[NGW Magazine] Brazil pursues market liberalisation

This article is featured in NGW Magazine Volume 2, Issue 15

Petrobras must cut the amount of gas it buys from neighbouring Bolivia, as the government tries to open up the import market to other companies.

State-run Petrobras has to halve the amount of gas it buys from Bolivia, so that other importers and distributors can take a larger market share, the Brazilian government said in a study last month.

Specifically, the firm should cap the volumes of gas it purchases from Bolivia’s state-run Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) to 16mn m³/day, the ministry of mining and energy research said in its Panorama of the Gas Industry in Bolivia.

At present, Petrobras is the only company that is allowed to distribute Bolivian gas. Under a current take-or-pay mechanism agreement with YPFB, which expires in 2019, it is allowed to buy up to 30.1mn m³/d.

If Petrobras limits its imports, then the remaining 14mn m³/d would be available to other companies in Brazil that are present in markets like Sao Paulo, Parana, Santa Catarina and Rio Grande do Sul, the report said.

The government is also keen to lower imports from Bolivia because the domestic market in Brazil has strengthened and because it has concerns over future availability of gas supply in Bolivia.

The availability of natural gas in Brazilian territory has contributed to the development of the natural gas consumer market and contributed to a diversification of the Brazilian matrix of energy imports of energy goods, improving security of supply in the country, the report said.

When deciding whether to renew Brazil’s current gas supply contract with YPFB, Brazil will take into account factors like the potential of Bolivia’s reserves and the level of Brazilian demand, it added.

There is some concern over the level of Bolivian gas reserves which have remaining production life of around 13 years and could therefore be “insufficient for fulfilling both domestic demand and its gas export agreements with Argentina and Bolivia,” the report warned.

If global oil prices remain low, Bolivia may not get the investment it requires to start up new gas fields, it added.

“If executed, the government's proposal to liberalise the domestic natural gas market would eat into Petrobras' direct market share,” the Economist Intelligence Unit's senior commodities analyst Cailin Birch, told NGW. The state-controlled company dominates Brazil's fossil fuels sector, including upstream and downstream activities, as well as logistics and distribution, she said. “A move to open the market to other importers and distributors stands to boost competition, and to therefore drive down prices for consumers,” she added.

Mounting concerns

Bolivia has been supplying gas to its neighbour since the late 1990s via the Bolivia-Brazil Gas Pipeline, also known as Gasbol. Brazil is Bolivia’s biggest natural gas buyer, though it also imports in lower volumes to other Latin American countries including Argentina.

However, for at least a decade, there have been mounting concerns in Bolivia that Brazil would lower gas imports from the country.

Since Petrobras’ gas assets were seized in Bolivia in 2006, under the nationalisation drive of President Evo Morales, Brazil has been keen to lower its dependence on Bolivian gas.

Bolivian concerns peaked late last year when Petrobras inked a $5.2bn deal to sell 90% of the Nova Transportadora do Sul pipeline to a consortium led by Canada's Brookfield Asset Management. The pipeline carries gas from Bolivia, as well as offshore Brazilian fields, through the heavily industrialised states in southern Brazil. As well as Brookfield, the foreign group acquiring the pipeline includes two Asian sovereign wealth funds: China-based CIC Capital and Singapore-based GIC Private.

In an effort to assuage Bolivian fears, Bolivia’s vice president Alvaro Garcia Linera said at the time that Brazil planned to continue buying gas from its neighbour but through private companies rather than solely through Petrobras.

In March, Bolivia’s state-owned YPFB Chaco, the E&P arm of YPFB, said it was looking for new buyers in Brazil to replace the lost business with Petrobras. It said at the time it was involved in talks with several potential buyers in Brazil.

Petrobras still strong

Even though the changes would mean Petrobras losing some of its market share, the overall impact on the firms' business “is likely to be limited,” because of its extensive reach, said Birch. The company has a stake in 21 of the 27 natural gas distribution companies active in Brazil, according to the US Energy Information Administration.

In addition, Petrobras is keen to reduce gas imports because domestic gas production is growing and is expected to continue growing, experts say. The firm, which has been embroiled in a major corruption scandal over the past few years, has shed a number of assets in recent years in order to focus more on its key oil and gas assets, especially those in Brazil’s pre-salt basins.

Brazil’s gas production is expected to go up by around 55% over the next decade, from 61mn m³/d to about 95mn m³/d in 2026, the government said earlier in July, according to local reports.

Most of that growth is expected to come from pre-salt gas production, which accounts for around a third of total net production. That could rise to 50% by 2026, according to government statistics. Those forecasts are set to feature in a 10-year energy plan, prepared by the government research firm Empresa de Pesquisa Energetica, which will be published in early August.

If the effect of the proposal is likely to be limited for Petrobras, it does have “important implications” for Brazil's natural gas market overall, said Birch. “Natural gas demand is rising quickly ­– Brazil consumed 1.4 trillion ft³ in 2014, up from just 0.6 trillion ft³ in 2004,” she said. The country sources around two-thirds of its natural gas imports via pipeline from Bolivia, which exposes it to potential supply disruptions if there is a political or diplomatic dispute with Bolivia, such as the one in 2006.

The proposal could end up having unintended consequences for Brazil’s gas market, because producers may in fact reduce their pipeline imports as a result of any import restriction imposed. “Given the limited pipeline infrastructure, a move to restrict imports from Bolivia could encourage other importers to instead increase their purchases of LNG. This would both help to keep energy prices down – the global LNG market remains heavily oversupplied, and prices look set to remain weak in the medium to long-term – and to diversify, and therefore de-risk, Brazil's energy sources," she added.

It is clear that change is afoot in Brazil’s gas market and that the days of Petrobras’ dominance are numbered ­– but how exactly the future will look is still open to question.

Sophie Davies