52576 , NATURAL GAS IN LATIN AMERICA MARKET STRUCTURE AND FUTURE OUTLOOK CHAKIB KHELIL WORLD BANK MAY 1990 NATURAL GAS IN lATIN AMERICA MARKET STRUCTURE AND FUTURE OUTLOOK CHAKIB KHELIL WORLD BANK In this paper I look at the evolution of the major domestic markets for natural gas in the Latin American natural gas consuming countries (LAC) over the period 1971-1987, a probable future outlook for natural gas use and supply by the year 2000 and the description of the major issues constraining a more rapid development of natural gas in the region. There are nine LAC which have indigenous gas reserves and a long record with gas utilization in the residential/commercial, industrial and electric power sectors: Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, Peru, Trinidad and Tobago and Venezuela. Since 1971, natural gas consumption in these countries has undergone a high rate of growth more in line with that of the electric power sector and a much higher growth than overall energy demand of competitive substitutable fuels such as Coal and Petroleum derived products e.g., Fuel-Oil, LPG and Kerosene. In particular, natural gas penetration (market share growth) has been phenomenal in the industrial market while maintaining its market share in the residential/commercial and a slight decline in the electric power markets over the period. There are, however, variations in the level and rate of growth of gas penetration among the countries considered and market sectors. On the other hand, while Mexico, Argentina and Venezuela have remained as the major consumers of natural gas, others, such as Trinidad and Tobago, Colombia, Brazil, Peru, Chile and Bolivia have increased their share of the total Latin America natural gas consumption from 13% in 1971 to 18% in 1987. There are many uncertainties concerning the economic growth level of LAC during the 1990' s and numerous obstacles of a legal, institutional, and government policy nature which would have a direct impact on the supply and demand of natural gas. The impact of these obstacles, which are described in more details in this paper, merit a separate analysis. Despi te these uncertainties, however, the outlook for natural gas consumption growth appears very bright, especially in the industrial market, in those countries with substantial indigenous reserves. Except for Brazil and Colombia, all the other countries mentioned appear to have adequate reserves to meet the expected natural gas demand by the year 2000. All countries, however, need to review carefully their natural gas strategy to expand reserves and supply, conserve demand and accelerate gas penetration in the different sector markets. Development of natural gas trade among LAC, especially in the southern cone, and exports to countries outside the region offer the greatest challenge to the countries in the region in the next century. Regional organizations such as OLADE and ARPEL have an important role to play in the promotion of domestic use of natural gas and in the development of interregional gas trade. 2 INTRODUCl'ION 1992 natural gas based electricity. Recently there has been a Other plans to export natural gas renewed interest in natural gas use have been discussed in the past bet in large part due to competitive and ween Argentina with both Chile and flexible gas pricing formulae im Brazil and studies have shown the plemented by some large exporters of feasibility of a gas pipeline from LNG (Algeria), a growing pressure by Argentina to Uruguay. Finally, antinuc1~ar and environmental groups Methanol is being exported by Chile which have influenced maj or energy mainly to Japan and Korea, other policy decisions in certain countries Methanol plants are on the drawing (Italy) and the good economic growth board in Argentina (Enron, Total) and that countries with the major natural Venezuela has been considering the gas markets (Western Europe, Japan possibility of LNG and Methanol and the US) have experienced during exports to the US market. the last decade. Environmental considerations have renewed interest Given the economic difficul in natural gas and particularly in ties facing most DCS and the looming natural gas derived vehicle fuels scarcity of foreign exchange which is such as compressed natural gas (CNG) , needed in many energy related liquefied petroleum gas (LPG) and projects, the DCS are examining more Methanol (derived from Methane gas). carefully all their energy options. Also many Methyl-Ter-ButylEther In particular they are evaluating how (MTBE) gas plants are on the drawing indigenous natural gas supply, board in many developing countries complemented in certain cases with (in particular Argentina and some gas imports, could be expanded Venezuela) to satisfy the burgeoning and natural gas utilization op needs of European countries in the timized in the country energy mix. future for a motor oil octane The LAC region contains 6.3% of the enhancer to help them in converting world's 96.5 billion tons of oil from leaded to unleaded gasoline. equivalent (TOE) of proven gas reserves (as of January 1, 1989). Most developing countries (DCS) Yet the region's natural gas commer that have sizable natural gas cial production represented only 4% reserves developed them to partially of the world's in 1988. By com satisfy their energy needs (Argen parison oil reserves in LAC repre tina, Mexico, Venezuela and Pakis sented in 1988 about 13% of the tan). Others (Algeria and Indonesia) world's 123.2 billion tons of proven were also able to export large oil reserves (as of January 1, 1988) surpluses in the form of either gas while the region crude oil production or Liquefied Natural Gas (LNG) or represented 11% of the total in 1988. both to the West European, US and Japanese markets. In the LAC region, . The paper analyses the evolu Bolivia is exporting natural gas to tion of the maj or domestic natural Argentina (about 1.7 