SAO PAULO – The natural gas industry in Brazil is relatively new—large-scale development only began in 1999—but it has quickly become a key element of the national energy matrix, increasing its share to 11 percent in 2012. Domestic supply has grown on average 5 percent per year over the last decade, but the potential for further expansion is significant—the country has 14.7 trillion cubic feet (TCF) of proven reserves, of which only 5 percent have been awarded for exploration and production. Three-quarters of domestic production is located offshore, in areas that contain significant prospects—including the giant ‘pre-salt’ gas reserves.
Still, the future of the gas industry is uncertain.
The government is keen to give a much-needed boost to the gas industry, particularly because Brazil still imports gas to meet roughly half of its domestic demand. Its main supplier, Bolivia, has proven to be unreliable because of political instability. A shortage of Bolivian gas in 2007—following the 2006 nationalization of the industry by President Evo Morales, which included the expropriation of some assets owned by the Brazilian state-owned company Petrobras—highlighted Brazil’s need for alternative sources. The government began diversifying by importing liquefied natural gas (LNG) from Trinidad and Tobago, Nigeria and Qatar. Petrobras has built two regasification terminals since 2008 and is completing a third this year.
The government has also heavily invested in pipelines: the Gasene project in 2010 connected the existing southeastern gas network with the northeast of the country. Most importantly, following six years of discussions, Congress in 2009 finally approved a new framework for the gas industry. The so-called Gas Law has been in force since 2010, when a presidential decree clarified obscure points left by the legislators. Its approval fostered huge expectations for the sector: projections by the Ministry of Mines and Energy indicate that Brazil could become an exporter of natural gas by 2020.
Despite these efforts, several factors have the potential to derail Brazil’s much sought-after gas boom.
First, the new legislation is not as comprehensive as most industry players would like. Different pieces of laws define rules for distinct parts of the supply chain. The Gas Law only establishes rules for the processing chain of natural gas, which includes transport from gas fields to processing units. A much-welcomed change was the permission for private investors to build their own pipelines, which could foster new consumer clusters across the country. However, the rules for gas exploration remain attached to the Oil Law, which regulates the extraction of crude. Furthermore, the distribution of gas to consumers depends on state-level regulation—and many states are lagging behind with out-dated regulations.
Second, the Gas Law did little to alter Petrobras’ stifling dominance of the sector, from extraction to production, transport and distribution for consumers—a legacy of the official monopoly the company held until 1997. Any company willing to compete with Petrobras in the extraction business would still have to rely on transport facilities owned by Petrobras and to sell gas to a distributor, which in most cases has Petrobras as a partner. Although the new legislation gives the National Petroleum Agency (ANP) the prerogative to define prices, Petrobras still controls more than 90 percent of domestic production, meaning that competition is almost non-existent and that the state-owned entity still has de facto power to set prices. Petrobras is also the largest consumer of natural gas.
Petrobras’ price policy calculates the tariff for gas based on oil prices, meaning that domestic tariffs are high compared with international prices. Although this may be positive for Petrobras, it represents a major hurdle for consumers who must bear higher costs. A study carried out by the Brazilian business association Firjan in 2011 showed that the average tariff paid by industrial consumers was $16.84 per million British thermal units (BTU), 17.3 percent higher than the average price in a poll of 23 countries—and 231 percent above the prices charged in the United States. This policy is one of the key reasons behind the stagnation of demand (excluding Petrobras itself) since 2008.
A factor that could dampen the gas boom is related to the consumers’ profile. The main market for natural gas in Brazil is the industrial sector, which received fiscal incentives to become a gas consumer. However, the local manufacturing industry has been struggling since the 2008 financial crisis, which caused Brazil’s currency, the real, to appreciate and global demand to decline. Despite continued government-led stimulus packages, industrial output fell 2.7 percent in 2012. Households make up only a minor share of the market as most homes in the country have no need for heating systems, further constraining the expansion of the market for natural gas. In addition, a growing proportion of the limited domestic gas supply is being used for electricity generation to offset drier than usual weather, which severely affects the productivity of hydroelectric dams.
The result: many manufacturing firms are now wary of shifting to gas because they fear being caught in a gas shortage—a far cry from the much-expected natural gas boom predicted by government officials.