Pipeline integration to boost gas competition

The model of an integrated Brazilian natural gas market connecting all regions is being challenged by some states and regional distribution companies, so decisions made now could result in less competition and higher prices and transportation surcharges.

As the market takes its first steps into liberalization, market participants are discussing ways to get around transportation networks as consumers try to reduce shipping costs and distributors try to gain market influence.

A major point of contention is the construction of the Subida da Serra pipeline, connecting the LNG terminal de São Paulo to state distributor Comgás.

São Paulo is the largest gas demand center in Brazil, at around 17pc. Pipeline companies and oil and gas regulator ANP have said the pipeline could not be built by a company that also owns a gas distribution company. The federal gas law also prohibits states from building transport pipelines.

Edmar Almeida, professor of energy economics at the Federal University of Rio de Janeiro, said Brazil could be stepping away from being a more liquid and competitive market if a single state were to connect its entire gas value chain under one company — from LNG to the final consumer, transportation, distribution and trading — creating a gas island where only the local supplier could reach consumers.

"This creates a risk of market fragmentation," he said.

Transportation companies frown upon the creation of projects to skirt their networks, as the current state of the market is very fragile, with the first trades between industrial consumers and gas producers being negotiated without the distribution companies' participation.

Rogério Manso, president of pipeline companies association Atgas, said that Brazil chose the European operation model in its gas law and regulation, which is interconnected, and must stick to it as the market advances.

"At this stage of the market every small transaction is celebrated — every new supply source, every new contract — and we must all be vigilant helping the market open," Manso said.

Gas consumers complain gas transportation tariffs and surcharges are high in Brazil and above international levels, but there are benefits of being connected to the network, said Adrianno Lorenzon, gas director at Brazilian association of energy-intensive industries Abrace.

"It's the value the transportation adds to consumers that must be perceived, such as operational and commercial flexibility," Lorenzon said.

Transportation companies have the burden of showing these benefits more clearly. Helder Ferraz, pipeline firm NTS' commercial and regulatory director, said that pipeline companies and their clients are still building relationships, so the penalty rules can be revisited.

Ferraz added that the gas island model could result in higher costs, because the spending burden on grid expansion would not be shared among as many consumers as it would in a totally interconnected system.

NTS is launching a new project to expand gas pipeline capacity from the offshore pre-salt to southern states. But those in gas islands will not be able to procure this new supply of domestic gas, even as Bolivia is reducing its exports to Brazil and LNG prices are elevated.

By Flávia Pierry