Brazil passes law to open up gas market to private investors

Monday, 05 October 2020
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The Brazilian lower house of the National Congress has approved a bill to further open up the natural gas and LNG terminal market to private competition and break the monopoly held by state-controlled energy company Petroleo Brasileiro, known as Petrobras.

The bill passed in early September by 351 votes for to 101 against will now go to the Senate for expected final authorization. The new legal framework changes natural gas distribution from a regime of concessions by the government to one of authorizations by the country’s oil and gas regulator, Agencia Nacional de Petróleo, Gás Natural e Biocombustíveis (ANP).

Analysts said the first result would be to reduce regulatory obstacles to building new LNG terminals, natural gas pipelines and other infrastructure needed by the South American nation. Petrobras was supposed to have lost the monopoly in the oil and gas sector by a law passed more than 20 years ago, though in practice kept a virtual monopoly in the natural gas industry.

High hopes for US$7bn in private investment

Brazilian congressmen argued that the new natural gas law would attract more than US$7 billion in private sector initial investments and generate millions of jobs.

Petrobras has gradually been scaling back control of Brazil’s energy industry by selling assets, including thousands of miles of pipelines. The state-owned oil and gas major began the binding phase in the sale process in July 2020 of its 10 percent remaining stake in gas pipeline firm Nova Transportadora do Sudeste (NTS) at the same time as reviving the possibility of floating LNG production from some of its prolific offshore oil and gas basins.

NTS provides natural gas transportation in a network of 2,048 kilometres located in the nation’s southeast and connecting Rio de Janeiro, São Paulo and Minas Gerais. The NTS system is also connected to the Bolivia-Brazil pipeline to the west and natural gas terminals to the east and south.

A group led by Canada’s Brookfield Asset Management Inc., which in October 2019 bought a stake in the Cove Point LNG plant in Maryland, purchased 90 percent of NTS from Petrobras in 2016 for $5.2 billion.

Ahead of the law being passed Brazil began the process to lease its LNG regasification terminal and associated facilities located in the northeast state of Bahia, a floating storage and regasification unit and the busiest in Brazil.

The Bahia terminal in Salvador is one of three controlled by Petrobras in Brazil. The two others are situated at Pecem in the northeast state of Ceara and at Guanabara in the state of Rio de Janeiro and which has been idle since 2018.

Opening up terminals for third party access

While Brazil’s three terminals have been significantly under-utilized, the government is now opening the way for third-party access. The natural gas reforms and the reduction in the market power of Petrobras began back in 2015 when the company finalised the sale of 49 percent of Gaspetro, the natural gas distribution firm.

Renewables other than hydro power are also expected to grow along with LNG-to-power projects led by companies such as Golar Power, a joint venture partnership comprising Golar LNG and US equity fund, Stonepeak Infrastructure Partners. Its activities are centred on northeast Brazil, including a project in Sergipe, the smallest Brazilian state. Golar Power has also signed an accord with the Brazilian state government of Pernambuco to develop an LNG import terminal in the Port of Suape.

The road to liberalisation has been long-winded and bumpy, analysts commented, but in the last 4 months the impetus for reform has taken hold. A new gas law will likely be enacted before December, effectively setting rules for a competitive gas market.

Today, the Brazilian gas market is small compared to its vast resource base and demand potential. It is also highly concentrated mainly due to the overreliance on Petrobras to develop and coordinate the gas market. Put in this prime position, Petrobras soon became the incumbent supplier by spreading out across each segment of the value chain, effectively crowding out competition.

To tackle the challenge, the Bolsonaro administration enacted liberalisation guidelines in 2019 under an initiative branded as the New Gas Market (NGM), calling for unbundling gas supply from transport and distribution; non-discriminatory third-party access in essential infrastructure; and the harmonization of tax rules.

The National Confederation of Industry, the largest industry association, said it believes liberalisation can bring prices down by 50 percent and triple investment in the sector to reach US$31 billion per year by 2030. For Economy Minister Paulo Guedes, the reform will bring a “shock of cheap energy” to the Brazilian industry, as government calculations suggested that a mere 10 percent reduction in the price of natural gas could increase industrial GDP by 2.1 percent. 

 

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