Without transition, new gas market in Brazil will have more risks, says Wood Mackenzie

Aug 19, 2019

The federal government’s ambitious New Gas Market program carries with it a number of risks to investors as there are legal, tax and regulatory uncertainties, not to mention supply and demand issues, in Wood Mackenzie’s assessment.

According to the global energy research and consulting firm, if the plan were to be executed “expeditiously, with so many uncertainties, it could translate into risks for investors and risks would translate into price.” The government program foresees a reduction in the value of the input.

Under the plan launched this year, Petrobras would completely exit the input transportation and distribution sectors by the end of 2021, making room for private investment and competition. And in the period, there could be about 40% drop in the price of electricity in the country, with greater use of gas in generation, according to the calculations of the Minister of Economy, Paulo Guedes.

The initiative was well received by the market, which approved diagnostics and principles outlined. The doubt, however, lies in the effectiveness of opening the sector at the speed intended to deliver results.

“In general, the signs are positive, the points are identified, the solutions are that they do not seem so clear or easy to define in the short term,” said Pedro Camarota, head of Wood Mackenzie in Brazil.

For him, the recommended way to lead the transition to a market opening would be through organized auctions taking advantage of the distributors’ contract renewal season, following the termination of the gas contract with Bolivia.

Several gas distributors in the country launched last year a public call to diversify the sources that supply the input and seek more competitive prices. Camarota believes that the government could have used this initiative to induce competition more directly and with more concrete results.

Following the lessons learned in the electricity sector, Camarota pointed out that a contract auction scheme could be a good alternative to promote a transition to the replacement of Petrobras, which today acts as a guarantor of supply, decision maker and supply risk manager for the market.

“Opening the market without an organized transition process and with so many legal, tax and regulatory uncertainties present, and in the absence of orchestrated sequencing between contracting gas demand and subsequent supply of transportation capacity, will translate into greater risks and greater inefficiency, ”said Camarota.

Another issue pointed out by the expert is the mismatch of the government’s opening agenda with that of the ANP.

While the government plans a significant two-year price drop as a result of investments and additional gas supplies, the agency plans to complete the regulatory reform needed for the government program by 2023 with the issuance of 11 new resolutions.

The natural gas market was created and is historically dominated by Petrobras, which has not always had its investments remunerated. Camarota pointed out that private investors will not act in the same way as the state-owned company and may raise prices if they see risks.

Among the factors that could eventually raise risks, Camarota cited a possible delay in regulating pipeline operations in a market with more agents besides Petrobras.

Supply and demand

Another point of concern, according to Camarota, is the lack of predictability related to supply and demand of natural gas.

Analysts estimate that a more substantial increase in Brazil’s natural gas production is expected to occur in the middle of the next decade as new projects enter the Santos Basin. There are doubts, however, about the Brazilian capacity to create a favorable environment that allows the construction of infrastructure to consume this gas.

By the middle of the next decade, Camarota estimates that gas flow and transport infrastructure already in operation or under construction by the state oil company will already be sufficient to meet the expected increase in supply. But after that, it is unknown.

According to him, the addition of the pipeline network should already be under construction so that it is ready in time to meet the increase in supply and this is not happening.

On the demand side, Camarota pointed out that there has been stagnation for many years, which varies greatly depending on the consumption of the thermal park. This increase in consumption could be driven by expected economic growth and more competitive prices, which, in their view, is not guaranteed in the current scenario.

“It is not clear which direction demand will take. One thing that is certain is that the demand response is a long term response. So the market to develop and the demand to expand is predictable. And today there is still a lot of uncertainty. ”

For Wood Mackenzie, such a gas market opening could take five to ten years to consolidate, and Brazil is trying to achieve it in two to three years.


Source: Reuters

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