April 23, 2018
Central America: Building A Gas Market
By David L. Goldwyn
The State Department press release is available here, and the full event webcast is available here.
While the discussion was wide-ranging, there were four key takeaways worth highlighting:
1. The global gas market is changing in ways that are particularly conducive to emerging markets in Central America.
The dramatic growth in natural gas production from US shale, the massive increase in US export capacity, more flexible market pricing, the growth of spot sales, and the shortening of the length and size of liquified natural gas (LNG) contracts have increased liquidity in global markets and eased the cost of accessing gas supply for credit-challenged Central American governments. The cost of access to LNG and the time to market has also been reduced by cost-effective Floating Storage and Regasification Units (FSRUs).
These developments have enabled the necessary financing for projects at the right size and scale for Central America, from baseload power supply to fuel oil to gas conversion to supply for peaking or back up power to support increased reliance on intermittent wind and solar power. Gas is more accessible for Central America than ever before thanks to a motivated global supply market that will find solutions to make project economics work in smaller markets. However, even with these changes underway, companies warned of the risk of over-building and having “zombie” projects, and countries were encouraged to build the right-size projects for their energy markets and consider available small-scale and modular solutions.
2. The experience of Panama and El Salvador, as well as new entrants in South America and South Asia, offers valuable lessons learned for new importers within and outside of the region.
Clear, transparent, and consistent policy and regulatory framework is the key building block for successful projects. Governments and private sector participants emphasized the importance of open and non-discriminatory access to LNG infrastructure, as Panama has done for its LNG import terminal coming online in 2019. The support of the host government for the project and rules for gas access, transportation, and pricing are also essential. While the entire framework may not be in place when projects are first tendered, delays in regulatory clarity produces delays in project delivery and can increase costs. The best projects are procured through open, competitive, and transparent auction and bidding processes, and that support the government’s articulated energy policy and strategy.
Beyond national gas markets, regional energy integration and interconnection of gas and especially power infrastructure has been a boon to consumers. Whereas Central America was historically a set of small, individual energy markets, regional integration can “grow the pie, “provide scalability for new infrastructure, reduce financial risk for investors in new major projects, and provide reliability and resilience for consumers. It can also lower costs overall by avoiding new capital-intensive infrastructure and, instead fully maximizing use of existing energy infrastructure and encouraging more regional energy trade.
3. There are major gaps in market information that impede market integration and project development.
Roundtable participants noted challenges in accessing information on the price, terms, and timing for new LNG supply, as well as the cost of import infrastructure. The creative ways that countries can use regulatory tools, from reliability payments to dispatch rules, to incentivize private construction of LNG import infrastructure should be better communicated to national and regional energy authorities. An IDB-supported market demand study, which looks at the potential use of natural gas for industrial and transportation uses as well as power generation could help Central American countries assess the number and size of LNG projects the region requires.
One obstacle to enhanced integration is that some counties are already well supplied from the neighbors (Guatemala and Mexico), others have modest to no near term need for gas supply (Costa Rica and Belize) while others are assessing whether or how much market demand there is for existing projects (Panama, El Salvador, or potential ones in Honduras). Finally, there is a great need for capacity building and technical assistance to regulators to create market-friendly regulatory frameworks and to deliver cost-competitive energy to businesses and consumers.
4. A great deal of assistance is on offer for Central America and more is coming.
From development banks to US governmental institutions, there is no shortage of interest in—and assistance for—Latin American countries looking to diversify their energy portfolio. The Inter-American Development Bank has conducted feasibility studies for natural gas in Latin America. It also has a new market demand study under way and has declared its openness to requests from Central American governments for technical assistance. The US Trade and Development Agency’s Global Natural Gas Initiative helps create new markets, facilitate exports of US gas, and assess the feasibility of new projects. The Overseas Private Investment Corporation is actively assessing project proposals.
Most notably the State Department’s ENR and Mexican Energy Secretariat announced in the April 16 roundtable discussion a joint US-Mexico Central American natural gas workshop initiative, beginning in May 2018. The upcoming workshops will focus on to strengthening policy, regulatory, and investment frameworks for natural gas in Central America. While a great deal of work remains to be done to fully develop the natural gas markets in Central America, projects are under way and the region’s energy leaders, that wish to introduce natural gas to their energy supply, are committed to making these markets more attractive to investors on an individual and collective basis.
David L. Goldwyn is chairman of the Atlantic Council’s Energy Advisory Board and a senior fellow with the Adrienne Arsht Latin America Center.