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Natural gas to play major role as transition fuel in Latin America

30 April 2021 Kevin Adler

Latin American nations are on a path to reducing carbon emissions, but for many of them the path will go through natural gas as a transition fuel, rather than leapfrogging to a renewables-dominated electric power, according to leaders of energy companies and an investment firm operating in the region.

Speaking on a panel organized by the Inter-American Dialogue on 29 April, the executives said the region's renewable energy potential is great, and opportunities are ripe for investors. But at the same time, they said many of the countries are struggling with underdeveloped power grids and with capital needs that exceed available funding.

"Natural gas … is clearly cleaner than coal or oil," said Jean-Michel Lavergne, president and CEO of Total E&P Americas. "The responsible way to act is to make gas as clean as possible."

To cite one example of environmentally responsible gas production, Lavergne said, Total conducts no flaring of gas at any of its Latin America oil and gas operations. On a global basis, Total is working towards reducing methane leakage from oil and gas operations to 0.1%, or 1/10th of the level of voluntary industry pledges, such as through the US-government's methane reporting program Methane Challenge.

Gas will play a dual role in Latin America, Lavergne said, first displacing crude oil for power generation, and second providing baseline power to complement growing capacity of renewables. "But until we develop [energy] storage on large-scale basis, we need to have gas" in Latin America and globally, Lavergne said. "Total is the number two LNG supplier in the world. And we are going to keep growing gas."

For BP, producing oil and gas in Latin America will remain part of its future, but at the same time it is responding to the energy transition, said Angelica Ruiz, regional president, Latin America, BP. "Electrification of the world, I think, is unavoidable, if we are to meet the goals of the Paris Treaty," she said. "We're going to be producing energy in a different way. That means we have to define our strategy on how to do it."

Both BP and Total have pledged to reach net zero carbon for their operations by 2050 or sooner, and they are actively reducing emissions today.

"We ask, how are we going to be producing these hydrocarbons?" Ruiz said. "It's about producing them in a better way, with less emissions, and considering values of CO2 in our financials and being transparent."

Much the same message came from Julian Nebreda, president of AES South America, the Latin American arm of the US power utility AES Corporation. "In Central America and South America, we are working closely with the gas industry as transitional fuel," he said. "Electrification is an exciting process … one of the main tools to get to carbon neutrality."

As electrification and renewables portfolios grow, so does the need for gas as a reliable power source, said Mario Fernandez, head of Latin American Energy Principal Investments, Macquarie Capital. The company's green investment group has financed 30 GW of solar capacity that's operating or in development around the world, and 9 GW of operating wind facilities.

He cited Brazil and Colombia, both of which obtain about 60% of their power from hydropower, as vulnerable to the vagaries of water flow, especially as climate change affects rainfall patterns. "Brazil and Colombia had some of lowest the hydro reserves they've ever seen in the last 18 months, and they have had to fire up their thermal units [powered by oil and coal]," he said. Gas-fired power would be a much cleaner option for those needed reserves of power production.

IHS Markit has analyzed demand trends in parts of Latin America, and it also has concluded that gas growth will continue for several decades. In a report released in March, IHS Markit said the Andean countries (Colombia, Ecuador, Peru, and Venezuela) will see an increase in gas demand from 54 million cubic meters/day in 2020 to 177 million cubic meters/d in 2050, an annual growth rate of 2.8%. "Domestic supply and, increasingly, LNG will sustain consistent growth in power generation in the Andean region in the long term," IHS Markit said.

Fernandez said that the US is well-positioned to supply that LNG from Gulf Coast export facilities. So far, US LNG exports to Latin America have been modest, with the largest markets of Argentina, Brazil, Chile, Colombia, and Mexico importing from the US about 500 million cubic feet/day (14.2 million cubic meters) of LNG in 2020, according to the US Energy Information Administration.

Governments stepping up their game

In addition to exporting LNG to meet the burgeoning demand in Latin America, the US is stepping up its game as a partner in expanding renewables in the region, said Andrew Light, principal deputy assistant secretary for international affairs at the US Department of Energy, who also spoke during the webinar. "I think Latin America is a smart bet," he said.

Concurrent with the Leaders' Summit on Climate last week, the Biden administration launched several initiatives to share best practices and increase investment in green energy in Latin America, Light said. "There's absolutely no way we could make the transformations that we need to do globally [on climate] without the private sector," Light said.

The energy executives said they see numerous ways that both the US and Latin American governments can help move the energy transition forward. Improving the transmission grid is at the top of the list, so that power can be delivered more widely and more reliably, said Fernandez. "A lot of the governments [in the region] do not have the funds to invest in transmission infrastructure that could lead to optimization of the grid," he said. "Also, it has become much harder to drive a transmission line through a protected area or a community where it is not wanted."

Decentralized power can be part of the solution to the grid's limits, said Total's Lavergne. In Guyana, for example, Total is bidding on tenders for small generation projects in areas not reached by power lines. "We offer customized solutions. Not everybody needs a 50-MW or 100-MW project," he said.

For AES, which is already well established in Latin America power markets, the challenge is maintaining its relationships with existing customers, but finding a way to deliver power from new, cleaner resources. Nebreda called it "decoupling" the company's contracts from its thermal power plants (mostly oil, some coal).

Over a period of two years, AES renegotiated contracts with most of its thermal power customers so that its obligation is to provide power, but not lock it into which facility is the generator. "That allows us to be more flexible," he said.

Simultaneously, to serve those customers AES has embarked on what he called "a huge investment program over four years for wind and solar," backed by sources of stored energy that enhance reliability. These solutions have included battery storage, pumped hydro, and "overbuilding" solar capacity so that it can generate excess power during the day that can be funneled to storage projects.

Prime opportunities

Regardless of the strategy chosen, the companies' executives agreed that the market is ripe for private investment. "We see huge opportunities [in providing] power solutions for our customers…. This includes a focus on customers in cement, steel, and heavy transport [sectors] that are hard to decarbonize. We are partnering up with them to provide solutions to reach their net-zero targets," said BP's Ruiz.

For AES, the future is in green hydrogen in Latin America, Nebreda said. With an abundance of renewable power potential, countries such as Chile are seen as prime territory for producing green hydrogen at low cost.

"Hydrogen is the bridge for difficult-to-electrify sectors," such as heavy-duty trucking and some industrial processes, Nebreda said. "We believe Latin America - Central and South America especially -- has a huge advantage in green hydrogen…. It's a long-term bet -- similar to the bet we made on batteries 10 years ago that is paying off now."

If governments in the region incentivize expansion of the transmission grid, Fernandez said that private investors would jump into that market. And he said the need is vast, with countries such as Mexico and Chile having large amounts of generation capacity in one area, but limited ability to move that power to population centers elsewhere in the country. In the Brazilian Amazon and in the mines in Peru, where power lines do not reach, he said large volumes of diesel fuel are burned to provide power which could be delivered cheaply through distributed renewable energy installations.

Governments could think even more creatively, Fernandez suggested. "We are seeing the growth in North America of waste-to-energy, but it is not yet applied in Latin America," he observed. "This is a very obvious opportunity. There are five cities in Latin America as big [populous] as New York City, or bigger, and 50 cities of 1 million people or more, and there is not a single large-scale waste to energy plant."

The problem, as with so many other things, is money. A waste-to-energy plant might have a breakeven cost of $100/MW, but the price of energy might be $20/MW, Fernandez said. "Somebody has to make up that difference," he said.

Posted 30 April 2021 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

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