Brazil New Gas Law Policy Brief

The development of an independent natural gas market in Brazil has long been a goal for the government and industry alike.

INSTITUTE OF THE AMERICAS P O L I C Y B R I E F BRAZIL’S NEW GAS LAW By Nelson Narciso Filho Non-Resident Fellow, Institute of the Americas & President of NNF Energy Consultancy



The development of an independent natural gas market in Brazil has long been a goal for the government and industry alike. But it has also been traditionally marginalized by the oil sector and the heavy centralization of production and infrastructure in the hands of Petrobras. For decades the potential of natural gas as an energy source was neglected. In 1997 the Brazilian government introduced the Oil Law, which opened the Exploration & Production market, and where natural gas was treated as an oil by- product. Two years later, in 1999, the Brazil-Bolivia gas pipeline (Gasbol) went into operation, forming an important milestone for the consolidation of natural gas in the Brazilian energy matrix. By 2009 the first Gas Law was enacted. At the time I was a director at ANP (the national regulator), responsible for the natural gas segment and I know from firsthand experience that drafting of the bill was not an easy task. Since 2013 the industry has called for more ambitious and comprehensive regulation specifically for natural gas, and by 2016 there were early results of this movement with the launch of the Gas to Growth initiative.

natural gas sector and to decrease the participation of the State in the sector. The new gas law is a direct consequence of the work started by the Gas to Growth initiative. In April 2021, Brazilian President Bolsonaro enacted the new gas law (nº 14.134/2021), which establishes a new legal framework to restructure the natural gas sector in Brazil. This new regulatory framework presents the conditions to improve economic competitiveness in the segment, encourage the participation of new agents, promote market decentralization, foster opportunities for new investment and the monetization of the pre-salt gas, reduce bureaucracy and lower costs for the consumers. The purpose of this Policy Brief is to set forth an analysis of the new gas law, its implementation and how it will impact the Brazilian oil & gas market. The new gas market in Brazil Natural gas is considered a key fuel in the global energy transition and currently accounts for 12% of the Brazilian energy matrix. It is expected to become a fundamental driver in the country’s reindustrialization because it can be employed in several industries, such as clay and glass, pulp and paper, metals, fertilizers, cement and petrochemical industries.

The program’s objective was to propose feasible measures to improve the normative framework of the

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have links with the carrier. Therefore, the law intends to create independence between the chains of the gas industry, in a way that new players are not inhibited by verticalization of activities and establishment of natural monopolies. The gas law also grants ANP authority to adopt mechanisms that reduce supply centralization, such as bidding rounds for exploration areas, transferring of transport capacity, and measures that may require agents to offer more natural gas in order to stimulate competition. There are several changes in the transport sector too. The new law simplifies the framework of transport activities, changing from a concession regime to authorization regime, where ANP is responsible for authorizing construction of new pipelines. If there is more than one carrier interested, ANP shall conduct a public bidding process to determine the most advantageous project to society. The law also grants third party access to gas essential infrastructure such as pipelines, natural gas processing units and LNG terminals. Another important aspect in the law is the new contractual model for contracting pipeline capacity, which includes the establishment of an entry and exit model for transport activities, where either could be contracted independently of each other.

Photo: "LNG Carrier" by HerryLawford is licensed under CC BY

The new gas law seeks to facilitate this process through four pillars: promoting the entrance of new players, making the transport sector attractive to new players, fostering competitiveness in natural gas trading, and reducing the price of natural gas to consumers. With regards to decentralization and entrance of new players, the new law brings the concept of market unbundling by preventing companies that operate in E&P, import or commercialization of natural gas to participate in transport and distribution activities. It also prohibits companies that contract transport to

