Market Talks: The prospects for the second year of the natural gas market in Brazil

The Brazilian natural gas market completed one year since its liberalization.

Join Camila Dias, Argus Brazil Bureau Chief, and Flávia Pierry, Brazil Gas and Power Editor, as they comment on the market prospects, gas prices, new investments and new companies entering this market in 2023.

Transcript:

[Camila Dias] Hello, and welcome to Market Talks, a series of podcasts brought to you weekly by Argus about the main events impacting the commodities and energy sectors in Brazil and worldwide. My name is Camila Dias, Argus Brazil Country Manager, and in today's episode I will talk to Flávia Pierry, editor of the Brazil Gas and Power publication, about the prospects for the natural gas market in 2023, as well as expectations for gas prices, new investments and new companies entering the market. Welcome Flávia.

[Flávia Pierry] Thank you, Camila.

[Camila] Flávia, we are in the second year of the liberalization of the natural gas market in Brazil. The scenario is much different now than it was in 2022, as there is a new federal administration, a new Petrobras management, but also new investments and more companies interested in transporting gas through pipelines. What can we expect from the natural gas market in 2023?

[Flavia] Camila, in 2022 we lived the expectation of how the market would behave after the opening, with the first gas supply contracts signed with companies other than Petrobras. Everything was so new, including the prices that would be charged for gas. Since then, a lot has happened, and no one can say that the market is still, or it is not progressing. A lot happened last year, with many new gas supply agreements beyond Petrobras, new gas shippers in the transport network, attempts at interruptible supply (when the buyer receives the gas only when the supplier indicates that it is available). But along the road there was a war in Europe.... And that hindered plans of those who saw liquefied natural gas, LNG, as the way to provide liquidity for the gas market. Another bump on the road was the delay to start operations of the Route 3 gas pipeline, which will initially bring about 9mn m³/d of natural gas to consumers from offshore fields. So, we entered 2023 with a scenario that is very different from what we had in 2022, which was one of great uncertainty, but of excitement. Now, the first barriers have been overcome, but there are still major regulatory obstacles, difficulties in dealing with several different state rules and gas supply is still restricted.

[Camila] Can you elaborate further on some of these topics, Flavia? Starting with the theme that is most dear to Argus: prices.

[Flavia] Sure. Argus has monitored natural gas prices in Brazil daily since December 2021, in our Argus Brazil Gas and Power publication. And what we can see in 2023 is that, considering mainly the contracts signed by distributors with suppliers, the gas market understood its price range, after having had time to test this new range in 2022. The data shows that in January 2022, when the first gas supply contracts with producing companies beyond Petrobras began to be monitored by Argus to calculate prices, prices had a wider range. On the one hand, in some cases there was a reduction of around 9pc compared with the price that was practiced when there was no competition. But on the other hand, prices rose by almost 9pc in other regions of the country. Throughout 2022, supply and demand were rearranged and settled at a new point. In 2023, when new contracts starting in January were assessed by Argus, we saw that the three regional prices varied much less, by around 1pc from each other With Europe having adjusted its gas inventories and going through the harshest part of the winter, the price of crude oil and gas in the world has returned to lower levels, which has dropped prices for gas contracts in Brazil by almost 15pc in comparison with the average price calculated by Argus in 2022. We realized, then, that suppliers understood the opportunity price, and that distributors were able to look for other supply options.

[Camila] So the market is figuring itself out, interesting. Could you list some factors that will help determine gas prices in 2023?

[Flávia] Well, Camila, we still don't have an actually competitive and open market. The world of natural gas is looking for new spaces, new opportunities, and trying to access new offers, new agents, and develop new business opportunities. After all, our society will still need natural gas for several decades, and even today, even if we are not in need of natural gas to generate electricity, some sectors of the industry have gas as their most important raw material or calorific. Such is the case for sectors of the chemical industry, fertilizers, and ceramics. These agents are fighting hard to develop new supply sources, including helping to develop biogas producers. But we still have a very tight gas supply. Without Route 3, we have less gas. There are also heated debates about natural gas reinjections – when part of the gas is returned to oil and gas wells to repressurize them and increase oil productivity. Gas consumers are trying to reduce reinjection and have even introduced a bill in congress. But we know that the subject is a touchy one. LNG is also still restricted. Despite very competitive LNG prices in 2023, close to US$13.00 per mnBtu, there are still few terminals connected to the transport network. Only Petrobras' terminals are connected and there is still a lack of clarity and regulations regarding the cost of accessing these terminals.

