Is it better to export LNG from Vaca Muerta via Argentina or Chile?

By Luciano Codeseira, managing partner of Gas Energy Latin America

The development of Vaca Muerta constitutes a central axis not only of Argentine hydrocarbon policy, but also a possible solution to the vicious circle of stop & go in the Argentine economy: a sure opportunity to generate foreign currency and employment in a global and local context in which such resources are truly scarce.

Regarding Vaca Muerta, the improvements in the industry have led to a significant reduction in risk and progress towards a leveraged upstream in time to market, in real-time planning and in the differential and integral approach to resource management, achieving a substantive optimization in each of the processes. In short, we are looking at a new industry, much closer to just-in-time and continuous improvement than the traditional oil industry.

However, over and above the benefits of the rock and improvements in productivity, we are certain that the measure of success in the development of Vaca Muerta's export potential will be competitiveness against a global LNG market that is in surplus. And in that context, I wonder what the best exit point for the LNG produced in the formation will be. The strongest options are Bahía Blanca port and Lirquén or Quintero ports in Chile.

Before going into the advantages and disadvantages of each option, it should be noted that the future global natural gas market has benefits that depend on the role it will play in the electricity matrix and its accessibility. That is, technological innovations, the integration between upstream and downstream and, ultimately, the large number of projects underway, indicate further reductions in natural gas costs as an energy source. All of this in a context where there is a need to improve air quality, as a catalyst in efforts to contribute to global decarbonization.

On the other side of the equation, we have to accept the reality of a tighter market, where levels of competitiveness will be very close. The competitiveness of an LNG project is defined by the capital costs of the liquefaction plant, gas supply and transport and freight. The sum of these three dimensions and their exposure to a volatile market will place limits on the overall competitiveness of a given project. Thus, LNG projects will seek to maximize profits and minimize volume and credit risk, preferring LNG buyers that offer a high netback, a high take-or-pay and an investment grade credit rating, all either to reduce the complexity of financing the approximately US$20bn of upstream and downstream investments that a global LNG plant of 10 million tons per year tends to require.

Competition for the Asian market (76% of purchases) or European (16% of purchases) will be tougher, due to the entry of new projects in the US, Africa, Canada or Russia. In this sense, it is necessary to compare the competitiveness of the development of the Vaca Muerta LNG business model with the new projects such as Mozambique LNG, Kitimat LNG (Canada), Sakhalin LNG (Russia), the 14 projects in the Gulf of Mexico (GOM), Qatar and Australia, among others.

Obviously, the distances or routes (in the case of going through a canal such as Suez or Panama) to the main markets represent costs associated with the projects and an advantage or disadvantage in competitiveness.

Except for the projects located in the Gulf of Mexico, the distance between Vaca Muerta and the Asian markets constitutes an additional cost of between US$1 per million BTU (MBTU) and US$1.6/MBTU, in contrast to projects such as Kitimat LNG or Mozambique LNG. In marketing to Europe, the situation is reversed and it would have better conditions, but would still be behind the projects in the US.

The option via Chile is only marginally better than the Bahía Blanca option, especially when assessing Asia as a destination: between US$0.24/MTBU and US$0.42/MBTU. In the case of possible sales to Europe or India, Bahía Blanca is better than Chile: between US$0.45/MBTU and US$0.61/MBTU.

At the end of the day, given that the margins of competitiveness between the Bahía Blanca and Chile options are relatively low, it will be the systemic competitiveness of Argentina or Chile that determines the difference between one option or another. That is, the ability to establish competitiveness factors, removing the knots in logistics costs, outsized and inefficient tax structures, the ankylosis of the labor market, the lack of intermediation between savings and investment, the lack of instruments for financing investment and technology, the dwarfism of the Argentine stock market and the preeminence of itinerant objectives and rules. Because in the end those competing are the countries themselves.

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