From the editor: Brazil boost masks softening LNG market [Global Gas Perspectives]
At just over $13/mn Btu in late September, more than two years after Russia’s invasion of Ukraine, LNG spot prices have yet to return to the levels prevailing before the start of war. However, prices moderated last year and are following a similar pattern this year, and at a lower level than in 2023.
European gas inventories are nearly full ahead of October and European demand for LNG in the first half of the year was about 20% lower than in first-half 2023. This year, the rise in prices heading into winter, a typical seasonal pattern, has not been so pronounced, despite support from Brazil, where LNG demand has ramped up in the face of severe drought and reduced hydro generation.
There is also the expectation that Russian gas exports to Europe through the Sudzha pipeline via Ukraine will cease at the end of this year. Ukraine has said it will not renew or extend the existing contract. Just under 15bn m3 of Russian gas was exported to Europe via the pipeline last year.
Increased renewable power generation, demand destruction as a result of high prices, near full inventories ahead of winter and perhaps an expectation that mild winters are here to stay, all suggest that European LNG demand may have peaked, limiting the impact of Brazil’s buying spree.
Brazilian boost
Brazil is expected to import record levels of LNG this year, exceeding for only the second time 10bn m3 in a year. Hydro generation makes up a large portion of total power provision in South America’s three largest economies, Brazil, Argentina and Chile, and it has typically been LNG that has provided the flexibility needed to address hydro power’s variability.
Brazil is the worst affected as its power system is not only the largest, but the most dependent on hydropower. Hydro capacity of almost 110 GW accounted for just over 60% of total generation in 2023. With hydro capacity of this size fulfilling so much of the country’s power demand fluctuations in rainfall have a big impact.
Last year, Brazilian hydro generation reached 428.7 TWh, 66 TWh higher than the drought year of 2021 and 69 TWh higher than 2015. LNG imports dropped to just 1.3bn m3. In 2021, they peaked above 10bn m3, and were a significant contributory factor in the sharp rise in spot LNG prices in the second half of the year before the outbreak of the Ukraine war in late February 2022.
This year, drought is again hitting hard. In August, water levels in some Amazonian rivers were at their lowest ever levels for the time of year. The Brazilian National Water Authority predicts that drought conditions could persist until the end of November. Part of the problem is that persistently low rainfall over the last decade has left reservoir levels low even when rain has fallen. In the last decade, only one year has delivered rainfall above the long-term average.
Reservoir levels at the country’s main hydroelectric dams were over 50% in September, comfortably above levels in 2021 when they fell to just 16%, but the low river levels have hit run-of-river plants such as the 3.6 GW Santo Antonio facility and the massive 14 GW Itaipu plant, which is shared between Brazil and Paraguay. Itaipu is powered by the Paraná river, where the flow rate is currently reported to be around 900 m3/second, compared with a normal flow of over 4,000 m3/s. Low flow conditions are expected to last until the end of the year.
As a result, Brazil has been on the hunt for spot LNG to boost power generation through to the end of the southern hemisphere winter. However, its increased presence in the spot market has not been sufficient to prevent prices taking a lower path compared with 2023.
Part of the reason is the changing gas balance within the Southern Cone. Both Chile and Argentina also have high levels of dependency on hydro power and are also affected by low levels of precipitation, but not to the same extent as Brazil. Hydro power accounted for 20.4% and 27.2% of total generation in Argentina and Chile last year, compared with Brazil’s 60%, and the power systems are much smaller.
Argentina saw an early start to the winter with below average temperatures in May pushing gas consumption to near record highs for the time of year, requiring an emergency cargo of LNG to be supplied by Brazil’s state oil and gas company Petrobras. However, Argentina’s LNG demand is on a downward trend as transmission capacity from the Vaca Muerta shale play increases, allowing more domestic gas to reach the regional market.
Argentina is likely to continue to need some LNG to cover winter demand, but the overall trajectory for imports is negative with the prospect that shale gas allows the country to rediscover a more significant role as an LNG exporter.
Pipeline exports will also have an impact. Argentina’s role as gas exporter will limit Chilean demand for LNG as Buenos Aires firms up pipeline supplies to its neighbour. Argentina has also approved pipeline exports to Brazil via part of the pipeline which runs from Bolivia. Declining gas imports from Bolivia have been another cause of higher Brazilian demand for LNG.
In addition to the changing gas balance in the southern cone, Chile and Brazil have been successful in developing renewable energy capacity in addition to hydro power – Argentina less so. Chile has doubled its wind capacity in the last four years to 4.5 GW and almost doubled its solar capacity in the last two years to reach 8.5 GW. Brazil, a frontrunner in the deployment of wind, had 29.1 GW installed at the end of 2023 and 37.4 GW of solar capacity.
More capacity and a more diverse mix of power generation sources, in combination with rising Argentinian gas exports, is reducing South America’s vulnerability to the variability of hydro and its need for LNG. At the same time, however, climate change appears to be increasing the incidence of drought and hydro’s variability. It’s worth remembering that hydro is the largest source of renewable energy globally, generating more power than wind and solar combined.
The significance of Brazil’s spot market activity is therefore not that it has pushed prices higher over the summer, but that it has had such a muted impact. The possibility that European LNG demand has peaked is softening prices ahead of the wave of new LNG supply coming to market from the US and Qatar. Although a severe European winter could still put the continent back centre stage, the locus of LNG demand growth and price formation is swinging solidly back to Asia and the currently lacklustre Chinese economy.
The European LNG market may have had its day in the sun, while volatility from the variability of South American hydro power may also have a more limited impact on LNG prices in the years to come.