Brazil avoids European gas prices volatility

Brazil is not yet affected by the hardships faced by the European natural gas market, but could face long-term problems if a severe drought in the next year forces the country to compete with Europe and Asia in the international LNG market.

The Argus natural gas Brazil network average price fell by 6.7pc in August, influenced by the 9.5pc reduction in the price of Brent crude, while the European gas benchmark TTF was up by 14pc and the LNG Brazil delivered price rose by 31.9pc.

"In the short term, Brazil is at a comfortable position in the natural gas market," said Edmar Almeida, professor at the energy institute at Pontifical Catholic University of Rio de Janeiro. But he points out that Brazilian rainfall and river flowsvary greatly from year to year, and gas and power consumers may be caught in a difficult position if LNG demand rises in 2023.

"At this moment, the LNG need is small because of favorable conditions at water reservoirs for power generation," Almeida said. "But our position inspires caution."

Last year, the thermal power dispatch reached 16,000MW on average per week, peaking in August, when the marginal cost of power generation including all sources reached R2,901/MWh ($556/MWh), according to grid operator ONS. Water impoundment in the southeastern and mid-center regions — where 70pc of the hydropower generation takes place — was down to 15pc of the maximum capacity. Currently, thermal dispatch is around 4,300MW on average.

The average LNG import volumes in 2021 were 26mn m³/d, according to data from the ministry of mines and energy, three times larger than the 2019 and 2020 LNG import average of 8mn m³/d. This year, average imported LNG is closer to the historical average, at 10mn m³/d through June.

"Brazil cannot compete with Europe and Asia for LNG and we are lucky our water reservoirs are full and the thermal power dispatch is low," a LNG market participant said. "If the water crisis was to take place this year, we would be toasted. But we cannot keep on relying on luck, right?"

Pipelines galore

Higher oil and gas prices abroad could spark interest in much-needed infrastructure in Brazil's gas sector — such as the construction of new outflow pipelines to bring natural gas onshore from the deep water pre-salt and post-salt fields. More than half of the natural gas produced offshore is reinjected back into wells, partially because of a lack of pipeline capacity.

"I foresee that gas prices in the international market will be high for some time and this can help Brazil attract investments," said Almeida.

Brazilian energy research bureau EPE mapped 11 new pipelines from offshore production sites that could bring over 70mn m³/d of gas ashore. In 2019, the public bureau for energetic planning estimated a R40bn investment need to build the 2,100km of pipelines.

But a market participant considers the turbulence in the gas market abroad as an opportunity for the development of alternative options, such as distributed power generation.

"The large gas and power consumerswill make a difference, with companies with infrastructure in both Europe and Brazil trying to find ways to increase production in Brazil to compensate for energy restrictions in Europe," the source said.

By Flávia Pierry