It is still difficult to import LNG to be injected into the grid and received by the distributor. Bolivian gas, one of Brazil’s most important supply sources, is still contracted by Petrobras. Bolivia’s state-owned oil and gas company, YPFB, is keen to sell its gas to Brazilian consumers without depending on Petrobras. But with a contract with Petrobras until 2024 and other commitments with Argentina and Chile, the Bolivian company can only sign interruptible contracts. And this is not ideal for many industrial consumers, who would have to have a firm contract — that is, the certainty of gas coming through the pipeline every day — in the same amount. On the other hand, if supply is tight, there is at least one factor reducing demand for gas in the country: the full hydroelectric reservoirs, which are allowing for a lower average thermoelectric generation using natural gas.

There is one more point of uncertainty, which is the role that Petrobras will want to play in the gas market. While the two previous presidential administrations wanted to reduce the state-controlled company’s role in the gas chain, focusing on exploration and production only, the current administration is yet to make clear how they’ll conduct Petrobras in the next four years. The company is still a gas giant, as it is responsible for more than 70pc of Brazil’s total production and owns almost all gas processing units in the country. The contracts signed for this year with distributors show that Petrobras is increasing its influence over them, signing long contracts, several of them extending until 2032.

The company does comply with the National Energy Policy Council’s guidelines to leave space for other suppliers, but is tanking back space that had been opened in 2021, when distributors wanted to sign shorter term contracts believing that in one or two years we would have more and more supplier options and therefore lower gas prices.

[Camila] And in this scenario, Flávia, how are the pieces on the board being organized for the next periods?

[Flávia] As I said, Camila: anyone who needs gas or who has natural gas as their core business is not standing still, and we see many companies looking for spaces, fighting for more transparency, trying to overcome difficulties and create possibilities. We see companies trying to change their relationship with their local gas distributors, so they can buy gas in interruptible contracts or spot operations. And a sign of this is the increase in the number of companies that signed contracts with gas transport firms TAG, NTS and TBG. 23 companies signed up to load gas into pipelines this year, up from the 11 companies in this position at the beginning of 2022. At TAG, eight new agents are preparing for opportunities to load gas, now reaching a total of 16 companies. In addition, six companies signed Master contracts, which allow them to contract capacity in the pipelines. At TBG, the portfolio of shippers increased from 3 to 9 companies. And 13 companies are ready to buy capacity. NTS has a shipper portfolio of three companies, against one in the beginning of 2022. And another 5 companies are ready to start shipping gas. At this point in the gas market, it is also interesting to see how agents are struggling to overcome difficulties. TAG and NTS are still waiting for regulatory agency ANP to firmly approve public tenders for access to capacity, that is, with that space guaranteed for them every day. Without these tenders, the companies are opening interruptible offers and allowing access. This is far from ideal and creates insecurities, but it is a way to make the market move.

[Camila] Creativity and efforts are the key to new markets, for sure.

[Flavia] That's right, Camila. And in addition, the groups that operate in the infrastructure part for the gas industry are also not standing still and are making investments to accommodate new business opportunities and embrace a more liquid market.

An example is NTS, which is making investments to increase the expected transport capacity for the coming years, which should change direction, with a possible reduction in volumes imported from Bolivia and an increase in volumes arriving from the Brazilian coast. This year they should take the first steps towards building a new compression unit in Rio de Janeiro. And they are preparing for the construction of a second 300km gas pipeline, connecting Rio to São Paulo, by 2030. There are also some LNG terminals that are under construction or planned to resume construction in 2023. There are at least four LNG terminals in this level of maturity in Brazil, which should start operating at the end of this year and throughout next year. In addition, two LNG terminals already in operation, Gás Natural Açu, in Rio, and Port of Sergipe, in Sergipe, must be connected to the transportation grid. This means that soon, when these connections are ready, consumers will be able to buy LNG and import it into Brazil, regasify at these terminals and receive through the distribution network. All this, Camila, shows the dynamics of this new market. And Argus is here, present and working to offer the market the information and prices that bring more transparency and help provide liquidity.

[Camila] Well, that’s our job, isn't it, Flávia? Thanks for joining us again. This and other episodes of our podcast are available on the Argus website at www.argusmedia.com. Visit the page to follow the events that affect global commodity markets and understand their developments in Brazil and in Latin America. We'll be back soon with another edition of “Market Talks”. See you soon!