Gas distribution hurdles concern consumers

Large natural gas consumers in Brazil are willing to sign supply agreements directly with producers, but struggle to overcome obstacles in local distribution systems that would open space for other suppliers.

Seven months into the liberalization of Brazil's gas markets and there are still fewer than 10 industrial gas consumers in the bilateral contract market. Companies looking to shift away from local distributors fear higher gas tariffs, fines and little flexibility on contracts, leading to financial penalties.

Most gas consumers with steady, high levels of demand — such as in the chemical, glass and ceramic industries — say they would only be willing to tap into the bilateral gas market gradually, meaning they would keep their relationship with gas distributors while slowly increasing contracts with gas producers. They argue this would be a good opportunity to learn how to manage multiple gas suppliers and test hurdles in the Brazilian gas transportation infrastructure.

While the Brazilian power market and laws in 12 states allow the so-called partially free consumers to split their gas demand between distributors and producers, distribution regulations for tariffs, surcharges and penalties hinder that freedom.

Besides the typical risks consumers will have to take when working directly with producers for the first time — such as dealing with take-or-pay contracts and ship-or-pay fees — a number of consumers tell Argus that state rules for distribution services are also disrupting the shift to the bilateral contract market.

The main concern is the distributors' tariff calculation model, which assesses the payments in a tiered manner: as demand grows, volumetric tariffs drop. If a large industrial consumer trims demand from the distributor to purchase that share from another supplier, the distributor will not consider its total consumption and charge less, but assess a higher price based on a lower volume.

Another concern is the payoff of an account that accumulates gas price and exchange rate fluctuations that are not directly passed to consumers. When a consumer shifts to a bilateral contract, it must pay off its share of the account all at once. But the calculation methods for sharing values are still unclear. The current balance at the biggest distributor in Brazil, Sao Paulo's Comgas, is R641mn ($122.9mn) for all industrial consumers.

On the other side, distributors feel that providing flexibility to open-market consumers would be more work for them, for which they should be compensated, former Sao Paulo state regulator Arsesp board member Zevi Kahn said. Transportation pipelines do not offer such flexibility on their contracts, he notes, which affects distributors.

Creating mechanisms to deal with flexibility is a must, large consumers say, so they can sell or pass along surplus gas, or receive gas when they are short, in a secondary market model. Gas consumers are finding it difficult to deal with surplus gas volumes, said Benjamin Ferreira Neto, administrative board president for the Brazilian association of manufacturers of ceramic products Anfacer. The company tried to sell excess volumes back to the distributors, but regulation in Sao Paulo state forbade it.

"This is unfair and thus penalties should be reduced," he said.

By Flavia Pierry