Petrobras to index gas sales contracts to Henry Hub

Brazilian state-controlled Petrobras is adopting the US benchmark Henry Hub as an index for its wholesale natural gas contracts, fulfilling a longstanding demand of distributors at a time of rising competition in the domestic gas market.

Petrobras said it is still negotiating the new pricing formula with distributors, so the decision will not immediately impact the current pricing formula, which is indexed to Brent crude.

Petrobras will also offer a broader range of contracts, including consumption-based and long-term, less flexible contracts under more favorable pricing terms. The company will offer ranges of six months to four years in contracts which can be tailored to seasonal demand. Distributors will also have the option to maintain Brent-indexed contracts.

The landmark decision will align Petrobras' formula with prices for LNG, which is gaining market prominence as more regasification capacity comes on stream and new actors enter the market.

The company has been working on the new pricing model since last year as the bulk of its non-thermoelectric contracts are set to expire at the end of 2021.

Petrobras continues to supply 100pc of demand from distributors, according to the most recent quarterly report from the gas monitoring committee (CMGN). But after President Jair Bolsonaro sanctioned a new gas law last month, the firm faces rising competition for new supply contracts. The regulations for the new gas law are expected to be issued later this month.

The Henry Hub index announcement was made just days after Petrobras hiked gas prices by 39pc, drawing the ire of Bolsonaro who earlier forced an overhaul of Petrobras' management over rising fuel prices.

Tender test

The first test of Petrobras' new pricing formula could come in south-central Brazil, where five gas distributors —Compagas (Parana state), MSGas (Mato Grosso do Sul state), SCGas (Santa Catarina state), Sulgas (Rio Grande do Sul state), and GasBrasiliano (Sao Paulo state) — are holding a tender for 3.5mn m3/d of supply in 2022-23 and up to 6mn m3/d starting in 2024.

In a separate northeast tender, five other distributors received proposals from nine suppliers including Petrobras, Shell and Total, local independents PetroReconcavo and Potiguar EP, gas and energy company Compass, and local energy companies EBrasil and Oncorp.

Pernambuco state-controlled gas distributor Copergas, one of the five participants seeking supply, has already selected Shell. And last week, New Fortress Energy, which recently acquired Norwegian LNG company Golar's assets in Brazil, said it was close to finalizing a contract with Sergipe state gas distributor Sergas.