Viewpoint: Brazil to open gas market as prices soar

With its long-expected free market debut scheduled for January, Brazilian natural gas has one of its most eventful years ahead, just as international LNG prices soar.

Natural gas prices in Brazilare expected to continue to extend their rise above pre-pandemic levels in 2022, with Brazil's hydropower plant reservoirs ending 2021 at 26pc of capacity, leading to elevated demand for thermal generation throughout 2022. Regulators have built into their market pricing structure a goal of keeping reservoirs above the 20pc mark through November 2022, meaning there will be less margin to draw on hydropower.

On the gas supply side, the shift to a competitive market in 2022 comes with Petrobras still responsible for around 90pc of the natural gas production in the country. The state-run company must decrease its gas purchases from other oil and gas producers under the new market structure, meaning those producers will have to reach consumers some other way for the first time.

The long-awaited market liberalization, formally enacted into law in April 2021,guarantees access to pipeline and gas processing facility for companies other than state-owned Petrobras. The new law is aimed at increasing the level of competition within the domestic market and breaking Petrobras' monopoly. It also would enable midstream expansion under third-party shipper permits, a move away from the government auction model that did not lead to significant pipeline expansions.

Access to pipeline and processing infrastructureis secured for 2022, although details about how such contracts will be regulated are still pending. The first open tenders for supply between producers and distributors happened in 2021, with onshore gas producer Origem Energia, gas trading firm Compass, Shell and onshore producer PetroReconcavo all signing contracts.

Nine companies in 2022 will be able to use pipeline company systems to ship gas, a change from the old model where only Petrobras could ship gas domestically.

The country still needs to address several pending issues for the market to open fully. This includes regulating pipeline services, such as requiring suppliers of spot gas maintain correct pipeline pressure when the carriers fail to balance the gas volumes — a process previously handled by Petrobras.

The tight Brazilian gas market — with 102mn m³/d of demand in August and a 52mn m³/d of domestic supply according to the ministry of mines and energy — will still depend heavily on LNG next year. At least four new terminals are under construction and set to start up by the end of 2022 or by 2023.

Oil and gas regulator ANP is eyeing steps to limit gas reinjection, in which natural gas production is reinjected into wells to increase pressure for higher oil production. ANP may update regulations in 2022 to incentivize oil companies to increase gas volumes sent to the market. This may happen with new rules for gas storage and for limiting gas reinjection to technical reasons such as avoiding CO2 releases to the atmosphere. Regulatory changes are expected as ANP plans to update gas market rules to match the new gas law. While, some new regulations are delayed, an agreement on midstream rules was reached in late November and more progress is expected in 2022.

By Rebecca Gompertz