A new gas pipeline in Argentina… at least, those are the plans…

Joe Cavaliere, guest contributor

A group of eight petroleum companies have agreed to invest $185.25 million to finance the Transmagallanico Natural Gas Pipeline (TNGP), a large project in which a single natural gas pipeline will cross the Straight of Magellan, to bring natural gas to the South American continent from Tierra del Fuego.

The remainder of the funds – total construction costs will be $245 million – will come from fixed fees added to the natural gas demand.

According to Argentine newspaper El Cronista Comercial, YPF, majority owned by Spain ‘s Repsol, Wintershall of Germany, Pan American Energy owned by BP, Petrobras of Brazil, Apache of the U.S., and France ‘s TOTAL will make the majority of the investment by providing $30 million each by December. In addition, Oxy of the U.S. will contribute $700,000 and Tecpetrol, owned by Techint, will contribute $360,000.

The plans are for the first section of the pipeline to be completed during the first quarter of 2010. The pipeline will cover 37.7 KM, and will connect Cabo Virgenes in Santa Cruz with Cabo Espiritu Santo, in Tierra del Fuego, and will have the capacity to transport 18 million cubic meters per day of natural gas, which is 14% of the country’s total needs.

This pipeline is key for Argentina ’s gas supply, as production is in decline. Last year production of 50.271 billion cubic feet is 3 percent below 2004 production and 1.2 percent lower than 2007. Meanwhile, internal consumption has been increasing by about 40 billion cubic feet per year. Tierra del Fuego is the only province which has excess
production, but this excess could not be brought to consumers previously because of the lack of pipeline capacity.

This predicament is entirely linked to the policies of Nestor Kirchner’s government when electoral politics trumped economics forcing gas prices to levels well below production costs. Companies responded by stopping all investment in exploration and production. Although new legislation of March 2008 authorized higher prices for gas obtained through new, untapped, or hard-to-reach gas reserves and the “Gas Plus” plan provides an exemption from the current price and supply accords that ongoing gas projects are subject to, most investors still do not trust the government’s word, even though the plan states that new gas discoveries will be priced at free market prices among players. In particular, the new legislation calls for a gas sale price “that must contemplate costs and a reasonable profit” – which are exactly the words used in the past to justify price controls. As such, “it could be more of the same; the price might not be that free,” one industry official told Dow Jones newswires.

The tensions between foreign and domestic oil and gas companies and the Argentine government have translated into much legal action. Last year the Texas-based law firm Fulbright and Jaworski estimated that at the beginning of 2007, 11 energy companies, including Exxon-Mobil, were seeking arbitration on legal claims worth approximately $8 billion against Argentina.

My take? Although this announcement might turn out to be just another announcement, ultimately, it makes sense for these companies to invest relatively small amounts to see their stranded gas reach markets. The rationale makes sense. Now all Argentina needs
is for the government to keep its word.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: