Election effects can make or break gas market

The natural gas industry's requests for the future Brazilian president are largely linked to increasing gas supply and reducing infrastructure costs, but Petrobras' dominance in the gas market means the next president's approach to the state-controlled company will be key.

The next Brazilian president will find a gas market in the infancy of its liberalization, very dependent on regulatory reinforcement to thrive — but still more mature than it was four years ago, when President Jair Bolsonaro took office.

The new gas law and its accompanying decree were completed in 2021, the same year that the first bilateral gas supply agreements were signed. Some large industrial companies are purchasing gas directly from suppliers, and distributors are purchasing gas from producers other than state-controlled Petrobras. Transportation pipelines were also privatized and Petrobras' piped gas distribution arm, Gaspetro, was sold.

At this stage, the gas market requires a proper balance of responsibilities and communication between regulators, the antitrust agency and market participants, to continue the liberalization process. At the same time, defining Petrobras' role in the gas market can be key for the development of a competitive and liquid market.

Undoing the legal and market advancements the gas industry has made would not be easy, nor is it likely to happen. The natural gas liberalization process, which started during former-president Michel Temer's term from August 2016-December 2018, was planned by then-oil and gas secretary Marcio Felix in a way to prevent it from being undone, making it hard to reverse course.

Large energy consumers' association Abrace has told both presidential campaigns its most pressing concerns include a gas release program and the reduction of gas reinjection rates – when gas is pumped back into the wells to repressure them or because of a lack of pipeline capacity. Consumers also want updates to federal regulations and the resumption of commitments signed by Petrobras to reduce its participation in the gas market. And they want state administrations and regulators to coordinate gas laws and rules.

Lula, Bolsonaro paths may differ

The two leading presidential candidates — incumbent Bolsonaro and former president Luiz Inacio Lula da Silva — have contrasting proposals that could lead Brazil's gas market down different paths.

Lula's past administration, from 2003-2011, strengthened public offices and state-run companies, which if repeated could help the gas market further federal regulatory updates, led by oil and gas regulator ANP. But Lula's recent statement about changing Petrobras' import parity price policy signals that if he was to win, the administration might play a bigger role in Petrobras operations, which could hinder the company's effort to reduce its position in the gas market.

By contrast, Bolsonaro's administration and its free-market priorities could increase Brazil's gas market's competition and decrease Petrobras' participation during a second term.

But the current president has not shied away from intervening with the state-controlled company's business, firing Petrobras presidents when they were at odds with the government's desire to keep rising fuel prices in check.

Presidential intervention in Petrobras policies will weigh heavily on the gas markets, particularly when it comes to gas reinjection. Currently, 50pc of the gas produced in Brazil is reinjected to both bolster oil production and because of a lack of takeaway capacity. Petrobras was responsible for 68pc of Brazil's natural gas production in June, so less reinjection can mean less crude production and less revenue. A self-directed company might stick with high reinjection rates to support its own finances. An interventionist president might reverse that move.

By Flavia Pierry