Gas exports to Brazil: Who's putting up $3 billion for the works?

To guarantee the supply of gas to local plants and sell 10 million cubic meters per day to Brazil, Argentina needs to invest nearly $3 billion in transportation infrastructure .

The number of investments required is derived from the combined initiatives outlined for these purposes. These disbursements take time to materialize and are currently hampered by the high interest rates on loans for Argentine initiatives.

There are major projects to sell liquefied gas to the world . But there are other, less grandiose and seemingly simpler goals, such as selling gas to our Mercosur neighbor through a physical pipeline connection. However, this is a huge challenge, the achievement of which depends both on securing funds at a reasonable cost and on establishing a price agreement that is sustainable for both parties.

Brazil is seen as a natural market for Argentina, as 35% of its domestic gas supply is imported. Its production has grown at an annual rate of 6% over the last decade, but much of what it obtains is reinjected to boost oil production, its primary objective. It also lacks established connections to transport the product from the coastal Pre-Salt fields to its consumers.

This is where the Argentine product, abundant in the Vaca Muerta subsoil, emerges as a necessary asset for a long-term binational operation.

Total Energies and Tecpetrol have just exported Patagonian gas to Brazil using Bolivian infrastructure , which is idle because that country's production is almost exhausted.

But these were "interruptible" sales, which do not imply continuity and do not warrant a large, dedicated investment.

To lay new pipelines, Argentina needs to sign long-term, firm contracts with Brazilian buyers. This way, they can be sure they'll receive the product, and local exporters can be assured of placement for at least fifteen years.

Brazil agreed to pay $11.50 per calorie unit (MBTU) for recent purchases. But its industry is unwilling to accept more than $7 , a 40% decrease, for a long-term agreement, according to private and official sources familiar with the preliminary talks.

The equation becomes enormously complicated when it includes the investments needed for new pipelines that allow Patagonian gas to be transported to the border.

The export plan outlined so far by the local industry consists of supplying the southern thermal plants near Porto Alegre and the São Paulo industry through a pipeline. The market estimates that this external operation could generate between $800 and $900 million in foreign currency annually.

With this lure, Transportadora de Gas del Norte is trying to move forward with a project to transport 20 million cubic meters/day from Neuquén. Half of this will be used to feed Argentine thermal power plants, and another 10 million will be exported to Brazil via any of the three routes under study: Uruguayana, Bolivia, or Paraguay.

Laying a pipeline from Tratayén, Neuquén, to La Carlota, southern Córdoba, requires an outlay of approximately $2 billion.

Each million cubic meters transported through a 36-inch pipeline costs US$100 million. Transporting it to the border could require an additional US$600 million , according to the costing formula used by the Techint-led consortium.

"In the 1990s, after privatization, a lot of infrastructure was developed with private resources . I don't see why the same can't be done now," speculated a senior official source, who believes the state's withdrawal from public works is not an impediment.

However, so far, no private proposal has emerged , despite the many interested parties in the initiative: gas producers, thermal power plant operators, large industries, provinces like Córdoba, and even Brazilian industrialists themselves.

It is a technical and economic challenge that ranges from defining the most appropriate route to establishing a private consortium that, even if it secures contributions from its partners, cannot do without bank loans at reasonable interest rates.

To make the initiative viable, it is necessary to avoid country risk: one alternative could be a third party, independent of all the actors involved, acting as a midstreamer (in this case, connecting the gas supplier's operation with the distributor's), a position authorized by local legislation.

And, first of all, the final route is not clear either.

• Heading north to utilize the empty Bolivian pipelines might be the technically and economically easiest option for Argentina and Brazil. But on this side of the border, there are fears that Bolivia's political instability and its own need for gas could jeopardize exports, either through potential measures of force or through the temptation to capture for itself the resource it will soon lack.

• The Paraguayan route is the least explored yet.

• The Paso de los Libres-Uruguayana route , a priori the most viable, also requires the construction of a 500-kilometer pipeline on the Brazilian side to bring the product to its consumers, in addition to the US$2.6 billion required on the Argentine side. A kind of sequence of economic feats.

The need to expand the gas transportation infrastructure also aims to meet the country's domestic needs to continue its import substitution policy, or to export gas by ship.

The TGN project specifically aims to transport Patagonian gas to local thermal power plants for electricity generation in the country. There are other proposals that are more advanced for a similar purpose.

Transportadora de Gas del Sur (TGS) led the way with a private-sector initiative to strengthen the capacity of the Perito Moreno Gas Pipeline (originally Néstor Kirchner), which connects Neuba II, Tratayén, and Salliqueló, in Buenos Aires province. The project is being put out to tender, but the consortium led by Pampa Energía has a preference in the bidding process. The investment is estimated at $700 million , adding 14 million cubic meters of gas to Neuba II through three compression plants and 20 km of loops (parallel pipeline extensions). The project would allow for the distribution of more domestic gas and continue replacing imported gas, but it is still in its early stages and has an open-ended approach.

The only state funds at stake are those committed to the slow reversal of the historical flow direction of the Northern Gas Pipeline (used to import gas from Bolivia) so that the fluid now flows from Neuquén to the northern region. The project, being carried out by the state-owned Enarsa through the private Esuco, still needs to reverse four compressor plants to increase the pipeline's capacity from 15 to 19 million cubic meters.

Finally, there are the enormous projects dedicated exclusively to the export of liquefied gas, which are much more ambitious but feasible.

Southern Energy , a consortium led by Pan American Energy and also comprising Norway's Golar, YPF, Pampa, and Harbour, has already made progress in developing a modular project using ships that will liquefy Vaca Muerta gas off the coast of Río Negro for buyers around the world.

One section utilizes some available transportation capacity, followed by a dedicated or exclusive pipeline, built and operated under the prerogatives of the RIGI (Large Investment Incentive Regime), including the availability of foreign currency generated by future exports.

This project, unofficially estimated to cost no less than $1.4 billion , has official approval to export products without interruption for thirty years. This means that the State would not exercise its prerogative to divert products to the domestic market in the event of a shortage.

Furthermore, this is the route that some specialists see as the most feasible (without building new gas pipelines between the two countries) for Argentine gas to reach the country governed by Ignacio Lula da Silva.