Million Tons of gas markets in LAC during the 1971 Oil Equivalent (MTOE) a year). On 1987 period and discusses a pos the other hand, Mexico has exported sible outlook for consumption and to the USA some natural gas for a supply of natural gas in the region short period during the early 1980's. by the year 2000. The paper, while Bolivia has recently signed a describing the many important issues contract to deliver to Brazil by which slow down the development of the gas sector, especially the supply 3 of natural gas and the expansion of average annual rate of 8.49% over the the natural gas system grid, does not period 1971-1987. Natural gas attempt to analyze them and present consumption grew at an annual rate of options. This is beyond the scope of 8.14% in the residential/commercial this paper. The possible outlook for sector and 9.05% in the industrial gas supply and consumption is based sector. In the power sector natural on the business as usual scenario gas consumption grew at an annual whereby natural gas prices in the rate of 6.88% in comparison with the past have been maintained below or at electric power generation annual about parity with fuel-oil for growth of 7.64%. As a result natural industrial and electric power uses gas consumption was distributed as and generally below substition fuel follows by sector: prices for residential/commercial uses. While this is true overall, the pricing policy differs from one country to the other. Given price and income short term high inelasticityl of the residential and -industrial demand, the impact on possible natural gas demand would only be important beyond the end of the decade, assuming that the Government would put in place rational natural gas and petroleum products pricing policies by the mid Table 1 shows the evolution of 1990' s. The following analysis is natural gas consumption in the region based on published data from OlADE2 and by country as well as its and the I EA3 · penetration of the residential/ com mercial, industrial and power sec DEMAND DEVELOPMENT IN THE tors markets. The market share of 1971·1987 PERIOD natural gas in the 9 LAC has conse quently grown from 18% in 1971 to 22% Final Energy Consumption Final in 1986, with Brazil and Colombia energy consumption in LAC (Figure 1) showing the highest growth in the has grown at an average 4.98 % a year region. over the period 1971-1987. In the residential/commercial as well as in Interfuel Substitution - The overall the industrial sectors which absorb growth of energy consumption (Figure a large share of natural gas, there 1) conceals however the important was a rapid growth, about 5.2 and 5.8 interfuel substitution which resulted % per year respectively over the from the two oil price shocks during 1971-1986 period, compared to a the early 70 I sand 80' s. Table 2 growth in the transportation sector and Figure 3 show the large changes of only 4.2% per year. This resulted in various fuels and electric power in energy used for transportation to requirements in LAC since 1971 represent only 37% of the total incomparison with corresponding energy in 1986 from a high of 41% in changes in overall energy 1971, while energy used for industry requirements. increased from 34% of the total energy in 1971 to 38% in 1987. By Crude Oil and Petroleum contrast, natural gas consumption in derived products demand growth did LAC (Figure 2) has grown at an not keep up with the overall primary 4 TABlE 1 TABLE 2 5 energy growth over the period. and rapid growth followed by Fuel Oil Gasoline and Kerosene consumption and Diesel. The latter shows a rapid growth have suffered the most in the increase as fuel for power generation interfuel competition process. until 1980 after which it shows a Gasoline as a transportation fuel has rapid decline, probably as the result been displaced by Alcohol and Diesel. of interconnection of power systems. Kerosene as a residential/commercial fuel has been mainly displaced by Figures 8·18 show the extent of LPG, natural gas and electricity. interfuel substitution by individual Electricity, natural gas and LPG show country mainly d?e to the high growth a similar and a very high growth rate of electricity and natural gas which in consumption relative to overall have displaced petroleum derived energy growth, while Coal and Fuel products in all three sectors: Oil which are used mainly in the in residential/commercial, industrial dustrial and power sectors have en and power. joyed a relatively average growth over the period. Alcohol has shown Residential/Commercial Market - Table a spectacular relative growth rate 3 and Figure 4 illustrate the but it has seen a major development residential/commercial natural gas only in Brazil. consumption and market penetration rates in LAC. Hydroelectricity and nuclear power have shown a much more rapid All countries show a large growth than that of electricity increase in absolute terms in natural generated from all sources. Among gas consumption in the residential the various sources of electricity /commercial sector. The average generation other than hydroelec· growth rate over the period, 8.5% a tricity and nuclear power, natural year, is much higher than the average gas and coal have shown a similar 5.2% growth rate energy use in the 7 when crude oil and Petroleum products consumption of natural gas in the underwent price increases. In electric power sector. addition to encouraging indigenous natural gas reserves use through The annual growth rate (6.88%) rational gas pricing, Brazil had also of natural gas consumption in the considered it necessary to implement electric power market was high but special low electricity tariffs to did not keep up with the higher encourage industries to switch to annual growth rate (7.6 %) of electricity use away from fuel oil. electric power generation. This This program has since been abandoned resulted in the loss by natural gas