Will Brazil's New Natural Gas Law Stimulate Investment?
By Energy Advisor Staff
August 28, 2009
Originally published in the Dialogue's weekly Energy Advisor newsletter
Q: Earlier this year, Brazilian President Luiz Inacio Lula da Silva signed a new natural gas law that aims to better regulate the industry, stimulate domestic production and spur investment in natural gas infrastructure. What will be the biggest changes in the new regulatory regime and is the law likely to have its intended effect? Will Brazil be able to reduce its dependence on natural gas imports from Bolivia? What role will liquefied natural gas, a relatively new phenomenon in Brazil, play in the country's natural gas market?
A: Larry Pascal, member of the Energy Advisor board and partner at Haynes and Boone in Dallas:
"In March, Brazil adopted the Brazilian gas law (No. 11,909/09), which regulates the transportation of natural gas, as well as its treatment, processing, storage, liquefaction, re-gasification and marketing, although the Brazilian petroleum law (No. 9,478) will continue to regulate the upstream segment. The new gas law is expected to bring more legal certainty and security to private investors, although the regulations have not been released and constitutional issues as to jurisdiction between the federal government and the states remain. The new law has several important aspects. First, it establishes a 30-year concession regime (with the possibility of one renewal for the same period) for gas pipelines and natural gas storage facilities. Second, it allows commercial purchasers to build their own pipelines to import gas directly from foreign producers, transporting the product to a pipeline network or paying for the use of the government's pipeline network. Third, it authorizes the Ministry of Mines and Energy to use public-private partnerships to develop new pipeline projects or increase capacity of existing ones. Finally, it authorizes state-owned companies and joint ventures to agree to binding arbitration. The new gas law, as well as the development of the pre-salt areas, may contribute to lessening Brazil's dependence on Bolivian gas, although the possibility of changing the existing and successful concession regime for E&P projects under the Brazilian petroleum law may delay new drilling projects in the pre-salt area. LNG could play a larger role in Brazil's gas market as an alternative way to import or transport gas. Currently, Petrobras operates two re-gasification terminals (Port of Pecem and Guanabara Bay), while a Petrobras-Praxair joint venture operates a liquefaction plant in Sao Paulo state. In addition, Gas Energy New Ventures has announced plans to build a re-gasification terminal in the state of Rio Grande do Sul."
A: Felipe A. Dias, economist at the Brazilian Petroleum Institute in Rio de Janeiro:
"The Brazilian natural gas regulatory framework had been questioned by almost all important players in the industry, including some government bodies, for quite some time. Since the early 2000s there was a general perception that the current petroleum law, from 1997, was mainly designed for the opening of upstream activities and was not adequate to face regulatory challenges of downstream segments, especially natural gas pipeline transportation and distribution. During 2007-2008, Brazil faced increasing threats of shortage of natural gas supply. In addition, political turmoil in Bolivia and the Argentine energy crisis reduced the possibilities of imported supply for Brazil and drove the Congress to intensify discussion of the new legislation. Even in this situation, it took three years for Congress to approve the new natural gas law. The new law has introduced a few important new concepts, in particular the bidding process and the concession model for new long-distance transportation pipelines. The current authorization process implies an enormous commercial risk to investors in new pipelines, which is a central barrier to entry, and only reinforces the vertical structure and highly concentrated market. However, the new gas law is widely seen as not having progressed much on the construction of a solid regulatory framework that would enable the development of a more competitive market, especially by removing some of the obstacles to new investors. A main reason for this is the complex and unbalanced negotiation process. The contradictory position and the power of the main players to influence or stop the political process make it nearly impossible to advance any regulatory framework that would imply a structural change from the current situation."
A: Carlos Miranda, energy consultant in La Paz and former hydrocarbons superintendent of Bolivia: "Due to the global economic crisis, demand for gas in Brazil is depressed. When the situation returns to normal, Bolivian gas will again be indispensable to Brazil. The vast pre-salt reserves won't enter the market until 2014 or 2015. Even then, they won't displace Bolivian gas, but rather complement it to meet Brazilian demand. In the medium term, after 2020, Bolivian gas will continue to be strategically and economically more convenient for Brazil. Gas production costs in Bolivia are lower than in Brazil and Bolivian gas can be transported at a lower cost, which means lower prices for the consumer. Geopolitically, it doesn't make sense for Brazil not to buy gas from a neighbor with abundant gas reserves and transportation infrastructure to supply Brazilian markets. For this reason, Petrobras has paid YPFB transportation rates for 40 years."
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