Group of RCGI researchers warns of the crucial nature of the Supreme Court’s decision regarding the difference between the “transport” and “distribution” piped natural gas

Besides the uncertainties regarding demand, one of the obstacles inhibiting investments in liquefied natural gas (LNG) projects in Brazil is legal insecurity. A case in point is the Gemini Project, which is a joint venture between Petrobras and White Martins for supplying LNG that has been in operation since 2006 while in the midst of a legal battle. The consequences of this conflict, which centers on a legal loophole regarding the definition of transporting and distributing natural gas, was the subject of a presentation of the FAPESP Shell Research Centre for Gas Innovation (RCGI), held last May 8, in São Paulo.

“The process has been held up in the Federal Supreme Court for several years, awaiting a decision by the plenary session. The delay has been so long that it is even possible that the consortium of companies that operate the Project could be dismantled before the case is tried by the Court, since during the administrative and judicial proceedings the members themselves have publicly disagreed,” lamented Professor Hirdan Katarina of Medeiros Costa, coordinator of the RCGI’s Project 21 and responsible for the organization of the event.

“At the time, the Project was important for the State. Today, the plant is considered to be too small and outdated. However, the legal imbroglio and the all the indefiniteness about it can negatively influence investment decisions on similar projects. The conflict was unnecessary and lost its reason for being, but it could jeopardize the LNG market, depending on the decision to be handed down by the STF,” stated the Coordinator of the RCGI’s Energy and Economy Policies Program, Edmilson Moutinho dos Santos.

The crux of the problem – The Gemini Project was created for the purpose of taking LNG to places that are not served by gas pipelines, within a range of up to one thousand kilometers from the liquefaction plant in Paulínia, São Paulo. According to the contract, would operate the plant and Petrobras would supply the natural gas. But, right from the start, the presence of Petrobras in the consortium stirred controversy.

The Energy Public Services Commission (CSPE) of the State of São Paulo, which was the sector’s regulatory agency at that time, objected, saying that supplying natural gas in a State concession area was a public service distribution activity, subject to regulatory tariffs and remuneration for the São Paulo Gas Company (COMGAS). In fact, Article 25 of the Federal Constitution states that the distribution and sale of piped natural gas is a public service and the responsibility and prerogative of the States. Also, Article 177 of the Constitution establishes that the Federal Government monopolizes the transport of natural gas.

For the consortium, the supply of piped natural gas for the Gemini Project would merely be a transportation activity, pertaining to the Federal Government, and not distribution, which pertains to the State.

“Since Brazilian legislation does not differentiate between ‘transport’ and ‘distribution’ according to the physical characteristics of the infrastructure (pipe diameter, pressure, etc.), a loophole was found for contesting the use, by the consortium, of a few meters of pipeline to transport the natural gas from the Gasbol branch line, where it arrives, to the liquefaction plant,” Moutinho explained.

He says that the Gasbol branch line practically takes the gas inside the plant. And the pipelines used to take it from that branch to the plant are on the property of Petrobras. “Nevertheless, the situation is subject to dispute. The law leaves room for this controversy. But that could be avoided if the concept of a common good had prevailed,” he regretted.

Indefiniteness – The challenge of the CSPE ended up going before the Supreme Court, since it involved the Constitution, and there are injunctions granted by Justices Ellen Gracie and Carmen Lúcia. “Justice Carmen Lúcia dealt with the merits of the issue, recognizing the responsibility of the States, as well as the fact that the Project should continue to be developed until the subject comes before the Court,” Professor Hirdan said. “This is because the companies involved in the Project had filed a petition for injunctive relief in the Federal Court, requiring that the CSPE abstain from the practice of any act or of applying any penalties.”

The case raises concerns on the part of the RCGI’s researchers due to the lack of a defining decision by the Supreme Court. “Dealing with subjects like Carbon Capture, Utilization, and Storage, which we are studying in other RCGI projects, cannot be bound up in this type of conflict. It is necessary to create a scenario that favors negotiation,” Hirdan stressed, who works in conjunction with researchers in other RCGI projects, such as No. 34, which is focused on carbon storage in underwater salt caves. Professor Claudio Mueller Prado Sampaio, who is one of the researchers involved in Project 34, was also present at the event.