Argentina negotiates with Brazil and Bolivia greater gas supply to avoid power cuts in winter

RIO DE JANEIRO, BRAZIL – The prospect of a winter with little gas, cuts of the fluid to the industry, requests of saving to the households, rationing to the compressed natural gas (CNG) vehicle fleet, and even possible cuts in electric supply (gas is the primary source of more than 60% of the electricity generated by Argentina) put in fifth gear the energy diplomacy of Argentina’s Minister of Economy, Martin Guzman and the Argentine ambassador in Brazil, Daniel Scioli.

In his recent trip to France, where he managed to extend the payment of maturities with the Paris Club, Guzmán also attended a meeting of the International Energy Association (an organization created at the end of the 70s at the initiative of the then US Secretary of State, Henry Kissinger, to respond to the pressures of OPEC), where he had several bilateral meetings and one of particular importance, on Thursday, with the Minister of Energy and Mines of Brazil, Bento Albuquerque, with whom he discussed the possibility of Brazil releasing up to two million cubic meters per day of the gas it buys from Bolivia so that Bolivia could increase its sales to Argentina. The negotiations began in January when the Bolivian government, at the request of the Argentine government, asked the Brazilian agency that oversees gas supplies whether the Mercosur giant could give up the two million cubic meters (Mm3d) that Bolivia would redirect to Argentina.

It would make it possible to reduce Argentina’s purchases of Liquefied Natural Gas (LNG) by ship, which are much more expensive. In addition, due to infrastructure issues, the gas arriving from Bolivia ensures a better supply to the northwestern provinces, where neither the gas from Vaca Muerta nor the gas coming as LNG by ship, which is regasified and injected into the system from the ports of Bahía Blanca and Escobar, arrives through pipelines.

The move would also improve relations between Brazilian President Jair Bolsonaro and Alberto Fernández, who has never ceased to express his preference for Bolsonaro’s rival in next October’s presidential elections, former President Luiz Inàcio “Lula” da Silva.

Guzmán also had a telephone conversation with his Brazilian counterpart, Paulo Guedes. Next Friday, he will travel to São Paulo and Brasilia to finalize the energy solution he designed with the key help of Scioli. On Thursday, the day before, Guzmán will accompany President Alberto Fernández when he receives the visit of the President of Bolivia, Luis Arce. If all goes according to plan, the increased supply of Bolivian gas to Argentina will alleviate many of the fears about gas and electricity supply during the winter months. But the key to this is some formal Brazilian permission so that Bolivia does not appear to breach its obligations. That is what Guzman’s trip and Scioli’s efforts in Brazil seek to ensure.

DEEPENING THE RELATIONSHIP

“The president instructed me to deepen the relationship with Brazil, and that is what we are doing. It happened with the common tariff, and now we will deepen energy integration,” Scioli told Infobae.

It is, of course, a quid-pro-quo. “We were very supportive of Brazil last year, with its drought and the drop in hydroelectric production. Now what we are looking for is for them to help us with the provision of gas, without this implying a reduction in the gas they use for their own consumption”, explained the Argentine ambassador.

There are still a few steps to achieve the design that Guzmán and Scioli are working on. In the first place, Brazil must formally release Bolivia from the obligation to provide it with the part by which it would increase its sales to Argentina. Bolivian gas supplies São Paulo, and these are electoral times in Brazil, so the Bolsonaro government cannot risk falling short.

However, the importance of Bolivian gas for Brazil is decreasing. The hydroelectric generation capacity of Mercosur’s largest partner has greatly increased with the latest rains, and Brazil had already been reducing its purchases from Bolivia, thanks to the increase in its gas production on offshore platforms, Gustavo Perego, director of the consulting firm Abeceb, explained to Infobae, which facilitates negotiations with Argentina. Brazil is even building a new gas pipeline, Rota 3, to bring offshore gas production to Rio de Janeiro, with which it plans to double its own extraction in the next ten years, Perego added.

“We have a trade deficit of US$52 billion in the last 15 years. Bilateral, regional integration will help us reduce that deficit,” Scioli told Infobae. Guzman seems to agree with this diagnosis and wants to reduce the multi-million dollar mountain of energy subsidies, which consumes hundreds of billions of pesos from the budget and tens of billions of dollars in imports. There is an implicit criticism of Kirchnerism’s energy policy.

There are still several details to be adjusted. For example, the price at which Bolivia will sell to Argentina the gas it does not sell to Brazil. The contract has delivery or pay clauses, which impose fines in case of non-compliance. It might even be convenient for Bolivia to pay the fine but sell the gas at a higher price. In any case, it would be suitable for Argentina: the average price of the last purchase of 8 LNG ships was US$42 per million BTU (British thermal unit, a sort of gas quality meter), about four times what Argentina pays for Bolivian gas.

The price of gas on the international market and that of LNG purchases have been increasing since the end of 2021. It has been rising since the Russian military operation in Ukraine when European countries hired more ships to reduce their dependence on the gas coming from Russia through pipelines.

Bolivia, meanwhile, is a declining supplier, and the subsequent addenda to the original supply contract, negotiated by Néstor Kirchner in 2006, had reduced what by now should be a daily supply of 27.7 million cubic meters per day, as specified in the fourth clause of the original agreement signed during the first Kirchner government when Alberto Fernández was Chief of Cabinet.

“We were demanding 14 million cubic meters per day from Bolivia, and they were offering 8 million cubic meters for the winter; that is why the addendum was not closed. I imagine that they will close an agreement for a figure higher than the 8 they offered before: 10, 12, 13; of course, that surplus will be charged at the price they would sell it to Brazil. Brazil needs less because it closes its equation with some of its own sources. Two million additional cubic meters per day do not solve the winter shortage problem. It can reduce the purchase of 4 or 5 LNG ships in peak months,” said Daniel Montamat, head of the energy consulting firm Montamat & Asociados.

In any case, the diplomacy and gas triangulation of Guzmán and Scioli would serve to reduce the uncertainty of a challenging winter.

With information from Infobae