Please provide an overview of the Latin American social/cultural/economic/political climate and its impact on LNG activities as well as any new developments or trends for 2013 that will impact the Latin American LNG markets.

JW: Latin America is a vast geographic area, consisting of 20 or more countries (depending on whether Caribbean nations are included) and a population approaching 600 million. Due to many factors, including geographic scope and historical, cultural, economic and political differences, the region has developed in response to each country’s particular needs and circumstances, rather than pursuant to any collective or regional action. There is a significant concentration of economic growth and activity in a handful of countries, notably, Argentina, Brazil, Chile, Colombia, Mexico and Venezuela - comprising the lion’s share of GDP for the region (over 90%). Brazil is the dominant economic force, notwithstanding its slowing economy over the last few years (GDP growth was below 1% in 2012). The IMF 5 year forecast for the region predicts moderate to strong growth (over 4% by GDP) - weighted towards Brazil, Mexico and Argentina, whereas energy demand is forecast to grow at just over 2% for the same period (more on that below). The region’s aggregated energy mix is weighted towards fuel oil (47%), with natural gas (23%), hydropower (8%), coal (4%) and nuclear (1%) all being relevant. However, the country-by-country breakdown varies significantly, for example, Brazil’s energy consumption mix includes hydropower (29%) and other renewables (21%) - with fuel oils (39%), natural gas (7%) and nuclear (1%) making up the balance.

The combined impact of the above and other political, economic and cultural factors has been the development of largely independent energy policies and energy infrastructure assets. One exception to this being the respective gas pipelines in the Southern Cone countries of Argentina, Chile, Brazil, Bolivia and Uruguay. The relative gas “connectivity” in the Southern Cone has led some analysts to speculate about the development of an integrated gas/LNG trading market in that region. However, this remains an unlikely outcome in the near term due to political, economic and regulatory differences and the specific energy needs of the Southern Cone countries.

Major developments for 2013 include the three bid rounds for new acreage in Brazil. The first is the 11th bid round, comprising 289 conventional onshore and offshore blocks - including from the Equatorial Margin, that appear to correlate closely with the sedimentary basins of Angola, Namibia, Gabon and Congo. The 11th bid round has attracted significant interest from the market (71 companies). The 12th bid round for unconventional, on-shore blocks, and the first off-shore pre-salt bid round (the 13th or 1st PS round?), are also both scheduled to take place in 2013. These bid rounds, if successfully completed, are of historic consequence to Brazil, and could raise Brazil from 10th largest oil producer in the world to near 5th by 2020, and result in the monetisation of significant reserves of conventional, unconventional and pre-salt natural gas. Brazil currently has 14 billion barrels of proven oil reserves (2nd behind Venezuela) and 14.7 tcf of proven natural gas reserves. However, some analysts estimate total pre-salt (only) reserves at 50 billion barrels of oil equivalent. While there remain issues and challenges to be resolved in relation to the tender and development of these new Brazilian resources, at this stage they are attracting significant interest and hold significant upside potential to both bidders and the broader business community.

The full impact of these and other developments in Latin America, including the potential development of significant unconventional gas reserves in countries such as Argentina, Brazil and Venezuela (in aggregate, estimated at 1,225 tcf of technically recoverable gas) and Mexico (estimated at 681 tcf of technically recoverable gas), on the regional LNG market are difficult to predict, and will likely vary from country to country.

Please provide an overview of liquefaction and regasification in Latin America and how it differs from Asia.

JW: Latin America’s first LNG liquefaction facility was The Atlantic LNG Company’s train at Port Fortin, Trinidad and Tobago, which commenced operation in 1999, followed by additional trains in 2002, 2003 and 2006 (total LNG production of 14.8 mtpa). This was followed by the Melchorita plant in Peru, owned by the PeruLNG consortium and which came on line in 2010 (a single train with LNG production capacity of 4.4 mtpa). Pacific Rubiales is also developing a micro floating liquefaction, regasification and storage unit (FLRSU) project in Colombia, through its wholly owned subsidiary Pacific Stratus Energy Colombia Corp. The FLRSU will have capacity to produce approximately 0.5 mtpa of LNG and will operate along with a floating storage unit (FSU) capable of storing 140,000m3 of LNG. Exmar has contracted to build, operate and maintain the FLRSU and FSU This project is expected to commence operations in Q4 2014. Petrobras, on the other hand, was considering the development of a large scale floating liquefaction project for pre-salt gas, but that project lost an internal competition to the “route 3” pipeline - that will transport natural gas from the Santos Basin to shore, and then to the huge Comperj petrochemical facilities in the state of Rio de Janeiro. Petrobras has recently confirmed that that LNG export projects are not part of its current 5 year business plan, and that it is not currently pursing this FLNG (liquefaction) project.

