Brazil struggles creating gas consumers amid downturn

Brazil wants to develop large natural gas consumers to anchor its soon-to-be liberalized gas market, but the effort is challenged by questions about the market-opening process and slow economic growth.

Natural gas demand in Brazil is heavily dependent on industrial consumption, with almost half of the country's demand coming from industry, as gas for heating is limited in the country. But industrial natural gas demand has been stagnant at best, ranging between about 40mn-43mn m³/d from 2011-2018 before falling to 37mn m³/d in 2019 and then to 36mn last year during the Covid-19 pandemic, according to Brazil's Ministry of Mines and Energy. Industrial users have also become a smaller part of the overall economy, dropping from 48pc of GDP in 1985 to 21pc in 2019.

Large energy and gas consumers have high hopes that the country's natural gas market opening on 1 January will increase competition for supply and eventually lower prices, increasing gas demand. But it may take some time to establish regulations and develop market liquidity, according to a recent Brazilian National Confederation of Industry (CNI) study. Prices may actually increase at the first stages of the new market as Petrobras' role shrinks from that of monopoly supplier.

"The industries that demand relevant volumes of natural gas and even industries that could shift to gas now are not shifting due to the high costs in the country," said Antonio Souza, an analyst with OfSeas consultancy.

Getting large energy users to make the switch is even harder, given Brazil's relatively tepid growth rate. Brazilian GDP grew 1.8pc in the 12 months ending 30 September according to Brazil's institute of geography and statistics IBGE, below the 6.3pc average projected for developing economies by the International Monetary Fund, or the World Bank's Latin America outlook of 5.2pc. This follows a sluggish 1.8pc growth in 2018 and 1.1pc in 2019, lagging behind other countries with similar levels of development.

Plenty of domestic gas

There is no shortage of domestic natural gas for Brazilian industry to tap. Brazil has large gas fields, such as Pão de Açúcar, operated by Equinor in the pre-salt Campos basin offshore Rio de Janeiro state, which is expected to produce 16mn m³/d by end of 2026. EPE estimates Brazilian gas production will reach 147mn m³/d by 2030, up from 55mn m³/d in August.

But by 2027 the country will need expanded pipeline capacity beyond existing gas pipelines Route 1 and 2 from the offshore, even with pipeline Route 3 operational by 2022. Significant pipeline expansions will not be built unless there are large customers willing to sign long term contracts for that capacity.

"The Brazilian gas market is still small. It may be difficult to find buyers for this much gas," a source with knowledge of the oil and gas production industry told Argus. "Finding anchor consumers in Brazil is a complicated matter, and gas producers depend on consumers with little ramp-up and steady consumption."

Gas-fired thermal generators, the second largest gas consumer group in Brazil, are being considered as another major long term customer. The Brazilian power market is mostly captive, with 85pc of consumers tied to local distribution companies that get their power through regulated government auctions.

But demand for thermal power generation in Brazil fluctuates. Hydropower is the dominant source with a 62pc installed capacity, and prices for wind and solar power are dropping. Given the interconnected nature of Brazil's power grid, new gas-fired power plants are unlikely to be built in states other than the coastal markets where they currently operate.

The bus and truck market is also being considered as a possible gas market, with distribution company association Abegás leading that effort. Some of the diesel truck market could be replaced by natural gas-fueled trucks, with a potential consumption of 30mn m³/d, Abegás strategy and market director Marcelo Mendonça said. That demand could also be met by biogas, providing buyers with a green option, he said.

Natural gas is the cheapest fuel option for heavy vehicles according to Minas Gerais state gas distributor Gasmig, costing R0.32/km, versus R0.65/km for ethanol and R0.63/km for gasoline.

Finding these anchor consumers is the focus of a study by Brazil's Energy Research Office, to-be released in December.

By Flávia Pierry