in 1985. of its electric power market share which declined from 17% in 1971 to For comparison purposes, 14 % in 1987. In all countries, countries in Western Europe have however, there was a significant achieved the following market share increase in natural gas use in in the industrial market in 1987: absolute terms in the electric power Belgium (24%), France (27%), Italy sectors (except for a slight decrease (30%), Netherlands (48%), United in Bolivia due to the economic Kingdom (30%) and West Germany (25%). downturn). The most important The corresponding market share were growths occurred in Argentina, respectively 47, 11 and 53% for Colombia and Trinidad. This latter Algeria, Nigeria and Pakistan in country generates most of its 1986. electricity now from gas-fired turbines. While in most countries Electric Power Sector Market for there was a higher growth rate in Natural Gas - Table 5 and Figure 6 natural gas consumption than in illustrate the evolution of the 6 sector during the same period and Industrial Sector Natural Gas Market explains the average increase in the - Table 4 and Figure 5 illustrate the natural gas market share from 11% in evolution of natural gas consumption 1971 to 15% in 1986. Argentina, in the industrial sector over the Colombia and Mexico show a subs period 1971-1987. tantial growth in natural gas consumption which resulted in natural Natural gas consumption in the gas expansion of its market share in industrial sector shows a phenomenal the sector as shown above. On the increase over the period at a rate of other hand, natural gas market share 9.1% a year which overtook' the has not changed in Brazil and even average 5.8% growth rate of energy declined in Venezuela. It is consumption in the sector. This interesting to compare this data with resulted in the large increase in the that of Western European countries average natural gas market share in where natural gas occup ied.. the· 1986 (33%) relative to 1971 (22%). following market share in the Bolivia, Brazil apd Colombia show the residential/commercial sector in highest growth rates in natural gas 1987: Belgium (31%), France (26%), consumption in this sector while Peru Italy (36%), Netherlands (75%), and Chile were the only countries United Kingdom (52%) and West Germany where natural gas consumption growth (24%) . The United Kingdom and the rate was abnormally low. The major Netherlands are the only countries in reason for the large increase in the group with indigenous gas natural gas consumption was the reserves and which show the highest switch from Fuel Oil to natural gas penetration rates. On the other in the early 70's and 80's in LAC in hand, natural gas market share in order for some countries to avoid Algeria and Pakistan were imports of fuel oil (Argentina, respectively 30 and 32% in 1986. Brazil) and to allow others (Mexico, Venezuela, Colombia) to export it TABLE 4 8 electric power generation as Algeria (83%), Nigeria (72%) and reflected by the larger market share Pakistan (26%). in 1987 relative to 1971, there were two exceptions: Mexico and DEMAND DEVELOPMENT BY THE Venezuela. Natural gas did not YEAR 2000 maintain its electric power market share in these two countries because Table 6 and Figure 7 summarize of the implementation of hydro the natural gas demand trends in the electric and nuclear power projects residential/commercial, industrial as well as fuel oil and coal thermal and electric power sectors in lAC power projects. For comparison during the period 1971-1987, showing purposes, natural gas consumption the natural gas consumption and its occupied the following market shares corresponding market share for each in the electric power sector in sector. Western European Countries in 1987: Belgium (3.5%), France (0.3%), Italy Total natural gas consumption (15%), Netherlands (58%), United has more than tripled over the period Kingdom (0.7%) and West Germany (6%). 1971-1986, increasing at an average rate of 8.3% a year compared to an As a general policy, Western average energy growth rate of 6.8% European countries have refrained a year for the same countries and an from using natural gas as a fuel for average 4.98% final energy growth. power generation. However, this is This resulted in natural gas occupy changing now, especially in Italy, ing a larger share of the combined Belgium and the United Kingdom. residential/commercial, industrial Other developing countries have also and power sector market, from an used natural gas for electric power average of 18% in 1971 to 22% in generation with the following elec 1986. As shown above (Tables 3-5) tric power market shares in 1987: 9 historical natural gas consumption national gas; and trends vary from country to country and sector by sector. The differen Population growth. ces in natural gas growth can be explained by the following factors: These parameters will continue to influence natural gas demand Initial natural gas market growth to the year 2000. However, share in the energy mix for only four of the countries considered each sector; have achieved a mature gas market given the extent of the natural gas Economic growth rates for each transmission/distribu-tion systems, country considered. All the the level of penetration natural gas countries have shown a high has achieved in various market economic growth during the sectors and the track record and period 1971-1980, after which experience in gas operations. These most of· them suffered a deep are Argentina, Mexico, Trinidad and recession (except Colombia) Tobago, and Venezuela which account from which some are still for about 89% of the total estimated trying to recover (Argentina. 