A Natural Gas Discovery For A Reserve-less Country

BMI View: Paraguayan President Federico Franco has announced that a natural gas discovery has been made within the eastern department of Alto Paraná . If confirmed , this would be the second hydrocarbons discovery within t he last six months, and could potentially generat e some modest momentum for the country's energy sector. Importantly, early indicators suggest the government is keen to develop Paraguay's hydrocarbons potential. In addition to already having favourable licensing terms, the president has recently suggested establish ing an independent energy and mining ministry.

Paraguayan President Franco has announced a natural gas discovery within the eastern department of Alto Paraná. While no details on the nature of the discovery or the company or companies involved have been provided, what is known is that the discovery was made in the eastern department of Alto Paraná, which shares a border with Brazil's Parana state, home to the Barra Bonita natural gas field.

President Franco said the company that made the discovery is already in the process of applying for a licence to drill in the area and that further exploration activity could begin 'shortly'.

Keen To Develop Paraguay's Natural Resources

The current government under President Franco appears keen to develop the country's natural resources. Indeed, in addition to already having favourable licensing terms in order to attract foreign investment into the sector, Franco has suggested - on the back of this gas discovery - that the government should establish an independent energy and mining ministry. Such a structural change, which would elevate these departments to a ministry in their own right rather than sub-ministries within the Ministry of Public Works & Communications, would be a symbol of an increased emphasis on such exploration.

Re-energising A Nascent Energy Sector?

Oil was discovered in the Pirity Basin in November 2012 - an area long known to have hydrocarbons potential but without active production ( see our online service, November 28 2012, 'Reigniting A Nascent Energy Sector?'). If either or both of these discoveries are deemed commercially viable, they could have a significant impact on the country's economy, both in terms of foreign investment in a nascent energy sector and a possible reduction of the country's energy import bill. Importantly, however, Paraguay does not currently produce or consume any natural gas; consequently, associated infrastructure challenges to the development of the field and domestic consumption create downside to the monetization of the discovery in the near-term.

Furthermore, Paraguay does not have any crude oil or natural gas production and there are currently only eight active exploration concessions, as well as 13 concessions currently under negotiation. In terms of consumption, Paraguay currently consumes approximately 28,000 barrels per day (b/d) of oil, all of which must be imported, either as crude to its 7,500b/d refinery or as refined petroleum products. All of its imports come from Argentina.

Rising Consumption Without A Domestic Resource Base
Paraguayan Petroleum Consumption, 1990-2011

A Fragile Economy

There are considerable political risks to doing business in Paraguay, despite the potential revival of its energy sector. Indeed, the Paraguayan political system grounded to a standstill in the first half of 2012 as conflict among the political elite led to the impeachment of then-president Fernando Lugo in June. This move met with international criticism and led to the country's suspension from regional trade-bloc Mercosur, a development which is now weighing on Paraguay's economic outlook.

Nevertheless, the country's business environment is evolving positively. President Franco has attempted to smooth relations with regional neighbours in order to gain readmission into the international organisations from which the country has been suspended. Additionally, Franco has attempted to attract investment and stoke economic growth in advance of the April 2013 congressional and presidential elections. Moreover, it is our view that either the incumbent centre-right Partido Liberal Radical Auténtico or the right-wing Colorados will win the presidency this April, and both parties tend to support business and inbound investment. While we believe the policy trajectory is heading in a pro-business direction, we highlight that the political recovery from the June impeachment is fragile, and political risks remain elevated, despite the country's below-ground potential.

This article is tagged to:
Sector: Oil & Gas
Geography: Paraguay

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