Imposition of an agenda by new market players and “regulatory limbo” in the trade and distribution areas of natural gas impact the Brazilian market

It is necessary to expand consumption, do proper planning, and build infrastructure, however, above all, there is need for regulatory and legal security, in order to develop the natural gas market in Brazil. These are some of the conclusions drawn during the seminar “Regulatory Updates of the Natural Gas Market: Natural Gas for Growth Workshop”, organized last June 7 by the FAPESP-Shell Research Centre for Gas Innovation (RCGI) and by the Energy and Environment Institute (IEE). The event was coordinated by Professors Hirdan Katarina de Medeiros Costa and professor Edmilson Moutinho dos Santos (both from the IEE) and brought together researchers, professors, public administrators, business people, legal consultants, and players involved in the natural gas sector for a full day of discussions regarding the Natural Gas for Growth initiative, which was launched last year by the Federal Government.

The discussion began with nonconventional gas, which is still a polemical subject in Brazil where, by court order, public bidding contracts were suspended for all of the basin areas after the filing of civil public suits by the Federal Prosecutor’s Office.

“We have non-conventional gas in Brazil and the reserves are apparently very large. The sedimentary basins of the Paraná, São Francisco, Parnaíba Rivers have the most important reserves and are closer to the big consumer regions. In 2013, an estimate was made and confirmed that the Paraná basin, alone, has 226 trillion cubic feet (TCF). In all of Brazil, the estimate is 414 TCF. But an assessment is still underway,” stated Professor Colombo Celso Gaeta Tassinari, of the IEE/USP.

According to the National Petroleum, Natural Gas, and Biofuels Agency (ANP), which was represented at the event by the attorney Laís Almada, Brazil has the potential for developing the nonconventional gas market. “But the ANP’s believes that we must first develop conventional natural gas, because its exploration will furnish the geological data and will drive the creation of the infrastructure for flow and transportation. Only then, when the basins run out, would we begin to produce nonconventional gas. We have no idea when that would happen. What we can do is be prepared, from a regulatory standpoint; if the possibility arises for that production. And that is exactly what we are doing.”

Laís revealed that during the eleventh round of the public bidding, the ANP attempted to insert a specific rule for the development of nonconventional gas. “But we ran up against big cultural resistance, and detected the immense lack of knowledge on the part of the people regarding the exploration of nonconventional gas.”

Tassinari states that the environmental risks are controllable with modern hydraulic billing technologies, besides being similar to the environmental risks of the exploration of conventional natural gas.

“The question of the aquifers, which is crucial for ensuring our water reserves, is one of the critical points raised by public opinion regarding nonconventional gas. Our aquifers are 150 to 200 meters below the surface. And our shale gas reserves are 2,000 meters down. The question is: if fractioning is carried out way down there, could it contaminate what is above it? And there is only one answer: there is a possibility only if the generating rock, which contains the gas, already has natural fractures. If not, no chance. For that reason, geological surveys must be made previously. In places where the rock is already fractured, it is not wise to explore. But, just to give an idea of the level of sealing safety of modern fractioning technologies, seven layers of concrete and steel are used to line the entire well through the aquifer zone.”

Transport, distribution and commercialization – The second panel discussion of the morning dealt with the transport, distribution, and commercialization of natural gas. “These are the hottest topics in the discussions of Natural Gas for Growth and they deal with challenges that have been evident for a long time. It’s true that the Natural Gas for Growth program has an enormous agenda of topics, such as shared natural gas, which is the government’s gas. The government never had its own natural gas to worry about. We are also talking about privatizing the State distributors, about disinvestments of Petrobras, which is getting out of the natural gas business and of other businesses, and the entrance of new players to this sector,” explained Edmilson Moutinho, for the IEE.

Edmar de Almeida and Marcelo Colomer, both from the Economy Institute of the Federal University of Rio de Janeiro (UFRJ), discussed the changes and perspectives of the Brazilian market. Almeida spoke about production and pointed out two big transformations: the new business concept of Petrobras and the rise of new, large-scale producers.

