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Central America’s pipeline dream

Even with widespread support, a plan to develop a natural gas pipeline through Central America has many hurdles ahead.

With the shale gas boom in the US and the recent deregulation of the energy sector in Mexico, a plan to develop a natural gas pipeline through Central America that is steadily gaining support from regional polities and industrial actors looks closer than ever to becoming a reality for an energy-starved region that is desperate for development.

For the past three years, demand and feasibility studies have been underway to determine whether a gas pipeline would make sense for Central America, and while these studies have uncovered a host of challenges, there are many who believe the pipeline is more than just a dream.

“The idea is to develop a pipeline in Central America that can be built in different stages with the support of Mexico,” said Anadie executive director, Julio Hector Estrada Dominguez, at the 13th annual CG/LA Latin American Leadership Forum in Antigua, Guatemala when discussing the pipeline plan earlier this month.

Currently, Mexico is in the later stages of development of a pipeline to bring natural gas from the Atlantic coast to the Pacific port city of Salina Cruz in the state of Oaxaca. From Salina Cruz, it is hoped that a pipeline could continue on through to the Guatemalan industrial centre of Escuintla, followed by a pipeline to Acajutla, El Salvador, that would continue on to Managua, Nicaragua, San Jose, Costa Rica, and reaching its terminus in Panama, according to Estrada Dominguez. A possible stop through Honduras is on the table as well.

By 2040, the pipeline would ideally be accompanied by regasification plants in each of these nations as well. At the moment, El Salvador is already planning to develop such a plant, and if the pipeline project is built according to the current timeline, this plant could be integrated into the new network created by a regional gas line.

According to Dario Quiroga, director of business unity and enterprise management studies at Mercados Energeticos Consultores, the pipeline price tag would be roughly $700 million, with a planned extension to bring gas through to Guatemala City for an additional $50 million, which, according to demand calculations, would lead to an average gas cost of roughly $6 per million BTUs of energy.

“Compared to the price of oil,” Quiroga said, which is currently sitting at about $10 per million BTUs in the region, “that's quite competitive.”

This demand is one of many forces driving the proposed pipeline development forward. Because of the lack of diversity in the Guatemalan energy portfolio, which currently relies on fire wood for 60 percent of domestic energy needs, many industries are forced to rely on energy provided by diesel and kerosene, which during the time that oil was priced at around $100 per barrel led to energy costs of around $31 and $24 per million BTUs, respectively.

Juan Carlos Paiz, a businessman who sits on the Comisionado Presidencial para la Competitividad de Inversion (Presidential Commission for Investment and Competitiveness) at Guatemala's PRONACOM, and who also manages a chain of Guatemalan bakeries, believes the introduction of natural gas fuel to the Guatemalan energy market would be a significant boon.

“For us, we are talking about one-third of what we would be paying three years ago and maybe half of what we would pay with today's oil prices,” Paiz said.

One of the central areas of concern, however, is that industrial and commercial demand for natural gas would take time to be established, as it would require development of infrastructure to distribute the gas to industrial and commercial districts.

According to initial demand studies commissioned by the World Bank, and with initial support for studies also provided by the Inter-American Development Bank (IDB, or BID, as it's known in the Spanish-speaking world), demand would pick up rather gradually, making investment in the pipeline a risky prospect for any private developers looking to reassure investors that the project is a worthy endeavour.

“The amount of gas that would be demanded will pick up quite slowly,” Quiroga said. “Initially, the demand for gas would be near 20 to 25 million cubic feet per day.”

In the long run, however, gas demand could reach as much as 80 million cubic feet per day during peak hours. For that reason, Quiroga later added, “this will generate a little bit of a disadvantage in the first years because [the developer] will be paying for the gas to reach the [average] volume of 60 to 65 million cubic feet.”

“Once it reaches that level in 2023 in accordance with the premises that were agreed upon with the government […] demand will hinge on the capacity of transportation.”

What all of this means is that whoever develops the pipeline will have to suffer through a few years of low demand in order to meet the long-term needs of the region, or else risk building a low-volume pipeline that creates a bottleneck down the line when future segments of the pipeline are ostensibly developed.

Edwin Rodas, who as the executive director of the Comision Regional de Interconexion Electrica (CRIE) in Mexico, is among those who believe that the only way the project will become a reality is through a public-private partnership (PPP; P3).

“If we don't have a PPP, then we don't have an anchor plan, and if we don't have an anchor plan, we start playing the game of the chicken and the egg,” Rodas said.

Rodas said that during the last meeting he attended in Mexico concerning the project, President Pena Nieto “was very explicit in manifesting his political will and his support for the project to come true”, and believes that despite the regulatory challenges that the project will encounter throughout its development, “the political will is there, so the only thing we need to find out is whether it is a private project […] or a public project.

Regardless of support, there are many challenges ahead for those who participate in a regional Central American pipeline project.

“In the short term,” said Luc Grillet, senior manager for Central America and the Caribbean at the International Finance Corporation (IFC), “achieving gasification of the region is not so easy.”

First, risk profiles across the region are widely varied, and the only investment-grade Central American nation is Panama, Grillet said. Further, the market price of electricity in Guatemala and Costa Rica marginalise demand for natural gas introduction, and only Panama and El Salvador have existing legislation that would ease introduction of the new fuel to their markets.

Perhaps the most significant challenge for project developers will be working with regional political actors to create a sturdy regulatory framework that contributes to the low risk profile that would be necessary to keep development costs down, and that ensures that supply chain issues, such as those experienced roughly a decade ago in Chile as a result of an energy crisis in Argentina, do not surface down the line.

“There is still a lot to do and I think that the first thing we need to do is to keep working and to keep on supporting this project that will be a great benefit to the region,” Rodas said.