Argentina's petrochemicals industry is unlikely to expand until more natural gas and related feedstock supplies become available when the potential of the country's shale gas plays is turned into production in a decade or so, an analyst said Wednesday.
"The big challenge is to find gas feedstock to keep pace with petrochemical demand, which is rising because consumption is growing," Hernan Cavarra, a regional analyst at Frost & Sullivan, said on the sidelines of a shale gas conference in Buenos Aires.
Argentinian gas production has dropped 20% to 115 million cu m/d over the past decade as low prices and regulatory uncertainty have deterred investment. Over the same period, demand for the commodity, which meets 50% of domestic energy needs, has shot up 33% to 126 million cu m/d.
This has forced Argentina to turn to Bolivia and the global LNG market for supplies. Imports have surged from zero in 2004 to between 30 million cu m/d and 45 million cu m/d this year.
Polymer producers are also importing ethylene as feedstock, in particular during the May to September cold season when gas shortages peak, Cavarra said.
Petrochemicals producers have to import feedstock to keep pace with demand, in particular for plastics for consumer goods, electronics and packaging, he said.
"Demand is growing a lot and supply cannot grow as fast as demand," he said.
What is more, the imported feedstock is hurting margins, a further disincentive to add petrochemical production capacity, he added.
Brazil's Braskem cannot proceed with plans to build a polyethylene plant in Argentina because of the lack of feedstock.
Dow Chemical and Basell Polyolefins's Petroken unit face the same problem for polyethylene and polypropylene products, respectively.
"Dow produces a lot of polyethylene, but if it wanted to expand its production it would be hampered in doing so because of the lack of gas," Cavarra said. "If they don't find sufficient feedstock, they cannot grow their production and that means they have to import to meet demand."
Petrochemical production capacity will be capped in Argentina and across much of Latin America until more gas supplies become available, he added.
The hope is that the development of Argentina's nascent shale gas plays, which are seen as potentially among the world's largest at 800 Tcf, will solve the conundrum, but for that to happen, gas prices need to rise enough to entice producers to explore for and develop new fields.
"The problem is that nobody wants to invest in gas production because of low prices," Cavarra said.
Even so, producers like Argentina's state-run YPF and Chevron are starting to develop shale resources, buoyed by the Argentinian government's decision earlier this year to raise the wellhead price of gas to $7.50/MMBtu for output from new wells.
YPF and Chevron agreed in July to invest an initial $1.5 billion in developing shale resources on a 5,000-acre tract of the Vaca Muerta play in the southwest of the country. The aim is to increase output there to 50,000 b/d of crude and 3 million cu m/d of associated gas by 2017 from 10,000 boe/d currently. Full development of the area will need $15 billion, YPF has said.
"Shale gas is seen as a great opportunity," Cavarra said. "But it will take 10 years for [these shale gas plays] to be commercialized and available for industry."
This is because estimates suggest that 5,000 wells must be drilled to reach a critical mass of shale production.
In a country that has seen drilling decline for conventional gas at $2 million per well, it may be harder for producers to quickly come up with the $10-14 million needed for drilling a vertical well and $20 million for a horizontal well, attendees of the shale gas conference were told.