54 MTOE of natural gas consumed in Bolivia, Mexico, Peru and LAC in 1987. The remaining Trinidad and Tobago); countries: Bolivia, Brazil, Chile, Colombia and Peru will only slowly in The pace of industrialization time represent a larger share of the which was high in most the LAC total gas demand in the region considered in this study; because of bottlenecks in transmission /distribution Energy sources diversifica infrastructure now being expanded tion; (Bolivia, Brazil, Colombia, Peru) and in some countries (Brazil, Chile) Use of indigenous or imported limited or not adequately located coal; natural gas reserves which in time may require imports from other Pricing and taxation of oil and neighbouring countries (Argentina, gas products; Bolivia and Peru). On the other hand, Ecuador and Uruguay could also Availability of indigenous become marginal users of natural gas natural gas and pricing of given that Ecuador has proven natural 10 gas reserves in the Gulf of Guayaquil mainly developed in Argentina where and Uruguay could potentially be a the residential and commercial natural gas importer from Argentina. sectors absorbed 38% of all the In addition, Ecuador and Uruguay have natural gas used in the country and a potential market for natural gas in achieved a penetration rate of 59% in the industrial sector (Figures 8 1986 from a level of 27% in 1971. 18). This is explained by the fact that in Argentina natural gas is used for Various studies" carried out by home heating during the cold winter the Bank have shown that the long season. Chile and Bolivia are the run marginal cost of natural gas is only other countries in LAC where generally lower than that of home heating may be required for competitive fuels that it would dis extended periods during the cold place, namely. LPG and Kerosene for months. Chile uses a Propane-air the residential market and fuel oil mixture for residential use in for the industrial and power market. Santiago which could be easily In certain specific cases electri displaced by natural gas if it were city generated with natural gas would to be supplied by Argentina. Uruguay be competitive with hydro generated is also a potential user of natural power. gas for home heating if the country would import natural gas from Figures 8-18 show the natural Argentina. gas market penetration in the resi dential/commercial, industrial and Generally, residential and power sector for each country commercial demand forecasts should considered in this study in addition reasonably follow urban population to Ecuador and Uruguay for the period growth and household disposable 1971-1987 and projections until the income in countries where a high year 2000 compared with that of other level of penetration has already been fuels and electricity. Proj ections achieved by natural gas in this of natural gas market penetration sector. This is the case for Argen were based on correlations that were tina. In the other countries con developed between natural gas demand sidered in this study there is a growth sector and growth of energy in large potential market (now served by each sector on one side and economic LPG, Kerosene and to some minor growth on the other. extent by Electricity) in the residential/commercial sector which THE RESIDENTIAL AND COMMERCIAL can only be served more aggressively MARKET OUfLOOK TO THE YEAR than in the past if adequate pricing 2000 and investors' remuneration regula tions are put in place. For Because the building up of a countries other than Argentina, it is gas pipeline system of transmission then expected that the growth of and distribution to meet the resi natural gas consumption in the dential/commercial demand is rather residential/commercial would capital intensive. it is expected generally follow the trend set during that the residential and commercial the last few years, namely the growth demand would be concentrated in of natural gas demand would general countries that would not require correlate with growth of the economy large additional investments to serve and the relative growth of natural users. Such mature markets have gas with respect to other fuels in this market (Figures 8-18). 11 Energy growth in the residen water-heating and cooking. tial/commercial market has conse Consequently the potential market for quently been correlated with GDP natural gas is defined as the non growth. World Bank scenarios of electric power fuels in the economic growth proj ections have been residential/commercial Sector. As a used as a basis for projecting gas result of this approach, Table 7 demand in the future. This model shows an estimate of the natural gas which does not take into account demand in this sector by the year relative price of natural gas, is a 2000. reasonable assumption because in most countries, natural gas has usually THE INDUSTRIAL MARKET OUTLOOK been promoted by government TO THE YEAR 2000 authorities as a relatively cheap and abundant resource. Even when priced Estimates for the natural gas at the same level as other fuels on demand of the industrial sector are an energy equivalent basis, natural tied to the forecast of economic gas would be preferred by growth rates, the structural changes residential/commercial users because in the economy as reflected by the it does not need storage as LPG. As industrial GDP and the price com shown in Figures 8-18 the model as petitiveness with that of fuel oil sumes that natural gas would only and coal. This is the sector where substitute coal and oil-derived fuels natural gas has achieved a rapid and not electricity at the consumers' penetration with an average annual level, such as electricity used in growth of 9.05% compared with an average annual growth of 5.8% for TABLE 7 12 energy in this sector over the period the lack of suitable markets and 1971-1987. Because of the lower reasonable prices for fuel oil which long-run marginal cost of natural gas is displaced under a regulated market relative to fuel oil opportunity cost environment as it exists today in estimated for all the countries most countries in the region. In the considered, it appears reasonable to case where fuel oil