The Institute of the Americas held a high-level meeting on Nov. 8, 2017 in Rio de Janeiro to discuss Brazil’s energy sector with a focus on gas as a “disruptor”. Brazil’s offshore pre-salt production has been well publicized and Brazil currently surpasses Venezuela in oil supply. The gas sector, on the other hand, has not received as much attention. It represents a new resource for Brazil’s energy matrix and Brazil’s growing role in the global energy market.
Natural gas as a disruptor links closely to oil production in Brazil’s offshore fields. Officials are increasingly recognizing the need for more market friendly policies in line with the international oil industry. In essence, the policy direction is to open the fields to international investment requirements, promote competition and reduce state intervention. Petrobras, the national oil company, will continue to participate and own production. But Brazil’s oil and gas sector will increasingly be partnering with private companies for the exploration, production and distribution of gas and oil. This shift has attracted attention to the renewed rounds of oil and gas field auctions.
Decio Oddone, Director of Brazil’s Petroleum Regulatory Agency (ANP), summarized the current state of gas production from the Presalt formation. Almost 80 percent of the 114 million cubic meters of gas produced a day comes from off-shore wells. Currently, a substantial percentage of this production is reinjected, burned off or not used due to insufficient pipelines and infrastructure to bring the gas to the market. The objective of the “Gas for Growth” program is to radically change this scenario by making the product available at a competitive price. According to ANP, Brazil has over 600 billion cubic meters of gas in proven reserves with probably over twice as much in as-yet-to-be explored fields. Brazil has abundant energy, which can be used effectively in the midterm given sufficient investment and adequate management.
The production and market challenges include ramping up production to reduce unit costs, improving delivery infrastructure and reducing the marketing strictures. Currently Bolivia is Brazil’s main source of natural gas with sporadic imports from other countries on the spot market. James Story, the United State Consul General in Rio, noted in his presentation that the US has exported LNG to Brazil six times during the past year.
Brazil expects to develop a new gas market through a step-by-step process that has already started. It should be completed within the next 4 to 5 years.
Melissa Mathias of ANP listed these major steps:
- Implementation of best international practices
- Attract investors
- Recruit a wider range of participants and agents
- Promote access to information and a dynamic investment environment
- Participate with those now in the sector
- Promote and open up competition in the supply of natural gas
- Adhere to contracts
Looking at the production and supply chain, the movement is away from the state monopoly held by Petrobras. Petrobras has overseen production, transportation, distribution and price regulation for the wholesale market. Brazil’s oil and gas industry will eventually provide access to other companies at all levels from production to delivery to the end user.
The proposed liberalization represents a major shift in the ongoing evolution of Petrobras and Brazil’s strategy. Presently, there are only 3 LNG terminals located in Pecem (north/northeast), Salvador (northeast) and Sao Paulo (southeast). Some 9409 kilometers of gas pipelines are currently tightly regulated by ANP and Petrobras. The new proposal would open this system of storage and transportation and attract investment funds for new infrastructure. Companies would compete in a more transparent market. This will certainly include major building of infrastructure for production, storage, transportation and end user delivery with an increasing focus on electricity from gas.
“Gas to wire” is becoming more important for electricity generation. As is well known, Brazil’s power costs are among the highest in the world even though hydroelectric plants generate more than 70% of the nation’s electricity. However, draughts, changing weather patterns, increasing demand and frequent fluctuations in hydroelectric supply open an immense field for gas and other alternative forms of energy.
Additionally, there is consensus among all productive sectors that “custo Brasil” has created an unacceptable drag on economic growth. Thus, “Gas for Growth” should help Brazil recoup industrial production and advance in the global market, through deregulation, opening and making competitive an underused energy source.
Nearly all of the 20-plus speakers at Institute of Americas’ Rio event were positive about Brazil’s economic and energy outlook. Statements ranged from Brazil being “back on track” to “making up for lost time.” Many were also optimistic about the enthusiastic participation of major oil producing companies in the recent rounds of auctions. Exxon Mobil, Shell, Total, Sinopec and others paid significant premiums for exploration rights. On the other hand, several speakers brought a dose of moderation to the proceedings. Concerns included the need to view gas as closely tied to oil production. There has long been a standing nationalistic view that Petrobras to safeguard Brazil’s oil. This “oil is ours” (O petroleo é nosso) mentality could thwart efforts to open up Brazil’s oil and gas sectors to others. There’s also worry about exactly how Brazil will open up its oil and gas sectors. Brazil is notorious for promoting policies that later get bogged down in execution. Much of this is due to preexisting laws and regulations that inhibit the movement of enterprise and the factors of production. For example, even as ANP has promoted the opening and competition of these sectors, it has also controlled and intervened, possibly defeating its own best intentions. Mauro Storino from Fitch, a rating agency, spoke of an important topic for financial markets. Brazil’s fiscal crisis has led to the loss of investment grade status. Further downgrades could come if Brazil fails to implement major spending reforms. Given that 2018 brings a presidential and general election, politicians are wont to give up their strong hold on Brazil’s pork barrel projects. This likely will make international financing for the gas sector more competitive and harder to achieve.
At the end of the day, knowledgeable people recognize the many contradiction inherent in Brazil’s erratic modernization. Certain sectors lead and then lag. Petrobras for instance is at the forefront in the development of deep-sea oil exploration and production. At the same time that the company developed this technology, it also almost succumbed to the most rampant and extensive multi billion dollar corruption scandal in history. Brazil’s has had two presidents in the last four years. Dilma Rousseff fell, officially, for fairly minor but illegal budget maneuvers. In reality she was brought down by her own political incompetence and radicalism. Her successor, Michel Temer, is a better and more experienced political manager. But he and his administration are much more deeply tainted by outright thievery, favoritism and connivance among a small yet dominant group of elite politicians. Even so, Temer has received some business backing because of his willingness to at least battle to reform the archaic labor code and the highly unequal social security system. The system protects a caste of public sector employees who enjoy benefits totally out of proportion with the vast majority of the private sector. Such are the contradictions in the system.
Many of the fiscal problems will be pushed onto the next administration. The smart money seems to favor a center right successor to Temer. Meanwhile, Lula, the popular, populist leftist former president, awaits a chance to run for president again. This will depend on the success of his appeal to corruption-related charges.
In Brazil, there can be significant uncoupling of political and economic activities. Today, for example, the agricultural sector is thriving and driving Brazil in spite of the general economic malaise. Petrobras and the oil and gas sector also seem to have uncoupled and it is likely that a market friendly outlook in the sector will prevail even if a left leaning candidate wins the election. Once in power, politicians act pragmatically in following the money. Also, given the oil sector’s recent past of malfeasance, there is a strong inclination that the company has survived the poison. However, like a recovering alcoholic, there is a chance that it might fall off the wagon, but the pressure for sobriety is strong.
Gas for growth can be a disruptor but it remains to be seen if Brazil’s disruptive politics will prevail and inhibit progress.
Here is the link to the program with a list of the speakers and as well as access to presentations: https://www.iamericas.org/en/events-sp-1138149363/2299-brazil-energy-roundtable-gas-power-and-disruptors