Sep 30, 2021
– Weak upstream production, a severe drought and strong industrial demand have driven Latin American LNG demand to record highs, with the bulk of this growth being met by US LNG
– With La Niña conditions likely emerging in the August – October timeframe and persisting through January, drought conditions in South America are expected to persist, keeping demand elevated through the end of the year
– The bulk of these incremental LNG cargoes are being sourced from the spot market, tightening an already precariously balanced Atlantic Basin, and injecting downside risk into our expectation for European LNG deliveries
Latin America LNG demand is averaging 116 mcm/d (~4.1 Bcf/d) so far in August, a 63 mcm/d (119%) increase over a year ago, as a severe drought in South America, weak upstream production recovery in the Vaca Muerta Shale, and strong industrial demand growth have boosted the need for spot LNG cargoes. Brazil and Argentina make of majority of this demand, having taken roughly 45 mcm/d (1.6 Bcf/d) and 32 mcm/d (1.1 Bcf/d) this month, respectively.
US LNG exporters have largely stepped into fill the incremental demand, with US deliveries to Latin American countries averaging roughly 78 mcm/d (~2.6 Bcf/d) this month, a 66.1 mcm/d (~2.3 Bcf/d) increase over last year and accounting for roughly one third of all US LNG cargo deliveries this month. In fact, US exporters have delivered roughly 150% more LNG to Latin American buyers than to European buyers in August.
Latin America’s dependance on the US has been heightened this summer given the relative underperformance of other regional suppliers such as Trinidad and Tobago and Nigeria, which have both struggled with upstream production issues and have seen roughly 14 mcm/d (58%) lower LNG deliveries to Latin America this month relative to last year. LNG production in Trinidad and Tobago has been particularly week this month, averaging just 12 mcm/d (400 MMcf/d), down roughly 70% from a year ago, suggesting that upstream issues may be mounting and recent reports indicate that production may not recover to pre-pandemic levels until 2023.
NOAA’s climate prediction center has indicated that there’s a 70% chance of La Niña conditions emerging in the August – October timeframe and persisting through January, which has historically correlated with dryer conditions across Latin America. Therefore, with drought conditions in South America expected to persist through the end of the year. Furthermore, in September, Brazil’s Petrobras will begin a 30-day planned maintenance on the Mexilhão platform and will require a shutdown of the Routh 1 offshore gas pipeline, which could boost Brazilian LNG demand by another 10 mcm/d. Therefore, Platts Analytics expects that Latin American LNG demand will likely persist around 92% higher, year-on-year, through balance of 2021.
Importantly, neither Brazil nor Argentina have long-term LNG supply contracts, meaning that the bulk of these incremental LNG cargoes are being sourced from the spot market. Accordingly, the risk of persistent demand in Latin America all but assures a competitive market for Atlantic Basin LNG cargoes this winter, which will largely price off a netback from the premium Asian markets. This could force European gas markets to price within a tighter spread to Asia if it needs to attract LNG and injects downside risk into our expectation for European LNG deliveries (see LNG Scorecard).