cannot be predict that the gas industry will be exported profitably, there is a need able to maintain its overall sales to to study the feasibility of the industrial users and expand its upgrading, for example, the local share by displacing in particular refineries to crack fuel oil into fuel oil which could either be lighter fractions. Despi te these exported (Mexico, Venezuela, Brazil, uncertainties a forecast of a Colombia) or its import avoided like probable demand for natural gas in in Argentina and Chile (Figures 8 the industrial sector has been 18). While a competitive price is estimated in Table 8. important for gas to make progress, low-polluting combustion and easy ELECTRICAL POWER MARKET control of gas-fired equipment are OUTLOOK FOR NATURAL GAS BY additional advantages in the THE YEAR 2000 industrial market. This is also sup ported by the dataS showing that Natural gas use for power long-run cross price elasticity of generation has increased substan natural gas with price of fuel oil is tially in LAC, at a rate of about close to 0.9 (Argentina). However it 6.88% a year over the 71-87 period, is also possible that natural gas growth of electrical power genera penetration may be slowed down by tion from all sources. As a result TABLE 8 13 slightly below the 7.64% rate of study now being conducted by the Bank growth of electrical power genera on the power sector financial tion from all sources. As a result situation in LAC in cooperation with natural gas used in power generation OLADE and other regional enti ties. has not kept up its share of the A simple model correlating power total natural gas market which grew sector generation and natural gas at an annual rate of 8.49% over the consumption growth rate based on the period resulting in a decline of the 1971-1987 data was then used to share of -natural gas used for power forecast natural gas used in the from 34% in 1971 to 27% in 1987 of electric power sector based on the the total natural gas market. This Bank scenarios for economic growth. trend reflects the decline in the Figures 8-18 show the growth of the power market share of natural gas in share of natural gas consumption in two major natural gas consuming the power generation sector market. countries: Mexico and Venezue la. Table 9 shows the estimates for Forecast of electric power genera natural gas consumption by the year tion demand has been derived from a 2000. TABLE 9 14 THE OVERALL DEMAND OUTLOOK do not guarantee supplies since FOR NATURAL GAS TO THE YEAR reserves must be developed when 2000 required and the gas must be supplied at competitive prices with other Table 10 and Figure 19 sum fuels. Reserves may not also be marize the natural gas demand by the adequately located to serve important year 2000 and potential market for markets. For example reserves in all sectors and countries considered: TABLE 10 required and the gas must be NATURAL GAS SUPPLY PROSPECTS supplied at competitive Chile are BY THE YEAR 2000 located in the southern part of the country while the major market is in All the countries considered in the Santiago area. A more detailed this study enjoy large gas reserves. study that takes into account the As shown in Table 11, life of the distribution and size of reserves reserves in 1987 varied between a low would be required to establish a more of 32 years for Colombia to a high of valid economic life of reserves. For 121 years for Venezuela, excluding purposes of exports there must also the extremely high life for Chile be a political will to export which rather reflects the far loca domestic resources, appropriate tion of reserves with respect to the production and transportation major market. Adequate reserves technology and adequate economic and 15 commercial incentives. Given the industry standards. Estimates of lower level of the long run marginal additional annual reserves to be cost of natural gas relative to discovered in the future were based prices of other fuels, the current on historical correlation of reserves supply outlook for Latin America is growth. Of course any improvements bright despite uncertainties in crude in incentives for oil and gas oil prices. There are however exploration leading to higher domestic policy and regulatory investments by international oil constraints imposed by the various companies and/or national oil Governments which have slowed down companies would result in larger natural gas market penetration and increases in reserves to be added. supply expansion. The demand pro Estimates of supply requirements for jections assume the same constraints each country were based on estimates as for the period 1971-1987 would of natural gas demand and took into remain for the foreseeable future account requirements for the and, even if corrected in the medium country's own uses through the term, would not have a significant national oil company and other impact on estimates for the year 2000 operating companies. distribution and made in this study. other losses and any refinery requirements. A correlation of the Data on reserves were obtained demand with total supply was from Degolyer & McNaughton6 developed on the basis of the considered to be reliable source by historical data and then used as a basis for projecting supply require ments by the year 2000 as follows: TABLE 11 16 Figure 20 illustrates the sector as they imply common carrier reserves level and remaining life in for bulk transmission and operations 1987 and 2000 for the countries con~ by a utility company having a sidered. Except for Colombia and monopoly on services to consumers in Brazil, the reserves level and pos~ a defined area. Except for the sible additions over time appear to Argentine-Bolivia natural gas import be adequate for the other countries contract, natural gas is a non to meet their demand and possible tradeable commodity much like exports requirements by the year electricity and