LNG in Argentina – A Regasification Plant Feasibility Study

Noelia Denisse Chimale 1, Gustavo Fabián Acosta 1

1. University of Buenos Aires (UBA)

Keywords: 1. LNG; 2. Gas market; 3. feasibility study; 4. regasification plant;

1 Background
The decline in natural gas production in Europe and the US and the increasing energy demand
mainly in Asia trigger the quest for natural gas in remote regions formerly unthought-of. The key challenge is
transportation to consumption hubs; this is where liquefied natural gas (LNG) comes as a one of the crucial
topics over the energy board, currently trying to overcome technological struggles to meet the needs.

The international outlook of higher oil prices and lower LNG value chain costs prompts an appealing
future for LNG in the world. However, uncertainties still remain regarding this future prospect according to
experts.

LNG development derives from the following context:

o High natural gas prices
o Demand for cleaner fuels
o Lower cost in the LNG chain, liquefaction, transport and regasification
o Increasing demand of natural gas, particularly in North America and Asia, where the gap
between supply and demand keeps widening
o Remoteness of new gas sources from consumptions centres.

2 Objectives of the paper

This paper describes the LNG industry in general and discusses particularly on the natural gas
market in Argentina considering different scenarios in the medium and long term – due to increasing demand
and compromised gas output – and its likely impacts. The paper concludes with the feasibility of a domestic
regasification plant to supply internal natural gas demand.

3 Development

a. LNG World Market

Natural gas demand is expected to grow in average by 1.76% annually until 2030, reaching a total
consumption of 4.47 Tcm per year – 52% more than current 2.91 Tcm 1. This need increase will be most
noticeable in some Non-OECD countries such as China, India and Brazil. Latin America will follow this global
trend, mostly in those countries where natural gas plays a leading role in their energy matrix, such as
Argentina.
World Natural Gas Consumption by Region 2005 - 2030 World Natural Gas Production by Region 2005 - 2030

180 180

160 160

140 140

120 120
Trillion Cubic Feet
Trillion Cubic Feet

100 100

80 80

60 60

40
40

20
20

0
0
2005 2010 2015 2020 2025 2030
2005 2010 2015 2020 2025 2030
OECD North America OECD Europe OECD Asia Non-OECD Europe & Eurasia OECD North America OECD Europe OECD Asia Non-OECD Europe & Eurasia
Non-OECD Asia Non-OECD Middle East Non-OECD Africa Non-OECD Central & South America Non-OECD Asia Non-OECD Middle East Non-OECD Africa Non-OECD Central & South America

2 3
Consumption Production

On the other hand, natural gas production will continue to be locally concentrated on current
production leaders such as Russia and Middle East countries, most of them located remotely from
consumption centres. Naturally, this poses a fertile ground to the continuous development of the LNG
business.
 Consequently, LNG yearly market growth is estimated at approximately 7%, almost three to one
compared to natural gas, reaching 2.4% in the next few years. LNG is taking a central role in the world
4
energy market growing from the 21% share today to a 30% expected in 2010 .

Asia and the US will remain the major players in the LNG world market, the former driven by
economical growth and the latter by drops of their own natural gas reserves. Japan and Korea will continue
to grow steadily, while India and China broaden to become the most significant players according to latest
projections.
Besides the already established producers such as Algeria, Indonesia, Malaysia, Nigeria, Qatar and
Trinidad & Tobago; other countries like Angola, Iran, Norway, Russia and Venezuela are beginning to size a
share of the LNG market that is rapidly increasing. Soon all major natural gas producers will become part of
the LNG value chain.

LNG is currently playing a vital part in creating a new world of opportunities for energy where natural
gas is gaining terrain in an oil-based energy market. For those countries whose energy generation and
consumption are based mainly on natural gas, LNG poises as the logical solution in the medium and long
term.
Latin America is by no means indifferent to this reality. One example of this is Chile, where
regasification plants are being built to comply with internal energy demand and, most importantly, to become
independent from regional natural gas producers.

b. LNG in Argentina
When reviewing the local energy matrix and comparing it with other countries of the region, the
relevance of natural gas in the Argentinean market is remarkable. More than 50% of the energy sector is
natural gas-based, whereas in other countries such as Chile or Brazil, natural gas represents less than 10%
of the total energy matrix. On a different page is Venezuela, where even though natural gas takes almost
50% of the total energy matrix, most of it is used in the oil industry, leaving only 33% to be consumed in the
local market.

Current natural gas domestic demand ranges at about 30,640 MMCM a year, according to the
Energy Secretary of Argentina. For the near future, an increase of almost 3.8% annually is projected in the
next five years. This growing tendency will continue but more moderately, exceeding 52,500 MMCM by
2030. These projections were made following EIA estimations for South America (excluding Brazil).

