Why Brazil's gas sector is 'in for a shock'

The natural gas sector in South America's Southern Cone will require annual investment of up to US$25-30bn over the coming years to meet its growth objectives.

Flexible bilateral and multilateral supply agreements – namely with regional swing supplier Bolivia – will also be crucial, according to a new study from Wood Mackenzie.

Bolivian gas exports to neighbors Brazil and Argentina have nearly doubled over the last five years, Wood Mackenzie's director of gas and power consulting for Latin America, Eric Eyberg, said at a natural gas event in Santiago, Chile.

While neither of the two recipient countries lack domestic gas resources, complex above-ground challenges shroud the immense opportunity presented by the offshore Pre-Salt and onshore shale and tight gas reserves in Brazil and Argentina, respectively.

"Three dry years of low rainfall and limited hydropower contributions have driven gas demand growth [in Brazil] but have completely masked the impact of the struggling Brazilian economy, slow policy development and Petrobras project delays," Eyberg said in a statement. "We predict a 30-40% drop in demand for gas from [record 2015 levels] when water levels return to normal."

That return to normal could occur as early as 2017 or 2018, Eyberg said, adding, "Once this unmasking occurs, everyone is going to be in for a shock as the impacts begin to be felt across the gas sector."

Argentina, meanwhile, will require US$150bn of capex over the next two decades just for its unconventional gas resources to be viable, according to the report.

Development will be hindered by "high capital requirements, local supply chain needs and unfriendly policy changes, Eyberg said, adding: "Our projections suggest that after a short-lived increase in supply to 2017, the ensuing drop in conventional production (-12% per annum to 2035) will be hard to compensate for."

Given all of these variables, Bolivia will need to carefully manage its key export markets in a coordinated fashion, Eyberg said, warning that "the future of the industry [is] on the line for all three countries."