An Overview of the Brazilian New Gas Market and the Electric Sector
This week the Brazilian Chamber of Representatives approved the bill 6407/2013. Known as the “New Gas Law”, it is part of the Gas to Grow¹ program (Gás para Crescer) and establishes the new legal framework for the Brazilian Natural Gas market.
The program aims to boost the market, facilitating the operation of private companies in the gas sector. The main changes proposed are:
- Ensure non-discriminatory third-party access (TPA) for essential facilities (e.g., upstream pipelines, gas processing plants, and liquefied natural gas terminals);
- Replace the point-to-point contracts by an entry-exit system with liquid virtual trading points;
- Guarantee an independent transmission system;
- Change the auction regime for new pipelines and expansion from concession to authorization or permit, reducing the process of creating new networks;
- Harmonize the state and federal regulation regarding Natural Gas.
The Brazilian government will have to implement all the changes, ensuring legal certainty for both the contracts that have already been signed and must be fulfilled and new investors, who need to know that it is safe to make large investments in the sector.
That alone will be a great challenge since the Brazilian law system is complex by itself. Adding to that, a conflict of interests between the federal and state governments can turn the situation in a very nasty way.
Besides that, facilitating safe access to the Natural Gas value chain does not necessarily make the Brazilian market attractive. The government needs to create measures to increase gas consumption, which will only be achieved if the gas price is competitive and if the government derives some of his politics.
That being said, let’s take an in-depth look at some Natural Gas data to understand how the market behaves today.
How is the demand for Natural Gas in Brazil?
As shown in Graph 1, the demand for natural gas in the past years was driven by the gas reinjection inside petroleum reservoirs. Excluding the leveraging caused by the reinjection, gas consumption in Brazil behaves competitively stagnant, after all, there is no gas pipeline to distribute it homogeneously within the country. And if that is not the case, the gas price is often not attractive.
Graph 1 also shows that the dependence on imported gas, which comes mainly from Bolivia drained through a gas pipeline and from the United States via LNG tankers, has decreased as production increased.
Reinjection: Reservoir Strategy or Lack of Structure?
It is important to explain that the Natural Gas produced in the pre-salt is gas-associated. This means that the gas is dissolved in the oil and recovered at the same time. Over the years, the pressure inside the reservoir decreases due to the production of hydrocarbons, and it is necessary to use special techniques to maintain the pressure at an economic level.
Although some consultants in the sector claim that the reinjection occurs due to lack of flow structure, according to Anelise Lara, Petrobras’s Chief Refining and Gas Natural Officer, the increase in the reinjection is due to techniques applied to maintain the pressure in the pre-salt reservoirs, improving its recovery factor and making oil production more efficient.
It makes sense to prioritize oil production, since it is more profitable than Natural Gas, given the difference in sales price between them.
In addition, corroborating the information given by Anelise, since 2016, Petrobras has put into operation the Route 2 gas pipeline², which, associated with Route 1, makes the flow from the pre-salt to the gas treatment units.
It is also interesting to notice that gas reinjection has no correlation (see Graph 2) to any metric that points to Natural Gas waste (e.g., adjustments and losses, gas flaring).
How are sales structured by segment?
Graph 3 shows that the two largest natural gas consumers are the Industrial and the Electric Generation segments, followed by the Automotive one. The residential and commercial segments have very low consumption; after all, we are talking about a tropical country where air-condition demand is much higher than for heaters.
Still, the commercial segment could benefit from using air conditioners and power generators powered by Natural Gas. Just as the automotive segment could invest in fleets of gas trucks, reducing greenhouse gas emissions caused by diesel consumption.
These are just a few examples of how an increase in the Natural Gas supply could be absorbed in the country, contributing both to the economy and mitigation of global warming, as Natural Gas produces almost 30% less CO2 emissions than oil when combusted (Graph 4).
How can the New Gas Market impact the Energy Sector?
Brazil has the third-largest electricity sector in the Americas, behind the United States and Canada. Furthermore, the country proudly boasts one of the cleanest electric energy sources in the world³, as shown in Graph 5.
Unfortunately, the construction of new hydro dam plants is not an option, since Brazil has one of the strictest socio-environmental laws in the world, and the potential areas for construction are located in the Amazon.
On account of that, the country has invested in wind farms and solar energy, which is environmentally-friendly but does not guarantee energy security, once these energies are intermittent and are vulnerable to weather conditions.
Speaking of energy security, in 2001, Brazil suffered a critical energy shortage that became known as the Blackout Crisis⁴, caused by the low rainfall, lack of planning, and investment in energy generation/transmission system.
Even after this episode, the country continued to invest in intermittent energy sources. The main consequence, according to Adriano Pires, founding partner, and director of the Brazilian Center for Infrastructure (CBIE), is that the spinning reserve in the electric system has fallen in the last 15 years from 8.6 months to currently less than 3 months⁵. And for the record: the Brazilian dry period lasts 7 months (Graph 6).
Graph 5 also shows that around 2012 there was an increase in the use of thermal energy. This happened precisely because the hydrological regime was not favorable to hydroelectric energy production, and it was necessary to resort to thermal dispatch outside the order of merit.
Besides being more expensive, these dispatches are also more polluting once they include not only Natural Gas, but also diesel, fuel oil, and coal.
Conclusion
Regarding the electric sector, increasing natural gas production and distribution can be an opportunity to decrease the electricity price for consumers and bring more stability to the sector, especially if the government adopts natural gas thermoelectric plants dispatched at the base of the electrical system within the order of merit. Spoiler alert: conforming to the report of the National Energy Plan 2050⁶, the priority still will be wind power plants.
In addition, the use of Natural Gas also represents fewer greenhouse gases being vented into the atmosphere, since, despite being a fossil fuel, it is the least risky to the climate.
Note: If you are curious about the pre-salt structure you can check this dynamic map that Petrobras has made available.
References:
- Programa Gás Para Crescer. Secretaria de Petróleo, Gás e Energia, Ministério de Minas e Energia, 24/06/2016.
- Rota 2. Comunicação Bacia de Campos, Petrobras.
- JOHNSON, Slade. Brazil has the third-largest electricity sector in the Americas. EIA, 23/03/2017.
- PAMPLONA, Nicola e TEREZA, Irany. Em 2000, o jeito foi racionar para não ter apagão. O Estado de S. Paulo, 26/06/2006.
- PIRES, Adriano e PASCON, Bruno. O Papel das Termeletricas a Gás Natural na Redução das Tarifas de Energia. Poder 360, 04/08/2020.
- Relatório do PNE(2050). Ministério de Minas e Energia.
