September 3, 2008

Argentina Natural Gas Crisis Crosses Over To Neighboring Chile

By Anonymous

Special To Pipeline & Oas Journal Chilean electric generators are not the only ones being hurt by the natural gas shortage in Argentina. The Argentine pipeline companies are also affected as the scarcity of natural gas has increased the near-term credit concerns of its two gas transportation companies: Transportadora de Gas del Norte S.A. (TGN) and Transportadora de Gas del Sur SA. (TGS).

They provide transportation of natural gas under long-term concession contracts due December 2027 from supply sources to consumption centers in Argentina. TGN also delivers natural gas to Chile, Brazil and Uruguay. There are almost 8,500 miles of interstate natural gas pipelines in Argentina with capacity of 125 MMcm/d.

Challenges faced by the companies include low probability of domestic tariff increases and continued government influence. As a producer/transporter of gas domestically, TGS faces the challenge of receiving gas to convert to LNG. These risks continue to be factored heavily into the companies' ratings. The latest risk to arise is the possibility that the exporter of gas to Chile, TGN, won't be paid pursuant to gas transportation agreements (GTAs).

In February, Chilean generator Electrica Santiago S.A. (ESSA) began legal action in an effort to terminate its existing GTA with TGN. That decision was not unexpected, as 2007 deliveries of gas to Chile amounted to one-third of the total gas contracted while offtakers had to pay in full for the capacity contracted to ship the gas from Argentina. To minimize the effect of the lack of natural gas supply most Chilean generators had to burn much more costly diesel fuel which squeezed their margins.

Last year, ESSA sought legal action against Consorcio Sierra Chata, a group of Argentine national gas producers that had entered into a natural gas supply agreement (GSA) with ESSA, in an attempt to receive compensation for the higher costs it was incurring by burning diesel. As a result of that arbitration process, the GSA was canceled and no compensation was established for ESSA.

TGN's export capacity is part of its regulated business unit, which has a dollarized tariff. Although exports represent 27% of total gas deliveries, revenues from exports account for more than 40% of total revenues, which lowers transfer and convertibility risk but exposes TGN to concentration of counterparty risk. The ESSA contract represents US$9 million or 6% of TGN's total revenues and US$7.5 million or 7% of EBITDA.

Loss of these revenues and cash flow, should the legal decisions go against TGN, is manageable. TGN's credit profile would deteriorate sharply, however, if the other three Chilean companies that are not receiving natural gas through TGN due to the restriction imposed by the government follow suit and discontinue their payments.

TGN should partially offset the export revenue loss with new revenues to be collected by ongoing government-sponsored pipeline expansion initiatives which are estimated to grow to USS8-10 million in the next few years. These expansions are promoted by the government and financed through private trust funds. TGN will benefit through supervision fees collected during construction and management and operation fees after completion. However, over the medium term, the company is debt service will remain tight.

Unlike TGN, TGS does not export gas to Chile. A unique risk faced by TGS relates to its ability to receive adequate amounts of natural gas to process into LNG at its Cerri plant. LNG business is a non- regulated, profitable operation for TGS and accounts for nearly half of its revenues and cash flow. During 2007, TGS's LNG production declined 20% as a result of nearly 70 days of gas shortages.

TGS also faces governmental pressures to fund the southern pipeline expansion, which would have a leveraging effect on the company's balance sheet. Despite these challenges, TGS has maintained credit quality consistent with its rating and has sustained a healthy level of EBITDA due to healthy LNG prices.

The Argentine regulatory environment can be characterized as weak with considerable government interference. The industry continues to await a tariff adjustment. Since 1999, the tariff structure has remained with no increases expected. No one expects the domestic gas transportation tariff to compensate for elimination of export revenues in the near term.

Incentives to promote gas exploration have been undertaken, such as the Gas Plus program that was initiated by the Secretary of Energy in March in an attempt to promote investments in natural gas. This program states that new gas discoveries will be priced at free prices among parties. Unfortunately, there are delays associated with such investments and the effect of the program will not be immediate.

Argentina's natural gas industry has changed dramatically in recent years. Prior to the 2002 economic crisis, gas utilities experienced an extended period of constructive regulation, manageable growth and financial stability. Pipeline concessionaires faced limited volume risk due to the existence of fixed payment obligations governed by a constructive legal framework. Aggressive capital-expenditure programs allowed companies to meet local market requirements and build a cushion in terms of transportation capacity. These programs also allowed the companies to become net exporters of gas to Chile.

After 2002, pipeline concessionaires drastically changed their growth strategy, reducing capital expenditures sharply in response to a frozen tariff structure imposed by the government. As the economy rebounded and price controls on energy have dramatically increased domestic demand for natural gas, the system has become capacityconstrained and gas producers are unable to meet high domestic demand. This has prompted the government to restrict gas exports.

Chile's electric generation industry has been affected by natural gas restrictions, droughts, high diesel prices, increasing energy demand and the initial delay in the development of new energy projects. Expect this situation to continue until the first LNG project is completed in 2009-2010, while at least 1,000 MW of new coal-based generating capacity comes on line.

Chile has been trying to reduce its dependence on Argentine natural gas by converting existing gas-fired plants into dual-fired systems that can use natural gas and diesel and by building new thermal plants based on alternative fuel sources (primarily diesel and coal). The use of diesel has led to big increases in generating costs so companies are investing in LNG regasification. The government is also promoting exploration of other energy sources. This, combined with the opening of new hydro plants, should enable generating costs to decrease.

The energy crisis has taken its toll on some generators' financial flexibility since contracted prices can't match rising generating costs. This is true of companies that had earlier relied on natural gas and/or hydro power as their main energy sources and whose contracts were largely signed at prices that did not foresee the looming shortages.

The legal framework regulating Argentina's gas sector is considered weak while often subject to unexpected rule changes, making gas companies highly dependent on the central government and regulator. Uncertainty and high levels of government interference continue to overshadow the future of the gas transportation sector.

Copyright Oildom Publishing Company of Texas, Inc. Aug 2008

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