is driven by local 2000. Brazil and Colombia appear to available demand. As shown in this need to develop a more aggressive paper natural gas competes with exploration strategy for natural gas, practically all other sources of conserve demand for natural gas energy in the resi through appropriate tariffs and dential/commercial, industrial and conservation efforts and also study power sectors .. Because of this com the feasibility of imports from plexity, the natural gas sector does neighbouring countries. However when not have a well defined status in the natural gas supply requirements most LAC. are seen in light of the huge poten~ tia1 for the natural gas market, The petroleum legislation there is a need for all countries generally addresses natural gas as concerned to develop a strategy to part of the oil sector. Petroleum promote the expans ion of their contracts usually are not very natural gas reserves through in~ specific about the terms and condi creased investments by both public tions under which natural gas would and private oil and gas companies. be developed and produced because of the lack of a market and consequent MAJOR ISSUES FACING THE ly the risk contracts do not con NATURAL GAS SECTOR sider natural gas pricing and marketing. This issue is usually Lack of incentive-based addressed through negotiations once resource development plan. The the reserves are discovered. In turn natural gas sector is generally as the market is not developed because similated with the oil sector because of lack of sufficient reserves. This g~s is either produced in association leads to a vicious circle which could with oil or found separately as free only broken if the Government energy gas. Gas is also produced in the strategy is explicit about what it refinery processing of crude oil or expects the role of natural gas would from Naphtha when low BTU city gas is be in satisfying the energy needs of produced for town gas distribution. the country and the policy measures While natural gas upstream operations needed to give the right incentives (exploration, development, to the public and private oil production, processing) have similar companies to explore for, develop and characteristics as well as legal and produce natural gas and for the contractual environment as oil utilities companies to transport and operations, downstream operations of distribute it. The policy measures natural gas (trunck1ine trans would need to tackle the pricing portation, distribution to issues of petroleum products and residential, commercial, industrial electricity with which natural gas and power sector consumers) are much would be competing. closer to operations of the power 17 At the level of production the tor, including among others indepen investors generally do not receive a dent analyses of natural gas legis reasonable return on investments lation, contractual arrangements, consistent with the technical and production potential, common carrier financial risks. Prices received at regulations and markets. the wellhead are generally below the economic value of natural gas. Cer Dissentives for private sector tain countries have deregulated the participation and public sector in natural gas and petrolewn products vestments. Generally the prices of prices so they would compete with natural gas competing fuels are sub each other and let the investors take sidized. Prices of LPG, Kerosene and the price risk on movements of fuel oil are usually low and conse petrolewn products prices.In the LAC quently impeding penetration of region however pricing of natural gas natural gas or force the Government has not been completely deregulated to allow gas prices which are below even in those countries that have their economic costs. In areas where taken measures to liberate petrolewn natural gas would be able to compete products prices. Natural gas pricing with electricity such as in water remains regulated even for those heating and cooking by residential countries with the price of natural conswners, electricity rates are kept gas tied to that of fuel oil for low for social welfare reasons or example (Argentina). In Argentina jus tified as a means to keep down natural gas prices at the. wellhead inflation. The price changes by the were negotiated in the past with the Government are also unpredictable and private producers on a case by case are not conducive to good planning by basis. In others where appropriate entities involved in gas operations regulations exist to price natural used to wait for four to six years to gas at the equivalent price of its have their exploration activities, fuel substitute (Brazil). price of for example, bear fruits. Prices for delivery of natural gas was still natural gas at the wellhead should be negotiated with the private company as predictable as the oil market that had discovered the gas and the prices or the long run marginal cost price was pegged to that of fuel oil of natural gas depending on whether in Rotterdam. the country is a natural gas surplus or natural gas short country and at Institutional structure. There the consumers levels natural gas is generally a lack of an adequate tariffs should reflect the institutional structure to encourage appropriate long run marginal cost or development of natural gas and pro the competitive fuels prices perly allocate resources for that depending also on the country purpose. The gas sector is generally reserves level situation. In dealt with as an oil subsector such addition prices and tariff increases that -natural gas is not integrated are not sometimes approved by the into national energy planning system Government on time. This" regulatory as a separate sector just like elec lag", particularly in an inflationary tricity is. The role of the Govern economy, erodes the financial viabi ment agency dealing with natural gas lity of both public and private in is not clearly defined