Brazil gas market advances, but boost needed

Brazilian natural gas market participants see progress in the first six months of liberalization, but still point to a lack of competition, restrained gas demand and high prices as problems.

Participants throughout the industry discussed the challenges for a wider market opening at the Argus Brazil Gas Commercialization Forum in Rio de Janeiro last week. Shifting risk between points in the value chain still confounds the market, creating friction between consumers on one side of the spectrum, and distributors, pipeline companies and producers on the other.

Restrained gas demand is the industry's biggest concern according to an Argus survey of 83 market participants, with 28pc of respondents saying larger volumes of gas need to be offered in the open market. The creation of competition among gas suppliers was the second most-urgent need overall, according to 25pc of those surveyed.

When asked what steps the Brazilian gas market needs to take to improve, participants said opening pipelines to bring more offshore gas production to shore was the top priority, while the reduction of gas reinjection — where associated gas is used to repressurize oil wells — was the second priority.

The gas market is awaiting a third gas pipeline project, known as Rota 3, from offshore pre-salt fields, which can help release more supply. Gas producers that own fields connected to this new pipeline expect it to come on line in September, one operator told Argus, after several years of delays. It is expected to first carry 9mn m³/d, and double that volume by 2023.

Gas producers say Brazilian production has a "natural stiffness" as more than 90pc of gas production is associated with crude output. Demand is also seasonal, since it coincides with thermal power generation when hydropower availability is reduced. Yet onshore non-oil associated gas production, being developed mostly by gas market newcomers, is trying to step into this market of repressed demand by offering flexibility and bringing new contract options.

High gas prices are also a concern to participants, adding on to difficulties with penalties and risks, such as take-or-pay clauses, according to participants in the Argus event. The relationship between gas consumers, pipeline companies and distributors is also a concern, pointing to relatively high transportation and distribution costs as hindering more competition. More gas-swap mechanisms among players would provide more liquidity, they said.

On prices, the poll conducted by Argus showed that 43pc of the respondents consider the creation of a Brazilian natural gas price benchmark as "very important" for more competitive prices. Speakers on a biogas panel debated the need for gas-pricing mechanisms, as the current system of using a fixed base price adjusted annually for inflation does not meet the needs of a liberalized market.

Gas storage was also a concern to participants. They suggested that onshore gas producers could add storage mechanisms, increasing flexibility and reducing prices to allow for more spot trade and liquidity.

By Flávia Pierry