Domestic demand Domestic Demand Estimation

60,000 60,000

50,000 50,000

40,000 40,000
MMCM
MMCM

30,000 30,000

20,000 20,000

10,000 10,000

- -
1998 2000 2002 2004 2006 2008 2010 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032

Total Domestic demand

60,000

50,000

40,000
MMCM

30,000

20,000

10,000

-
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
 When it comes to natural gas supply, Argentina is one of the most important producers in the region.
The production rate has been steady at around 51,000 MMCM per annum over the past five years. However,
some difficulties have been faced lately, and natural gas imports were necessary to cope with domestic
demand. These represented only 3.5% of total domestic production.

In this paper two possible scenarios are introduced, in the first one, production rates will be
maintained fulfilling natural gas demand. While, in the second one, what according to this paper is called
“worst-case scenario”, these rates will have to be decreased to keep a sustainable operation. To aid the
solution of this situation, the installation of a regasification plant is proposed.

In the first case, it is estimated that significant investments in exploration and field development will
be made in order to preserve natural gas reserves that will enable production rates to be maintained in the
future. Current production rates amounts to 139 MMCM/d and reserves stand at approximately 450,000
MMCM. This indicates an 8 to 10 years reserves stock that should be kept to manage future demand.

Domestic Demand vs Supply Domestic Demand vs Supply Estimation

60,000 60,000

50,000 50,000

40,000 40,000

MMCM
MMCM

30,000 30,000

20,000 20,000

10,000 10,000

- 0
1998 2000 2002 2004 2006 2008 2010 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
Gas Supply Domestic demand Gas Supply Estimation Demand Estimation

Total Demand vs Supply

60,000

50,000
40,000
MMCM

30,000
20,000

10,000
-
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032

Gas Supply Total Demand Total

On the second case, according to this study, estimations are that maintaining these production rates
in a sustainable manner will not be feasible, and that more natural gas imports will become mandatory. At
present, Argentina imports natural gas from Bolivia via gas pipelines and has also set up an onboard
regasification facility in Bahia Blanca, a port city in the south of Buenos Aires province. This facility, which
presently operates only during the winter season to cover peak demand, could have its capacity ramped up
to supply 10% of domestic demand, according to official estimates.

In this worst-case scenario, natural gas domestic demand remains as in the first case, while
production will be decreased by 5% annually according to these estimations. This will compromise demand
fulfilment by 2014. Unfortunately, this spread grows deeper to double natural gas production volume in 2025.
In order to fill part of this gap, an alternative to install a regasification facility that will operate full-time to cover
baseload demand is presented.
 Domestic Demand vs Supply Domestic Demand vs Supply Estimation
60,000 60,000

50,000 50,000

40,000 40,000

MMCM
MMCM

30,000 30,000
20,000
20,000
10,000
10,000
-
1998 2000 2002 2004 2006 2008 2010 0
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
Gas Supply Domestic demand Gas Supply Estimation Demand Estimation

Total Demand vs Supply

60,000

50,000

40,000
MMCM

30,000

20,000

10,000

-
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
Gas Supply Total Demand Total

c. Feasibility Study

As previously mentioned, the construction of a LNG regasification plant in the country is introduced,
as part of the solution to bridge the gap between natural supply and demand. In this study plant capacity and
LNG price are assessed. In the first case, two capacity alternatives are presented to evaluate project
feasibility and profitability; secondly, LNG CIF price is examined considering LNG market and maximum
price allowed by the regulated domestic natural gas market.

First of all, regarding plant capacity, there are two alternatives, one of 10MMCM/d and another one
of 20 MMCM/d.

In the grounds of plant location, availability of port facilities and the current natural gas pipeline
system were evaluated. Under these circumstances, a location that optimizes both these variables is
proposed. This will be in the vicinity of the city of Bahia Blanca, where the main trunklines coming from the
top natural gas producing basins converge. This facilitates regasificated gas to be distributed in the
metropolitan pipeline system. In addition to that, there is port infrastructure accessible for this kind of
operation. This idea is supported by the fact that current onboard natural gas regasification is conducted in
this area, as mentioned before.

Regarding the facilities needed to operate this regasification plant, marine infrastructure, LNG
processing, LNG pumping, liquids storage, liquids export, vapour handling, vaporization and power were
taken into account.
The plant will have the followings process units:

o Marine berthing and unloading systems, to receive LNG carriers of approximately 145,000
CM capacity.
o LNG Storage: two cryogenic tanks with total capacity ranging from 110,000 and 220,000 CM
each, with the capacity to control gas production level.
o Boil-off compressor and recondenser, to manage evaporated gas in the storage tanks during
the LNG unloading process from the LNG carriers.
o Open rack vaporizers, to produce regasificated gas.
o Primary and secondary pumps, to increase regasificated gas pressure in order to meet
national pipeline network pressure requirements.
 o Metering stations and odorization units.
o Other onshore facilities (management, control, maintenance, warehouse, access roads,
etc.).

Given the estimated project plan and plant operation timeline, capital expenditure (CAPEX) and
operational expenditures (OPEX) have been estimated. This CAPEX corresponds mainly to plant facilities
construction that has been outlined in different categories: equipment, materials, prefabrication, construction,
design and project management, insurance and certification and contingency.
For the first alternative, the total investment is estimated at around 590 MMUSD; while in the second
case, total cost will rise to 980 MMUSD approximately.

