The Brazilian gas market had a second wave of contract negotiations with Petrobras last week that brought back to the table an old friend as a new index factor: the US Henry Hub index.
Petrobras first started to use the benchmark for negotiations in May, as part of a broader expansion. Major distributor Comgas in Sao Paulo state was the first to use the Henry Hub index last month, and was followed by MSGás, Mato Grosso do Sul's state distributor.
They remain a minority, as a total of 41 contracts, including additions and revisions, have been closed this year. In September, four involved MSGás, two of which were new contracts; and one was done with Sergás, a Sergipe state distributor.
Similarly to Comgás, MSGás has entered into new longer-term contracts with Petrobras. These agreements are set to remain in effect from 2024-2034. In the new September contracts, the pricing structure follows a hybrid formula primarily anchored to the price of oil with a Brent crude factor from 11.7-11.9pc. The other component is Henry Hub, stepping into the calculation formula from 2026 on the longer contract. The Brent factor, in effect until the conclusion of 2023, has been dropped to 13.5pc from 14.4pc. Additionally, there adjustments have occurred regarding supply volumes.
As Brent usage in deals dips below the 12pc mark, it appears that the market is reverting to the recent higher percentages in the wake of the conflict in Ukraine, albeit in longer-term contracts. Instead of the usual three- or four-year contracts, it now seems that 10-year agreements are becoming the norm. So, despite the overall feeling of pricing normalization, it does not represent a return to status quo before Russia's invasion of Ukraine last year, as these conditions are less favorable. In Brazil, 10 years is a long-term commitment.
Still, all new Petrobras contracts include a clause stating that distributors are allowed to decrease their natural gas supply if their clients migrate to the liberalized market, but with one caveat: The distributors must decrease their contracted quantities in the same proportion with all suppliers in this situation.
These new contracts mostly show pricing stabilization after so much unpredictability during the most intense moments of the Russia-Ukraine conflict in the second half of 2022, "and unpredictability is an exceedingly complex phenomenon in the commodities world," said Rivaldo Moreira Neto, consultancy Enegry Gas' chief executive.
But these pre-crisis levels were never truly competitive, only hovering around 11-12pc of the Brent index in 2020, going up to 16.7pc of Brent earlier this year.
This shift is challenging when considering its impact on stimulating consumption, especially in a country where there is no significant seasonal surge in domestic gas consumption for heating purposes, as in the US and Europe. Brazil's residential gas consumption remains consistently low.
