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Brazil gets moving on gas competition

The government has progressed on freeing Petrobras from its unwanted dominance of the domestic gas market

Brazil is finally getting serious about loosening the hegemonic grip of Petrobras, the state-owned oil and gas company, on the country's gas industry, almost ten years since regulatory reforms failed to kickstart greater market competition.

Allowing Petrobras to sell off assets and get out of non-core sectors is central to the government's natural gas strategy. In July, Brazilian President Jair Bolsonaro inaugurated the New Gas Market programme, aimed at cutting the domestic price of gas 40pc within two years, guaranteeing participation of new entrants and attracting greater investment to the natural gas sector.

The current lack of gas market competition is stark. Petrobras controls around 77pc of Brazil's gas production, 100pc of imports, 99pc of processing and 69pc of transport, as well as 20 of the 27 state distributor.

Brazil's natural gas prices are also among the highest in the world. In 2018, Brazil's energy ministry reported industrial users were obliged to pay almost $14/mn Btu, compared to an average European price of just over $8.80/mn Btu and a US bill of under $3.90/mn Btu.

The government, wary of both the financial burden of non-core businesses on Petrobras and the unpopularity of high prices, wants change. Just weeks before Bolsonaro signed the latest raft of reforms, Petrobras agreed a settlement with Cade, the Brazilian anti-trust regulator, to offload equity interests in several key pipeline companies. The firm will sell its remaining stakes in pipeline companies Nova Transportadora do Sudeste (NTS), Associada de Gas (TAG), Bolivian interconnector Transportadora Gasoduto Bolívia-Brasil (TBG) and gas subsidiary Gaspetro by December 2021, with a possible one-year extension.

Prior to the settlement, divestment had been sluggish. In three-and-a-half-years between managing to shift 49pc of Gaspetro, in December 2015, and a 90pc share in TAG, in June this year, its only sale was a 90pc share of NTS—admittedly responsible for 55pc of national consumption-in April 2017.

Source: Ministry of Mines and Energy, Abegas

Opportunity knocks

The potential opportunities the reforms represent are enormous. The Brazilian association of piped gas distributors (Abegas) estimates gas industry expansion could attract c.$32bn in total investment.

"There are multiple opportunities across the value chain," says Daniel Szyfman, partner at Brazilian law firm Machado Meyer Advogados. "First, for new market agents, there are the various assets disposals, the M&A. For E&P companies operating in Brazil, this is the first true chance to monetise gas beyond selling at the well head. With time there will be a more liquid market, with multiple agents at all ends."

The reforms could significantly boost the country's economic performance. The Brazilian association of major power consumers (Abrace) calculate that a 40pc reduction in gas prices would increase GDP by 2.2-2.6pc annually over the next 10 years—a cumulative increase of R$325bn ($81.35bn) relative to the base scenario.

Infrastructure is, though, an obvious challenge. Most of the country's existing gas infrastructure is positioned around the populous south and southeast. "It is important to note that Brazil has less than 50,000 miles of gas pipelines—for transport and distribution. By comparison, the US has more than 4mn miles," says Fernanda Delgado, research coordinator at Brazilian think-tank FGV Energia. Due to lack of transportation pipelines, more than half of total domestic production is either flared or injected, she adds.

Gas infrastructure connecting the offshore pre-salt fields to shore has been particularly underdeveloped. Route 3, linking the Santos Basin to Rio de Janeiro, is expected to be operational only by 2020. Brazilian brokerage firm XP Investimentos notes that that visibility on how the future Routes 4, 5 and 6 will be developed remains limited. Abegas estimates that the pre-salt evacuation pipeline network must develop to match c.170-215mn m³/d of associated gas production capacity by 2030.

“There are multiple opportunities, across the value chain” Szyfman, Machado Meyer Advogados

Brazil is also targeting innovative ways to overcome the limitations of its inadequate grid infrastructure, including an emphasis on more gas-fired power generation. "As the power grid and regulation are very well established in Brazil, there is huge potential for 'gas to wire' projects," says Felipe Boechem, head of oil and gas at Brazilian law firm Lefosse Advogados. "Shell and BP have already announced important 'gas to wire' projects. Other companies are looking at opportunities to supply gas on trucks to places where there is no pipeline infrastructure."

The government, keen to build on the pre-salt success offshore, is also looking at further onshore exploration. "There is a governmental program called Reate 2020—revitalisation of activities of exploration and production of onshore petroleum and natural gas—that aims to bring onshore production up from 100,000bl/d to 500,000 bl/d," says Delgado.

Challenges ahead

But there are considerable barriers facing the government's grand gas ambitions. "The Brazilian economy has been shrinking over the last 3-4 years, so gas consumption is not increasing in a way which would anchor large supply projects," says Ieda Gomes, senior visiting fellow at the Oxford Institute for Energy Studies.

Maximising the use of natural gas would require massive investments in infrastructure to increase gas flow, to build more transportation pipelines and to improve the distribution system, warns Felipe Feres, partner at Brazilian law firm Mattos Filho. Delgado is also doubtful, calling the government's ambition to reduce the price of gas by 40pc over the next two years "structurally not possible".

And, despite the appetite for reform, much of the existing regulatory structure is still preferential to Petrobras' incumbency. "The current regulatory framework is not very favourable to investors keen to participate," says Feres. To fully liberalise the market, regulatory changes would be needed across transport tariffs, shipping, marketing, storage and expansion of transport capacity.

Moreover, under Brazilian legislation, individual states or state regulatory agencies have control over their local gas distribution services. While Ceara and Rio de Janeiro states have already begun implementing regulatory changes, reform in other states will likely happen at different paces, on different terms or even not at all, says Feres.

Brazilian pipeline infrastructure Source: Petroleum Economist
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