates or a solar park delivers energy to the system, a thermal power plant will cease to deliver electricity. This shift will take place hour by hour throughout the whole year, and the system needs to adapt to operating in this way.
New and efficient power plants that can start and stop in response to these disruptions and the need to adjust generation capacity to demand will be required. This will lead to the development of a more complex scenario that we will understand more as renewable electricity generation is gradually incorporated.
Today, we have peak electricity demands of 25 GW. We can imagine an aggregate demand of 30 GW in a few years, with a participation of renewable energies that, if they are all working at the same time, will reach one-third of Argentina’s generation capacity, even though the law establishes a minimum target of 20% by 2025.
In the hourly electricity dispatch, there will be times in which power delivered into the system that is generated from renewables will displace other energy sources.
How is traditional power generation expected to evolve?
Power plants that generate electricity from hydrocarbons will be more efficient, and able to start up faster and consume less fuel per unit of electricity delivered. Renewable energy projects will continue to come on stream and the whole interconnected system will have to adapt tho this new reality that will call for a seamless integration of both thermal and renewable sources. The addition of power generation facilities in 2017 was fostered by Resolutions 21 and 287, which involved fast and efficient power plants, cogeneration projects and closing cycles.
In addition, we expect combined-cycle projects fueled by natural gas in Argentina in the following years. These projects will incorporate increasingly more efficient infrastructure, equipment and power plants that will also replace some of the most inefficient ones. For a long time, power generation facilities in Argentina have been generating electricity on average with efficiencies quite below the standards that can be achieved today.
How do power storage technologies and Argentina’s lithium potential fit into YPF’s plans?
Once storing electricity is cheaper than generating it from thermal sources when required, then the possibility of installing batteries in any integrated and interconnected system such as ours will boom. This will bring about lithium demand, which is increasing worldwide. Unless lithium is replaced by something else, that path will be followed.
Through multidisciplinary analysis, YPF is considering business opportunities in the value chain associated with power storage. This is where we ask ourselves what the advantages would be to compete or partner with other actors that are also looking into the same market opportunities.
This is a sector with very different entrance barriers than what we are used to in the oil and gas sector. The entrance barriers for creating businesses based on power storage in markets such as this, in which there is a multitude of technology suppliers, are much lower. Thus, one has to prepare for an extremely competitive scenario.
The first thing that must be asked is how competitive one can be in a market in which hundreds of other actors want to participate. This is why we analyse each of the links of the value chain associated with the generation, transportation, storage and distribution of electricity, as well as where YPF’s competitive advantages in those areas can guarantee that investments we make can be carried out in a competitive and profitable manner.
In the case of batteries, we could exploit a mine for lithium production, work on a technological development to increase the efficiency of a certain battery, or manufacture batteries, given that there are still no big battery manufacturers in Argentina. We could also be at the other end of the chain, trying to structure a business that would allow the combination of a power storage service with other products or services, even bundled together.
We are still assessing this. Some think that we would have greater competitive advantages in the development of the mineral, while others think we have greater opportunities on the demand side. The world is changing all the time and, as a result, we are studying where we can find a business opportunity to get involved in.
What midstream and power generation objectives would you like YPF to achieve by 2019?
One goal has to do with the regularisation of the natural gas market and its regulatory framework, promoting contractualisation so that the different market segments can again establish a healthy and free commercial relationship with gas-producing companies, the way it used to be in Argentina.
In a couple of years, we hope to see a more organised market in which we can know how much natural gas we will sell to distributors, industries and power plants, and under which modality; and be able to plan annual investment decisions according to the market we will supply based on a contractual basis. We are working closely with the Ministry of Energy and Mining on this issue, contributing proposals, ideas and solutions so that this ongoing organisation can be achieved as soon as possible.
We are also focused on the consolidation of the growth of our electricity business. We will have more than 2 GW installed and operational by the end of 2018, and we have many more projects that we are working on so that we can reach approximately 4 GW by 2020 or 2021.
What is YPF working towards in the natural gas midstream sector?
Compañía Mega is a very important company in the Neuquén Basin, with an exceptional geographical location and unparalleled facilities and infrastructure. YPF’s role in Mega, in some sense, defines the position that YPF wants to occupy in midstream sector. Through Mega, we can also access alternative financing sources to carry out all these developments.
We are also working on the partial or total divestment of YPF’s stake in Metrogas, the distribution company serving 2.4 million customers in the city of Buenos Aires. The company is back on a very healthy track with huge investment commitments to expand its distribution network, replace old pipelines and meters with new ones, and modernise its commercial infrastructure with the objective of enhancing customer satisfaction and growing business in the area.
Does the company have any plans for its petrochemicals business?
We are working on the development of a large petrochemicals project at the Bahía Blanca complex to monetise natural gas via the development of polyethylene production capacity. The development of the petrochemicals pole in Bahía Blanca and its expansion is probably one of the most significant and important incremental demands of natural gas we know we can develop in Argentina during the next four years. With investments in the upstream and production capacity meeting expectations, the industrial demand will need to come together with development projects of this kind.
The development of Bahía Blanca’s petrochemicals pole is there for anyone to profit from and we want to be a part of that development. We are working on this and are in the process of deciding who our ideal partner should be for such a development. The demand is there, the economics make sense and the project will certainly come on stream with the strong participation of YPF, both in the supply of raw materials – natural gas – and the required capital expenditures.
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