because it is vestments. Tariffs and prices should usually the policy maker and regu be adjusted. The investors will then lator _ It is not adequately have to make the decision whether it organized and staffed to discharge makes sense for them to expand their its responsibilities in the gas sec operations in the natural gas sector 18 in the future. While the Government while ensuring that guidelines on could always decide to go ahead with safety and design of installations a certain natural gas project despite are implemented. The Government poor economics, it will have to make needs to eliminate as much uncer that decision knowing in advance what tainty as possible from gas opera the cost to the economy would be and tions as uncertainty breeds increases whether it is ready to subsidize the in cost of capital and cost of users or not. Finally since natural utility service. gas is a non tradeable commodity, international private oil companies Energy sector strategy. The do not have an incentive to develop country/s energy strategy strives to gas reserves for the local market if provide the economy with the leas t the legislation does not allow for cost energy supply. In this strategy direct or indirect convertibility of natural gas should have a large role revenues. to play given it is a low cost ener gy in most LAC considered and also Autonomy of public sector because it will allow the country to enterprises. The Government through diversify from being too dependent on its various agencies act as the oil products. However up to now policy maker, regulator and share natural gas advantages have not been holder of the public enterprise. realized because in the country's Through labor laws the public enter planning process there was a failure prise finds itself with no ad to internalize all economic, social ministrative autonomy in fixing and environmental costs of competing salaries or in hiring or firing of energy forms or to take into account employees. Through the Government the adequate cost of capital of fixation of tariffs and prices well competing projects. below opportunity or long run mar ginal costs, the public enterprise CONCLUSIONS has no financial autonomy which guarantees an adequate rate of return There is large potential market to it and assurance that it could for natural gas in the 9 Latin finance a large share of its American countries as well as in investments with its own resources. Ecuador and Uruguay in the resi As was done recently .for Petro dential/commercial, industrial and Ecuador, the Government needs to electric power generation markets. separate its role as a policy maker While natural gas penetration has and regulator of the sector from its reached important levels in the in role as a shareholder of the public dustrial sector comparable to those enterprise and ensure the technical, in gas rich developing countries and administrative and financial autonomy European gas importing countries in of the company. As a policy maker, 4 countries: Argentina, Mexico, the Government is in charge of the Venezuela and Trinidad and Tobago, energy policy and within this gas penetration in the residen framework of the country I s natural tial/commercial and electric power gas policy. This function is dis sector markets are low except in charged by an appropriate state Argentina. agency. The Government also regulates the natural gas sector Except for Brazil and Colombia operations through appropriate all other countries considered in natural gas tariffs and common car this study appear to have sufficient rier and distribution regulations 19 reserves to meet supply or forecasted (ii) legal and contractual export requirements by the year 2000. nature in terms of improving incen However when looking at the huge tives for exploring and developing potential market which could be reserves; penetrated by natural gas, all countries have to review the ir (iii) regulatory nature in natural gas strategy within the terms of deregulating natural gas framework of an overall energy prices and competing fuels and ener strategy in order to promote further gies and developing common carrier additions of reserves to expand regulations; supply while at the same time imple ment policy measures to conserve (iv) institutional nature in natural gas and study the feasi terms of strengthening the organiza bility of imports from neighbouring tion, staffing and role of the policy countries. There is large potential and regulating agencies; and for interregional natural gas trade especially in the southern countries (v) public sector restructur among Agentina, Bolivia, Brazil and ing in terms of providing public Uruguay and great prospects for ex sector entities with the required ports of natural gas either in the administrative and financial auto form of LNG or Methanol from the nomy. region to the USA and the Far East. In respect to natural gas There are however numerous development it is important to un constraints which, unless they are derline the important role regional eliminated, would continue to slow energy organizations such as OUDE down the development of natural gas and ARPEL should play in promoting in the region. These are of: the conditions for increased inter regional trade and exchange of im (i) a policy nature in terms of portant lessons in this sector bet the role natural gas should play in ween member countries. the country's energy strategy and in interregional trade, the role of the private sector and ensuring that a stable and predictable framework is established; 20 REFERENCES 1. The Demand of Natural GAs: A Survey of Price and Income Elasticities, M. A. A1-Sah1awi. The Energy Journal, January 1989. Volume 10, Number 1. 2. OLADE, Annual Energy Statistics (1986). 3. International Energy Agency Statistics (1989). 4. "Marginal Cost of Natural Gas in Developing Countries: Concepts and Applications", World Bank Energy Department No. 10, August 1983. 