Petrobras expands influence over distributors

State-run Petrobras is offering to extend gas supply agreements for distribution companies in Brazil to nine years, sparking concern among market participants that this will hinder more competition.

The longer and lower-priced contractsare being prepared over the next few weeks with distributors from Alagoas, Espírito Santo, Ceará, Santa Catarina, Sergipe and Rio de Janeiro states, which fought legal battles with Petrobras and received injunctions to maintain 2021 gas prices. These companies together are responsible for 42pc of Brazilian distributors' gas demand.

The contract extensions come just one week after the release of gas market transition rules in Resolution 3/2022 by the Brazilian national energy policy council, CNPE, which previews the adoption of gas release mechanisms.

The price of Petrobras' gas supply agreement for distributors rose from 11-12pc of the Brent oil index in 2021 to 16.75pc of Brent crude in 2022, with rates falling gradually every year to 11.6pc by 2025. The price increase led those six distribution companies to file injunctions to avoid the price hike and keep the 11pc of Brent price contract.

To end the dispute, Petrobras agreed to a 12.6pc of Brent price policy for this year, but extended the four-year-contract to a nine-year period, two distributors told Argus. Petrobras declined comment on the matter.

The new Petrobras proposal has some flexibility that will allow room for some competition, said one person with knowledge of the contract. Minimum gas intake is reduced annually, allowing distribution firms to sign gas supply agreements with Petrobras competitors.

A clause in the contract also grants waivers to distributors in case large gas consumers migrate to the competitive free market. Petrobras will adjust gas intake for a distributor to shave the volume it will no longer purchase after a consumer shifts away.

Distributors argue that the gas volumes available for purchase with other suppliers is too small for the whole market, at only around 2mn m³/d, leaving them with no other option than to stick to Petrobras. But others in the market say that Petrobras' move could still threaten the newly liberalized gas market that welcomed nine gas suppliers, all of which signed agreements with distributors with lower prices.

It also presents questions about the adoption of gas release mechanisms — where Petrobras would be forced to give up its supply contracts should regulator ANP and antitrust agency Cade believe they are needed to promote competition. With Petrobras responsible for producing more than 90pc of the Brazil's gas supply, the prolonged agreements could provide a guaranteed market for its gas production even if the gas release mechanism is triggered and third parties have to step in.

There is also concern among Petrobras' competitors as to why the former monopoly wants to mitigate price hikes in the short term by expanding its influence over distributors for another five years.

"Petrobras saw it has a lot of gas to sell, since thermal needs dropped this year and the new outflow pipeline from pre-salt basins, Route 3, is coming on line", said one person participating in the negotiations with Petrobras.

By Flávia Pierry