For the past two years, Brazil has been slowly opening its natural gas market to the private sector in hopes of reducing high end-user prices, its reliance on imports and longtime bottlenecks in its midstream market. If successful, the country could attain its ultimate goal of using its own plentiful natural gas resources in the energy transition.
Although Brazil is beginning to see progress, stakeholders realize that to achieve a completely open and competitive market, careful regulation and infrastructure are key.
“Brazil has relevant indigenous reservoirs to be explored. There is strong potential to boost economic growth and energy security, but it is not enough to have gas reservoirs if the country is not able to coordinate the necessary investments on infrastructure to make such reservoirs available for the market,” explained Ovidio Quintana, commercial and regulatory director at Transportadora Associada de Gas (TAG), which designs and operates gas pipelines in Brazil. “Regulatory framework improvements are mandatory to boost sustainable market opening.”
In 2021, Brazil passed the New Gas Law, which changed its government-based concessions system to one of authorizations by the National Agency for Petroleum, Natural Gas and Biofuels (ANP). The law’s objective is to allow third-party access to the natural gas market in an unbiased manner; unbundle the industry’s vertical structure and prohibit gas network operators from involvement in other areas along the gas value chain; establish an entry-exit regime for contracting transport capacity; and provide operational transparency.
In 2019, an agreement between Petrobras and the Brazilian Antitrust Authority called for the release of the oil company’s control over the national transportation network and banned the continuous purchase of gas from third parties at the wellhead.
“The main topic in Brazil right now is that we are beginning to open this market,” said Adrianno Lorenzon, director of Natural Gas at the Brazilian Large Industrial Energy Consumers Association (ABRACE) in a recent webinar on the topic. “Our main goal is to ensure that we have a competitive market in the future. Natural gas can be an instrument to develop more jobs and achieve more wellbeing for the population.”
“Natural gas provides a safe and known pathway for industry decarbonization,” added Heloisa Borges, director of oil, gas and biofuel studies at the Empressa de Pesquisa, an organization that supports the Brazilian Ministry of Mines and Energy. “Later on, it can connect us to biomethane, hydrogen infrastructure and give us a good pathway into the future.”
As the country works to break open its natural gas market, both opportunities and challenges abound.
Beyond Petrobas’ Monopoly
Brazil essentially dealt with a monopoly on the natural gas market until 2021, with Petrobras being the sole seller of the resource in the country.
TAG currently oversees a program to encourage third-party participation in the natural gas market in northeast Brazil. The participating states are “reaping the fruits of this head start,” Borges said, referring to an increase in operators, distributors, suppliers and flexible, innovative transportation.
In 2022, Brazil’s northeastern states, under the guidance of TAG, saw 14 new shippers of natural gas enter the market, and presently 23 percent of the area’s new revenues are coming from a new, open market.
“We were able to support the right investments to allow competition,” Quintana said. “And, we can now celebrate the entry of multiple players in the network, results on gas price competition and the launch of different types of transportation contracts.”
As a result of new competition, natural gas supplied by private players to distributors and free consumers in 2022 was approximately 16.5 percent lower than Petrobras’ average price, according to TAG.
It is hoped this trend will continue throughout the nation. “More demand can be achieved if we have more competitive costs at the end of the chain,” Lorenzon said. “I think that is a premise for us.”
For decades, Petrobras set the price for natural gas. Now, it is crucial that Brazil develop an integrated infrastructure network so that all of the natural gas injected into the system can be traded nationally – offering end-users multiple sourcing options. “If I am the consumer, if I have an option to buy it, to choose it, that brings me more power,” Quintana said. “If I buy from one specific source, if this source is competing, it reduces the price of my carrier’s supplies. This is a must.”
He added that an integrated network should be incentivized to stimulate competition.
“There is no sustainable market if the players cannot select from different alternatives to trade between,” he said.
Furthermore, lower prices would allow many industries in the country – specifically cement and steel manufacturers – to decarbonize more quickly.
Diversifying the Supply Chain
In preparation for further market expansion, Petrobras has been divesting itself along the natural gas chain, including from onshore fields in northeast Brazil, refineries and distributors. In tandem with such divestments comes the need for “intelligent” investments in new infrastructure, Quintana said.
