Brazil's natural gas market has made significant progress on the supply side in recent years, supported by regulatory reforms, growing competition and the emergence of a more active spot market. But the next phase of development will depend on greater demand, particularly from industrial consumers, according to Origem Energia commercial director Flavia Barros. Argus spoke with Barros about the recent improvements in spot negotiations, the role of gas storage and the potential impact of the latest power reserve capacity auction (LRCAP). Edited highlights follow.
How do you assess the gas market's current stage of development?
Industrial demand has been moving sideways, still hovering around 50mn m³/d. But it is not going to jump to 60mn m³/d simply because gas supply has increased. Demand needs to be built, with both industrial and broader economic growth. Increased supply will then be able to meet that demand.
The recent regulatory efforts that have been made to increase supply and expand the pool of participants are, to a great extent, what have led us to where we are today. When I joined Origem three years ago, only one or two companies were trading in the spot market. Today, it is a much more active market.
The spot market is a way for producers and consumers to both balance their positions and take advantage of opportunistic gas volumes. It is another way for demand-side participants to capture more competitive gas prices, benefiting when short-term supply exceeds demand. But for that to happen, there is still a need for more education, for companies to build teams able to work 24/7 and to engage more directly in pipeline transportation activities.
The migration to the open market was the first step of this transformation, when industries realized they could negotiate directly with suppliers, in a way that was better tailored to their own demand than through distributors. But now there is another stage. Beyond contracting directly with suppliers, consumers may not need to contract all their demand in an inflexible manner. They can contract part of their demand and leave the rest exposed, taking advantage of spot opportunities that occasionally arise.
That requires learning. I believe that simplifying transportation contracts, as well as making transportation tariffs more predictable, can help. The fact that the hydrocarbons regulator ANP has taken ownership of moving the gas regulatory agenda forward will improve competition, educate participants and foster demand, creating critical mass for the spot market.
There are industries that, at a certain gas price level, can increase their consumption. But there is still not a well-established culture of developing elastic demand, of buying gas when prices are attractive, in the Brazilian market. We still live with the legacy mindset of mainly contracting volumes equivalent to annual demand requirements. Demand needs to play a larger role in the market. When that happens, the spot market will gain critical mass, liquidity, dynamism, and gas price formation will look different.
Do you see meaningful spot-market activity beyond portfolio-balancing transactions?
Yes. Today, some companies already anticipate situations in which they will need supplemental supply and therefore purchase gas in the spot market. Likewise, a trading company with power dispatch exposure in its portfolio may anticipate a period of stronger power generation demand, seeking supply in the spot market.
However, it remains a market largely restricted to those who know how to operate in it and have the necessary market intelligence. When heavy industry consumers, which historically contract fixed volumes to meet their operational needs, begin operating in and understanding this dynamic environment, the spot market will gain greater critical mass and mature further.
At Origem, whenever production increases because a new well comes online, we may not have contracted those volumes at the beginning of the year. So, there is incremental production that needs to be placed in the market. There have been months when we traded 250,000-300,000 m³/d in the spot market, particularly when demand declined and new production entered the system. Shortly afterward, we typically secure longer-term contracts to avoid exposure to spot-market price volatility. Currently, Origem's spot-market sales stand at around 100,000m³/d, out of total production of roughly 2mn m³/d.
Origem is developing Brazil's first dedicated natural gas storage facility — a 50mn m³, $200mn site. What impact do you expect this to have on the market?
The users likely to generate the greatest demand for storage will be those requiring daily balancing. Customers with portfolios that require highly immediate supply, such as gas-fired power plants, will be its primary users. In Origem's case storage serves as a supply buffer for our gas-fired power plant. Within a multi-source, multi-purpose portfolio strategy, storage is infrastructure that will greatly assist trading desks in balancing positions.
How do you see the gas storage facility affecting spot-market price dynamics?
The current balancing activities within gas pipeline network that currently occurs without the market participant's control is a punitive mechanism. Once storage becomes available as a tool to absorb those fluctuations, participants will no longer necessarily have to sell inventory when the market is long and prices are low. So, it becomes possible to smooth prices to some degree.
The same applies in reverse. If you need to increase supply to your portfolio, you may not need to pay balancing prices or levels such as 13-15pc of Brent crude. You can simply withdraw gas from storage that was injected when prices were lower.
Storage is therefore inherently a tool that helps reduce price volatility, especially in a market where demand may fluctuate hourly, with levels of intensity and volumes that are difficult to predict.
Considering the outcome of Brazil's latest LRCAP, which awarded contracts to Origem Energia power plants, what will be the company's strategy for securing supply to meet this flexible gas demand?
Our power plant is not connected to the gas pipeline network and will be supplied entirely by our own production. But the idea is to have a portfolio structure behind it that provides the flexibility needed to supply the power plant without exposing our other customers to risk.
Since we do not know when the plant will be dispatched, we need room to maneuver. Storage provides physical flexibility, while a diversified portfolio provides commercial flexibility. This is a highly transformative moment for our company.
