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Originally appeared in Pipeline & Gas Journal, January 2007
Bolivia’s recent about face on LNG projects intended to supply the U.S. has prompted thoughtful investors to reexamine the pitfalls that might lie just below all those whitewater rapids that best characterize South American political economics. What can an investor do? The desire is to guard against risk that exceeds the potential return on a proposed LNG project. Asking an expert might help and to do that, Pipeline & Gas Journal has entertained a question-and-answer profile from someone versed in the vagaries of the region. He is Jose Luis Vittor, an international attorney in the Houston office of Bracewell Giuliani, LLP.
P&GJ: What does Bolivia’s nationalization of its oil and gas industry mean for the future of South American LNG projects?
Vittor: It emphasizes more than ever the political risk factors that companies will increasingly face. No matter how detailed a contract, a new political regime could change the rules and the conditions under which you made your investment virtually overnight. New investors in Latin America arriving from other countries like China and India may not factor this into their economic models. For example, the vast impact of the electoral process in specific countries could transform what they initially thought was a good market opportunity. There are still countries that are strongly market-oriented such as Colombia and Mexico. By and large, however, no LNG deal should be exempted from a deep analysis, particularly on the sovereign and regulatory environment and its associated risks.
P&GJ: How can players deal with this level of risk?
Vittor: In any deal, be sure to define every aspect of risk right from the start with a deep understanding of the host jurisdiction and its track record. That includes currency conversion risk, sovereign risk, financing guarantees and supply and customer agreements. Companies need to develop sophisticated risk management expertise, have great investment and technology capabilities and possess an understanding of the global market and the balance of gas and LNG supplies. Any given LNG project requires a rigorous permitting process involving different levels of government action from federal to local agencies. Environmental and safety issues should be addressed in a framework of fairness for all parties involved. It’s especially important to have a clearly defined and realistic timeframe for the return of your investment. You should have a defined exit strategy and the strategy should be one that you have mapped out when drafting the agreements.
P&GJ: What do you see as the most important competitive dynamic in the region today?
Vittor: I believe it is the large number of new energy investors that were formerly government- owned entities and are now looking for new market opportunities, as well as the current government-owned ones. That includes companies like Chile’s ENAP, Colombia’s Ecopetrol and Brazil’s Petrobras. With the exception of Petrobras and ENAP, these companies typically do not have extensive knowhow on technical aspects of an LNG project. Government-owned companies are usually less experienced in dealing with and understanding the needs of private investors, especially the newly created ones. Thus, they will benefit from working with experienced industry partners in developing markets and projects.
P&GJ: On a country-specific basis, where are some of the best LNG opportunities?
Vittor: With large natural gas reserves, Peru has designed the conditions to develop the Camisea project. One of its main features is to export LNG to the U.S. and Mexico. Today, Peru LNG is the most advanced project in South America. The Peru LNG project is already under way as a consortium between major companies from the U.S., Spain and Korea. It will involve the construction of transportation, liquefaction and terminal facilities on the country’s Pacific coast. It’s also important to note that Peru has just elected a new president and the new administration seems to offer a prospect of political stability.
In Chile, the LNG project promoted by ENAP, together with other large Chilean customers, consists of building the basic infrastructure for permitting the import of LNG from overseas markets and distributing it in Chile as natural gas. The project therefore includes the installation of a sea terminal for receiving the LNG carried in LNG tankers, a re-gasification plant and later distributing it through gas pipelines located in central Chile. As part of that effort, last February the BG Group, a global natural gas business, signed a Letter of Agreement with a group of Chilean gas buyers for the supply of LNG and the development of a 2.5-mtpa LNG import terminal in Quintero Bay.
Most recently, Suez and Gas Atacama signed a Memorandum of Understanding formalizing their alliance for the study and development of a reception, storage and regasification terminal for liquefied natural gas. They plan to build the terminal in Mejillones with the goal of offering secure natural gas supply to all the electricity generators and users in the north of Chile.
In the Caribbean, Trinidad and Tobago should be singled out. It is the largest LNG supplier to the U.S. and, besides some recent issues, is a model in the development of LNG facilities. Finally, countries like Brazil and Argentina may consider alternative LNG projects to reinforce their energy matrix.
P&GJ: In the broad spectrum of energy projects, are there factors that distinguish LNG investment requirements?
Vittor: Above all, LNG projects are highrisk, long-term efforts. To recover your investment takes a substantial amount of time and involves the commitment to buy significant amounts of gas to make the investment worthwhile. It is also undeniable that the regulatory framework in most Latin American countries is not fully ready to support sophisticated LNG projects. Because of these considerations, investors in a multimillion-dollar LNG project should keep their eyes open and be realistic.
Tensions between market and political agendas can have a tremendous impact on prices and future investments. If everything can change in a matter of months or days, investors should have long-term commitments that detail the rights and responsibilities of all parties — particularly from the standpoint of an investment exit strategy.
P&GJ: What advice would you give to U.S. LNG companies?
Vittor: I would urge them to look for stable supply opportunities as a way to position themselves in a given country and to clearly assess the political, regulatory and market realities. For example, the projects that were nationalized in Bolivia were primarily aimed to serve the U.S. market and faced incredible resistance based on historical and political reasons deeply rooted in the Bolivian society.
There are plenty of gas reserves in countries like Bolivia and Venezuela, but political and other risks associated with the undertaking of a multimillion- dollar LNG project are extreme unless the government is supportive, local supply is stable and the regulatory framework is fair and not subject to sudden and unexpected changes by any regulator or instrumentality of the government. U.S. companies can find market advantages by recognizing local market and political realities.
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