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The new law also regulates natural gas storage, which had not been fully covered in previous regulations but was sought by the oil and gas industry. It also grants ANP the authority on import and export activities. With regards to natural gas commercialization, the new law brings the standardization of trading contracts, harmonization of state and federal regulations, which includes the regulation of the free consumer. Prior to the Law, consumers had to acquire natural gas from state distribution companies, and now they can acquire directly from any agent qualified to exercise commercialization of natural gas activities. Consumers whose necessities are not met by state distribution companies are allowed to build their own facilities and pipelines, which are to be operated by the state distribution companies. The role of Petrobras in the new gas market Prior to the Gas Law, the public organization responsible for the promotion of free competition (CADE) imposed on Petrobras a Term of Termination of Conduct (TTC), where the company agreed to sell all its assets in the transport and distribution segments in an

effort to de-verticalize its dominant position in the natural gas sector.

Photo: By Travel mania/Shutterstock

In order to comply with the terms of the TTC, Petrobras intensified the sale of assets in the natural gas sector. The company has sold most of its transport assets, including 100% of its stake in TAG (Transportadora Associada de Gás), its main transport company. The company has also started the process to sell its stake in Transportadora Gasoduto Bolivia-Brasil (TBG), responsible for the gas imported from Bolivia. Petrobras has also initiated the process of selling Gaspetro, a subsidiary that holds equity interest in 19 of the 27 Local Distribution Companies in the country.

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droughts; this is increasingly the case with extreme weather patterns of the last several years. Due to energy security concerns, the dispatch of thermal plants remains fairly common in the country. Furthermore, following global trends that place natural gas as an important energy transition fuel source, the Ministry of Mines and Energy (MME) intends to promote the deactivation of thermal plants powered by coal and fuel by the end of the decade, converting them to natural gas or fully deactivating them. However, the expansion of gas-powered thermal plants may increasingly find hurdles in the future, due to the diversified energy matrix available in Brazil and the expectation that renewable sources, such as solar and wind, will tend to grow. Therefore, the market expects that the demand for gas will shift towards the industrial segment. In 2020, the primary natural gas destinations were industrial sector (43%), power generation (38%) and the automotive sector (9%), with domestic households accounting for only 2% of consumption. Currently, Brazil imports natural gas from nine countries, with Bolivia and the USA heading the list, accounting for 81% of import. Bolivian gas comes via the Gasbol pipeline, while American gas is imported via LNG. In January 2021, Brazil imported, on average, 20.38 million m³/day

By most estimations, Petrobras seems satisfied with this position, as it has long stated its desire to reduce the number of activities involved and focus on core businesses – E&P activities. Who wins? In theory the new gas market should benefit the sector’s entire production and value chain. Ultimately, it could make the Pre-Salt more attractive to investors, given its large associated gas reserves. Uncertainties related to the lack of a guaranteed gas demand have caused the IOCs to postpone the Final Investment Decision in Pre-Salt projects. The Brazilian industrial sector hopes that the law can promote the country’s reindustrialization based on more competitive energy sources. For the chemical industry, which is the largest industrial consumer of gas in the country, it can account for 80% of production costs, thus making production unfeasible at current prices. The electricity sector should also benefit from the new market model given demand for natural gas for thermal power plants. Even though hydropower dominates most of the Brazilian electrical matrix, hydrological risk is always a possibility due to seasonal

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from Bolivia - almost half of the country’s imported supply of 41.13 million m³/day. Nevertheless, Bolivia represents a supply risk for Brazil, as it has not had reserve replacement in the last 10 years. The movement of O&G companies Given the potential of the Brazilian gas market, many companies have been positioning themselves to explore, produce and monetize onshore and offshore gas reserves. The day after the law was enacted, Equinor announced the transport route for the natural gas production from Pão de Açúcar, one of the main natural gas projects under development in Brazil scheduled to go into operation in 2026. The Norwegian company is also developing Bacalhau, a Pre-Salt reservoir of high quality oil and associated gas that makes it one of the biggest oil discoveries of the last decade in Brazil. BP has been building the largest natural gas thermoelectric park in Latin America, located in Porto do Açu (state of Rio de Janeiro) to make commercial use of Pre-Salt gas. The British company will be the exclusive supplier of the liquefied natural gas that will supply the project. The project involves the construction of two thermal plants powered by natural

gas which, together, will reach 3 GW of installed capacity.

