Distributors welcome Petrobras switch to Henry Hub

State-controlled Petrobras' decision to adopt US natural gas benchmark Henry Hub as an index for its wholesale gas contracts with distributors may help decrease prices in Brazil and stimulate new investment in the sector.

Because the Henry Hub index is less volatile than Brent crude prices, Brazilian distributors believe they will have more control over their gas supply pricing, which is currently provided by Petrobras under Brent indexation.

"The distributors are at the mercy of the international political mood," Larissa Dantas, chief executive of distributor Potigas in Rio Grande do Norte state, said. Major impacts on Brazilian gas prices are most likely to occur during the US winter, when prices more often rise for Henry Hub gas.

From December 2019 to October 2020, gas prices in Brazil fell by 48pc, with global demand for oil decreasing with the rise of Covid-19-related work and travel restrictions. But inflation and exchange rates have led to a 39pc increase in Brazilian natural gas prices for distributors from May-July 2021,when priced in domestic currency. Brazilian firms worry oil prices may keep escalating, which would hike their final prices for the third quarter because Petrobras supply prices are updated quarterly.

Most gas supply contracts signed between Petrobras and state distributors will run through 2022, according to Petrobras, and distributors will be free to sign new supply contracts with it or with other gas producers. The shift will allow indexation on prices other than Brent.

Pernambuco state distribution company Copergas is one example of a distribution company contracting with a supplier other than Petrobras, having signed with Shell to supply 750,000 m³/d in 2022, after a tender that attracted eight gas production companies.

With Petrobras adopting Henry Hub indexing, more investors may become interested in the Brazilian gas market, Rogerio Manso, president of the Brazilian Association for Gas Transporters (ATGas), said. Petrobras' decision signals a new phase in market development, recognizing the start of an era of competition in Brazilian gas, he said.

Henry Hub indexing can also reduce the competitiveness of LNG imports into Brazil compared with natural gas delivered through pipelines. This could decrease tariffs for the final consumer because contracts will have less volatility and stimulate more demand, generating investment to expand the distribution grid and transportation pipelines.

"The most important gas supplier in Brazil, Petrobras, is searching for a compatible answer in a market that will suffer [from] competition from LNG imports", said Manso.

By Flávia Pierry