New investment opportunities can be found along all parts of the supply chain. On the exploration and production side, pre-salt reservoirs – such as the Santos and Campos basins, the Sergipe-Alagoas Basin, the Equatorial Margin and onshore fields controlled by the state – need to be explored for natural gas, Quintana said. All require new routes to interconnect.
On the midstream side, new gas treatment plants and underground storage are needed as well as investments in transport to reduce bottlenecks and facilitate liquidity, expansion maintenance and integrity in the infrastructure.
Downstream, expanding the natural gas distribution network to include the mining, steel, fertilizer and petrochemical sectors is also greatly needed as Brazil works to develop its biomethane industry.
The continuation of Petrobras’ disinvestment in mature fields serves as an important incentive for the diversification of suppliers.
“We can observe already the results of a production increase coming from the entry of new actors in mature onshore fields,” Quintana said.
Furthermore, there are new frontiers to be explored, including unconventional reserves. Better visibility of the allocation of gas portfolio rights of the government-owned Pré-Sal Petróleo SA are measures that can attract new players to the market, he added. These include gas auctions, long-term contracts, options of indexation and flexibility terms.
Establishment of a gas release program is naturally becoming a part of the conversation.
“We built a new natural gas law that is very inspired by the European market, and one of the instruments we saw that was applied in the European natural gas market was gas release programs,” Lorenzon said. “They were necessary instruments to reduce the incumbent role in the market and to have some competitiveness in the market. We see this as a necessary instrument that we have to apply in Brazil.”
As a start, he suggested estimating the volumes of natural gas that Petrobras continues to acquire from third parties that are not produced by Petrobras. Such volumes are currently not public information.
Petrobras acquires 17 million cubic meters of natural gas per day from Bolivia and 7 million cubic meters from other producers at the wellhead, Lorenzon said, explaining “this is relevant for the Brazilian market.”
Integrating New Players
As Brazil’s open market continues to develop, many anticipate the entry of more natural gas producing agents in the country.
“The participation of these agents in the auctions of exploration areas promoted by the ANP and eventual divestments carried out by Petrobras will aid in the process of opening up the country’s market,” Quintana said.
In this context, a “permanent offer process” could be of value in areas of exploration and rehabilitation. Exploratory blocks that contain marginal accumulations in mature fields could be of interest to smaller operators willing to make new investments in such areas. A new concession could increase the useful life of these fields and continue to generate jobs and regional income, he said.
In addition to new E&P players and free consumers, the entry of new traders into the market is expected to create more dynamism in market transactions.
Yet all new growth is precipitated against the backdrop of regulatory framework improvements, Quintana stressed. Specifically, pipeline expansions between transportation and distribution networks must be carefully regulated to ensure uniformity. In Brazil, gas transportation and gas distribution in local areas fall under separate jurisdictions. The construction of new pipelines must be standardized to avoid fragmentation.
A lack of coordination “plays against the integrated business model, withdrawing from the connection of supply sources through the transportation system, and in doing so, reduces the competitiveness, flexibility and supply security of the energy system,” Quintana explained. “The result is the formation of isolated gas markets.”
A crucial item to address is tariff calculation in an integrated market. Since the introduction of an entry-exit regime, the ANP began implementing a cost-weighted distance analysis within each transport operating system. However, the national gas network continues to use an integrated system, prompting the need to mitigate regional differences in transport tariffs, Quintana explained.
Furthermore, there is a need for change in the Brazilian tax legislation to guarantee efficiency in exchanges that should theoretically take place at the virtual negotiation point and commercial hub, as laid out in the New Gas Law, he said.
All in all, Brazil’s natural gas market is expected to grow if competition is kept fair under a stable and reliable regulatory environment.
Petrobras will continue to be a relevant player in the market, but the country is embracing others in its budding competitive environment.
“These are very exciting times for Brazil,” Borges said. “We want to create jobs in the upstream, in the industrial sector, in the natural gas sector and also in the transport sector. We are all striving to boost demand.”