“The natural gas industry in Brazil, despite the apparent lack of dynamism, grew a lot over the last 20 years, and it is successful, in terms of expansion. The structuring role of Petrobras was very important, but the industry has changed significantly and I believe that over the next five years it will change even more. Today, Petrobras is responsible for 70% of the natural gas produced in Brazil, but it has announced its disinvestment in the sector. We will have more players producing and importing. The agents will impose this agenda, because the way to structure the market will be different from that of the time when Petrobras was the main player.”

According to him, today, the structural conditions of the industry do not favor competition. “The players that control the distributors are few, there is a heavy concentration of production and the current regulations are basically against the idea of competition. Furthermore, the regulatory responsibility for commercialization is indefinite and there are no regulations regarding the access of third parties to the infrastructure for flow, treatment and regasification. Today, Petrobras controls 100% of the market.”

Almeida explains that, in his opinion, it should be a competitive market. “It’s where we leave the context in which one only commercializes natural gas with long-term contracts to a context of shorter deadlines, sometimes, very short. Briefly: more diversity of players and more short-term contracts.”

Colomer focused on the distribution and showed the “dilemma” of the distributors. “The distributors have two businesses: distribution and sale of natural gas. But they have a dilemma: do they grow their distribution business or do them maintain strong sales of the energy source?” He says that the distributors will now have to deal with an open market and a captive market.

Other peculiarities of the Brazilian market were pointed out by Colomer. “There has been a drop in the consumption of the distributors in recent years, but the distribution network has increased. Another unique point: the distribution segment has spread out, while transportation has been concentrated at Petrobras.”

According to Colomer, there is a regulatory and legal limbo hovering over the responsibility for regulating the activity of the sale of natural gas. “For example: the regulatory actions regarding the activities of the consumer and of those who produce their own natural gas are up to the States or to the Federal Government? Abegás, for example, thinks they are up to the States. But producers and other players think they are up to the Federal Government. There is no consensus, and no consensus was reached even during the preliminary discussions of the Natural Gas for Growth program.”

Colomer stresses that there is still insecurity and much apprehension regarding the disinvestments of Petrobras. There are signs that Petrobras would reduce its participation in the distributors, but that is still moving very slowly. “It’s one thing for me to have a distributor where my partner is also the owner of the natural gas. Another situation is when I begin to buy natural gas from other suppliers, that are not my partners. In that case, the market structure, exposure to risk, and the contractual portfolios must be rethought.”

Moutinho says he believes in the creation of a more efficient business environment for natural gas. But leaves a provocative thought in the air: “We need more consumption and new consumers. The natural gas market is worsening. The consumption of the biggest distributor in the county has been stagnant for six years. Above all, we must ask ourselves: do we really want natural gas? Because wanting more natural gas means emitting more CO2, and perhaps not fulfilling the Paris commitments, thus besmirching the green matrix that we have proudly maintained for at least 10 or 15 years, during the transition period.  And this leads us to the technological commitments: currently, 100% of Brazil’s driving force is electricity and there is no vision that natural gas could serve as a substitute for electricity, causing movement…. There still is not a clear vision of the roles that natural gas could play in Brazil.”

Professor Hirdan Katarina de Medeiros Costa, one of the organizers of the workshop, sees the discussion generated during the event as an opening for the subject in the university. “The discussions brought up a wealth of information and the audience was well selected. There were representatives of the distributors, like Comgás and Bahiagás, and of such State companies as Gaspetro. There were public administrators and representatives of regulatory agencies, as well as consultants and business people from the energy area. From the academic standpoint, the workshop was very successful, because it started a debate regarding Natural Gas for Growth within the university milieu. And, in this context, it has a tendency to be more impartial, because academe tends to show the scientific aspects of the natural gas supply change, in detriment of others. Here, therefore, we are talking about the economic and legal areas, which were the focus of the event.”