This capital expenditure is split according to the following portions:

Equipment 33%
Materials 16%
Prefabrication 2%
Construction 14%
Design and project management 14%
Insurance and Certification 1%
Contingency 20%

In addition to capital cost, fixed and variables costs have been considered as operational
expenditure, as well as the cost of LNG acquisition.

Alternative 1 Alternative 2
Total OPEX 7.55 7.35

Project timeframe is another issue that is addressed in this paper. Looking into similar regasification
projects the average timeframe is forty-eight months from project initiation till start-up. This plan comprises
different stages: feasibility study, conceptual and basic design, detailed engineering, procurement,
construction, commissioning and start-up.

For this kind of facilities we estimate that each stage could take:

Feasibility Study 18 months

Conceptual and basic design 10 months
Detailed engineering 12 months
Procurement 24 months
Construction 26 months
Commissioning and start-up 10 months

These stages are overlapped during the project development and total project timeframe results in
approximately 48 months.

In order to study the economic feasibility of this project different sources that set reference prices
were taken into account, such as the natural gas price of the gas supply contract from Bolivia levelling at 7.5
USD/MMBTU; and the regasificated gas price from the onboard facility in Bahia Blanca ranging at about 14
USD/MMBTU. Regarding this information, it is considered that a reasonable price would be around 10
USD/MMBTU.

The LNG CIF price currently reaches approximately 6 USD/MMBTU, due to increasing costs in the
first link of the LNG chain – natural gas production –, is considerably higher than historical prices.

The final assumption to this feasibility study is that external capital is not needed to finance the
project.
4 Results
The following economic indicators result from the cash-flow evaluation of each of the project
scenarios:
 Alternative 1 Alternative 2
NPV @ 12% 85 MMUSD 411 MMUSD
IRR 14.80% 20%
Repayment period 8 years 7 years
Maximum Cash Exposure 571 MMUSD 942 MMUSD

Additionally to this analysis, LNG CIF price is studied considering LNG market and maximum price
allowed by the regulated domestic natural gas market.
In Argentina at present, natural gas price is regulated, and the Government must subsidy clients that
buy natural gas at higher than regulated prices.
The exercise that follows assesses how much the market is willing to pay for natural gas fixing the
Investment Return Ratio (IRR) at 12%, given different LNG CIF prices.

Top Regasificated Gas Sale Price

Alternative 1
Alternative 2
14.5

13.5

12.5
Sale Price (USD/MMBTU)

11.5

10.5

9.5

8.5

7.5

6.5

5.5
2 3 4 5 6 7 8 9 10 11
LNG CIF Price (USD/MMBTU)

This analysis reveals that if the regulated market sets a fixed IRR to the project, regasificated gas
price will range from 9 to 14 USD/MMBTU when LNG CIF price vary from 6 to 10 USD/MMBTU.

5 Conclusions
On the one hand, there are several risks that should be assessed, not only technical but also
strategic, social and governmental as well. Since building this type of facilities represents a huge CAPEX,
stakeholders in general and investors in particular should have a complete and detailed business case that
depicts risks with corresponding mitigation actions. As far as natural gas market continues to be regulated,
one of the main risks will be to get project endorsement from the Government, given the fact that it will most
certainly demand subsidies to keep the low domestic price. Furthermore, a significant discovery of natural
gas reserves in Argentinean offshore platform could also become a threat to this project. This risk will
depend on the size of these discoveries.

On the other hand, natural gas demand will drive the need for this project as Argentina has a natural
gas-based energy supply. Although this forecast is likely to be challenged in the near future by the current
global crisis, this can prove to be an opportunity, as it should provide enough time to effectively study,
architect and plan execution of this initiative.

6 Acknowledgments
We are pleased to thank the effort of the Oil & Gas Institute of the University of Buenos Aires (IGP-
UBA), the Head of Natural Gas Specialisation Postgraduate Degree, Gustavo Cavallo, and the Academic
Coordinator of Natural Gas Specialisation Postgraduate Degree and Counsellor, José Luis Lanziani, who
guided us during our studies and specially in the making of the final project on which this paper is based.
References
[1] According to the International Energy Outlook 2008 – Energy Information Administration
[2] Sources. History: Energy Information Administration (EIA), International Energy Annual 2005 (June-
October 2007), web site www.eia.doe.gov/iea. Projections: EIA, Annual Energy Outlook 2008, DOE/EIA-
0383 (2008) (Washington, DC, June 2008), AEO 2008 national energy modelling system, AEO 2008
D03028F, Web Site wwww.eia.doe.gov/oia/aeo, and World Energy Projections Plus 2008
[3] Sources. History: EIA, International Energy Annual 2005 (June-October 2007), web site
www.eia.doe.gov/iea. Projections: United State: EIA, Annual Energy Outlook 2008, DOE/EIA-0383 (2008)
(Washington, DC, June 2008), Web Site wwww.eia.doe.gov/oia/aeo. Others: EIA, World Energy Projection
Plus (2008)
[4] According to World LNG Review 2007 – Energy Intelligence Research