Shell has invested 700 million US dollars to build a natural gas thermoelectric plant in Macaé (state of Rio de Janeiro) called Marlim Azul. The plant, expected to start operation in 2023, will use natural gas produced by Shell in the pre-salt fields. However, the opportunities are not just restricted to the Pre-Salt layer. In the Sergipe-Alagoas basin, ExxonMobil owns 11 exploratory blocks with a huge potential for gas discoveries. On the other hand, the Brazilian independent company Eneva has been developing the Reservoir-to-wire (RW2) model that combines the exploration and production of onshore natural gas with the generation of electricity. The company will apply the R2W model in the states of Amazonas and Maranhão.

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The future challenges Despite promising expectations, it is still too early to say whether Brazilian gas will be competitive in the international market or even when compared to other domestic sources of energy. The main challenge remains reducing the price of gas. With the introduction of the gas law, it is expected that a further opening of the gas sector, with more producing companies competing in the market, can bring greater transparency to the composition and disclosure of prices. A potential increase in the supply of gas and quicker, cheaper access to transport facilities will play a part too. BNDES (Brazil’s development bank) estimates that the domestic supply of gas could double over the next 10 years, mainly from the Pre-Salt production. Today, Brazil has some of the highest prices in the world for natural gas, which seriously hinders the competitiveness of the national industry. According to the Ministry of Mines and Energy, in 2020, average prices for the industrial sector remained around $12- 14/MMBTU, which stands at the triple of US prices and double of most European countries. Industrial production at this rate is practically unfeasible. Industry experts state that, in order to be competitive for the

petrochemical industry, natural gas needs to be around $ 5-7 per million BTU.

Other relevant topics to note are the challenges imposed by Pre-Salt offshore conditions and the high content of contaminants such as CO 2 and H 2 S, whether it will be necessary to intervene in the levels of gas reinjection in the Pre-Salt fields, whether there will be a steady demand to absorb a larger supply of gas, and how can the market attract investments for the construction of new outflow routes for the pre-salt gas. Transport is another challenge for the new gas market. Brazil only has 9,400 kilometers of gas pipelines. Argentina, the USA and Europe have 16,000 km, 497,000 km and 200,000 km of pipelines, respectively. Oil and gas platform. Photo: Shutterstock/curraheeshutter

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About the Institute of the Americas E stablished in 1981, the Institute of the Americas is an independent, inter-American institution devoted to encouraging economic and social reform in the Americas, enhancing private sector collaboration and communication and strengthening political and economic relations between Latin America, the Caribbean, the United States and Canada. Since 1992, the Institute’s Energy & Sustainability program has played a crucial thought-leadership role in shaping policy discourse and informing policymakers and investors on the most important

The next steps regarding the implementation of the law is the publication of the decree that will regulate it, harmonization of the state regulations for the commercialization of natural gas. Brazilian states have autonomy to legislate on the topic and the rules are often different. From a regulatory point of view, it is important to consider that ANP will play a more active role in the gas sector. It is also important to stress that the success of the new gas law hinges on the conclusion of the agreement between Petrobras and CADE related to the divestment of assets, and the regulation on access to essential infrastructures. Overall, the challenges can be intimidating, but the positive prospects should outweigh the worries. The Gas Law is a necessary step forward, the natural gas segment has the opportunity to establish itself as an independent sector as seen in other parts of the world, and the country should benefit from it.

trends in the energy sector. About the Author

Nelson Narciso is President of NNF Energy Consultancy, Non Resident Fellow of Institute of the Americas and Former Director of The National Petroleum Agency (ANP) the Brazilian Oil and Gas regulator agency.

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