There has been more activity in Latin America on the LNG regasification side of the equation. Mexico has three regasification terminals: the Altamira plant in Tamaulipas state (northeast cost), Costa Azul (Baja California) and Manzanillo (Pacific Coast), however, three-quarters of Mexico’s natural gas imports are delivered by pipeline from the U.S., with the relative proportion of U.S. imported gas increasing in recent years.  In South America, the recent trend has been towards floating regasification. While Chile has two land-based regasification terminals (the Mejillones and Quintero plants), it also has a floating storage and regasification unit (FSRU) project under development by GasAtacama, in Mejillones (to be operated by Golar LNG). Argentina has two floating regas vessels, one being the Bahia Blanca GasPort and, the other, the GNL Escobar GasPort, each operated by Excelerate Energy. Brazil has two FSRUs, one located at Guanabara Bay (Rio de Janeiro) and, the other, at Pecem (in the northeast), each being is operated by Golar LNG. There is also a third FSRU under construction, which will be located in the state of Bahia and will be operated by Excelerate Energy. There are also, reportedly, a number of floating and land-based regasification projects under evaluation in various countries in the region.

There are similarities and differences between the Asian and Latin American LNG markets. One similarity is that both regions are (except for Trinidad and Tobago, Peru and Colombia, and a few export trades by Petrobras) LNG importing regions. The paradox of this is that there are vast amounts of untapped gas in Latin America - which will require significant investment to monetise. One example is Argentina, a gas exporting country until 2008, and which as a result of significant declines in domestic gas production (reportedly down by 10% from 2006), has become a net gas (and LNG) importer. Argentina is also considered to have one of the largest reserves of unconventional gas in the world (estimated to be 774 tcf of technically recoverable gas). Another is Mexico, where natural gas production has fallen in recent years, venting and flaring remain an issue and demand for gas has increased (particularly in the electricity sector). And yet, Mexico has 17.3 tcf of proven natural gas reserves, an estimated 681 tcf of technically recoverable shale gas reserves - and imports gas from the U.S. and LNG from Qatar, Nigeria, Peru, Indonesia and elsewhere.

Another difference between the regions is that a significant amount of LNG cargoes finding their way to Latin America are spot cargoes (particularly Brazil), whereas most LNG imported into the large Asian markets (Japan, Korea and Taiwan) are contracted under long term sale and purchase contracts, often with a term of 20 years. One reason for this, in the case of Brazil, is the seasonal nature of the energy mix, and the availability of alternative energy (such as renewables and Bolivian pipeline natural gas), providing alternative means to balance the country’s energy needs. These factors reduce the imperative to lock-in long term LNG supplies, and provide the flexibility required to meet Brazil’s energy needs (in the case of LNG, to supply the thermo-electric power stations).

Please discuss opportunities for LNG investment in Latin America as compared to other parts of the world.

JW: While the gas/LNG markets in the Southern Cone have become more connected over the years, some consider that the relatively fragmented nature of the regional market means there are considerable gaps that could be filled by LNG. According to this view, the construction of additional regasification capacity and use of existing and (potentially) new pipelines, make LNG an efficient and (importantly) reliable means by which to fill the energy gap. For example, to supply the thermo-electric power stations when traditional energy sources (hydropower) are not available. This model would likely include (or require) some regional LNG trading.

In addition, and due to the relative few number and scope of gas pipelines in the region, there are energy needs that could be filled by a flexible and relatively speedy alternative energy source - such as floating LNG regas. This is a need, and an opportunity, similar to that of certain developing countries in other parts of the world.

here is also the possibility of a regional LNG trade, in which LNG is transported to remote regions, or places not connected to a gas pipeline, to be used as an alternative energy supply.

What do you think the LNG industry will look like 10 years from now?

JW: The LNG industry has undergone significant changes over the past 10 years - including swings in supply and demand, major new market entrants, the doubling of LNG supply and the tripling of LNG shipping capacity. For these reasons alone, it would be a brave person to predict what the LNG industry may look like in 10 years’ time.

However, when considered in the context of developments in Latin America, such as the vast potential of new hydrocarbon reserves (including unconventional gas) in Argentina, Brazil and Colombia, and with massive reserves in Venezuela, and the level of investment, technology, coordination and political will needed to successfully monetise such reserves, it becomes nearly impossible to predict the future LNG industry in the region. Borrowing the words of one analyst, all that we can know about the future gas/LNG market is that it will be different from what we know today.

Please provide any additional information pertinent to LNG in your region.

JW: When considering the Latin American energy market, it is impossible not to consider the impact of interventionist government policies in certain countries that have effectively transferred control of oil and gas assets to the government - or at the least, imposed additional tax or regulation on companies operating in the energy sector. Such political actions can (and typically do) adversely affect investment sentiment, making it harder for the relevant country to attract the very investment and know-how needed to achieve its full energy potential.

Another issue raised by companies doing business in Latin America is the high degree of regulation and bureaucracy experienced in the local market, particularly when compared to that of their home countries. Some analysts have commented that such factors could result in up to a 2% drag on economic growth in the relevant market. However, these factors must be weighed against the opportunities and potential returns available in new and developing economies, with significant need for investment, technology and know-how, and vast amounts of hydrocarbon to be monetised.