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Brazil: Gas surpluses mount

WHEN BOLIVIA nationalized its gas industry in 2007, Brazil worried about shortages of natural gas. The government's response was to encourage the construction of liquefied natural gas (LNG) import terminals (PE 5/09 p12).

But two years later, instead of a supply crunch, Brazil has a large oversupply. Lower domestic demand has led to a growing problem of surplus supplies, forcing state-controlled Petrobras to auction unwanted gas or resort to flaring. Managers worry the situation could worsen in 2010 when the country's Mexilhão field, in the Santos basin, begins producing and analysts expect Brazil to suffer periodic oversupply problems until 2015. Mexilhão is expected to add 15m cubic metres a day (cm/d) to Brazilian gas supplies when it comes on stream next year.

Brazilian consumption fell by nearly 28% in the first seven months of 2009 to average 37.2m cm/d, as high domestic prices pushed consumers to switch to alternative fuels such as fuel oil, according to Brazil's gas distributors association. Heavy rains have also allowed electricity generators to rely more on hydro-electric capacity.

A gas record surplus of 20.4m cm/d was recorded in May, forcing the flaring of 8.72m cm/d of associated gas. The remainder was reinjected into oil and gas fields. Petrobras has opted to offer gas supplies at auction in a bid to reduce the surplus and distributors have been asking the government to reduce domestic prices. The company was last month due to auction six months of supplies – around 22m cm/d.

The surplus has added urgency to Brazil's desire to renegotiate its gas-supply agreement with Bolivia, which obliges Petrobras to buy a minimum of 24m cm/d from its neighbour until 2019 (see below). Gas distributors are also asking the government to link gas prices more closely to fuel oil and to convert prices into Brazilian reals from dollars to take advantage of the currency's appreciation, which would cut domestic gas prices to the equivalent of $0.95/m Btu from around $1.68/m Btu.

In return, distributors would commit to expanding domestic distribution networks to help reduce the surplus. However, Brazil's economy has been among the most resilient in the face of the global economic crisis and gas demand is expected to recover in the coming months.

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