5. Argentina Energy Sector Study. World Bank, February 26, 1989. 6. DeGoy1er & McNaughton: Twentieth Century Petroleum Statistics. 1980 1988. 18 in the future. While the Government while ensuring that guidelines on could always decide to go ahead with safety and design of installations a certain natural gas project despite are implemented. The Government poor economics, it will have to make needs to eliminate as much uncer that decision knowing in advance what tainty as possible from gas opera the cost to the economy would be and tions as uncertainty breeds increases whether it is ready to subsidize the in cost of capital and cost of users or not. Finally since natural utility service. gas is a non tradeable commodity, international private oil companies Energy sector strategy. The do not have an incentive to develop country's energy strategy strives to gas reserves for the local market if provide the economy with the least the legislation does not allow for cost energy supply. In this strategy direct or indirect convertibility of natural gas should have a large role revenues. to play given it is a low cost ener gy in most LAC considered and also Autonomy of public sector because it will allow the country to enterprises. The Government through diversify from being too dependent on its various agencies act as the oil products. However up to now policy maker, regulator and share natural gas advantages have not been holder of the public enterprise. realized because in the country's Through labor laws the public enter planning process there was a failure prise finds itself with no ad to internalize all economic, social ministrative autonomy in fixing and environmental costs of competing salaries or in hiring or firing of energy forms or to take into account employees. Through the Government the adequate cost of capital of fixation of tariffs and prices well competing projects. below opportunity or long run mar ginal costs, the public enterprise CONCLUSIONS has no financial autonomy which guarantees an adequate rate of return There is large potential market to it and assurance that it could for natural gas in the 9 Latin finance a large share of its American countries as well as in investments with its own resources. Ecuador and Uruguay in· the resi As was done recently for Petro dential/commercial, industrial and Ecuador, the Government needs to electric power generation markets. separate its role as a policy maker While natural gas penetration has and regulator of the sector from its reached important levels in the in role as a shareholder of the public dustrial sector comparable to those enterprise and ensure the technical, in gas rich developing countries and administrative and financial autonomy European gas importing countries in of the company. As a policy maker, 4 countries: ArgentinaJ Mexico J the Government is in charge of the Venezuela and Trinidad and Tobago, energy policy and within this gas penetration in the residen framework of the country's natural tial/commercial and electric power gas policy. This function is dis sector markets are low except in charged by an appropriate state Argentina. agency. The Government also regulates the natural gas sector Except for Brazil and Colombia operations through appropriate all other countries considered in natural gas tariffs and common car this study appear to have sufficient rier and distribution regulations 19 reserves to meet supply or forecasted (ii) legal and contractual export requirements by the year 2000. nature in terms of improving incen However when looking at the huge tives for exploring and developing potential market which could be reserves; penetrated by natural gas, all countries have to review their (iii) regulatory nature in natural gas strategy within the terms of deregulating natural gas framework of an overall energy prices and competing fuels and ener strategy in order to promote further gies and developing common carrier additions of reserves to expand regulations; supply while at the same time imple ment policy measures to conserve (iv) institutional nature in natural gas and study the feasi terms of strengthening the organiza bility of imports from neighbouring tion, staffing and role of the policy countries. There is large potential and regulating agencies; and for interregional natural gas trade especially in the southern countries (v) public sector restructur among Agent ina , Bolivia, Brazil and ing in terms of providing public Uruguay and great prospects for ex sector entities with the required ports of natural gas either in the administrative and financial auto form of LNG or Methanol from the nomy. region to the USA and the Far East. In respect to natural gas There are however numerous development it is important to un constraints which, unless they are derline the important role regional eliminated, would continue to slow energy organizations such as OLADE down the development of natural gas and ARPEL should play in promoting in the region. These are of: the conditions for increased inter regional trade and exchange of im (i) a policy nature in terms of portant lessons in this sector bet the role natural gas should play in ween member countries. the country's energy strategy and in interregional trade, the role of the private sector and ensuring that a stable and predictable framework is established; 20 REFERENCES 1. The Demand of Natural GAs: A Survey of Price and Income Elasticities, M. A. Al-Sahlawi. The Energy Journal, January 1989. Volume 10. Number 1. 2. OLADE. Annual Energy Statistics (1986). 3. International Energy Agency Statistics (1989). 4. "Marginal Cost of Natural Gas in Developing Countries: Concepts and Applications". World Bank Energy Department No. 10, August 1983. 5. Argentina Energy Sector Study. World Bank, February 26, 1989. 6. DeGoyler & McNaughton: Twentieth Century Petroleum Statistics. 1980 1988.