BRAZIL'S THREE NATURAL GAS SYSTEMS: SOURCES, MARKETS, REGULATIONS, AND BUSINESS PERSPECTIVES
| Jurisdiction | Derecho Internacional |
(Mar 1999)
BRAZIL'S THREE NATURAL GAS SYSTEMS: SOURCES, MARKETS, REGULATIONS, AND BUSINESS PERSPECTIVES
Prates & Associados (Expetro Group)
Rio De Janeiro, Brazil
INTRODUCTION
After fifty years of state monopoly on oil and gas activities and of secondary role for natural gas in the country's energy mix, Brazil finally starts looking seriously at natural gas as a important alternative source of energy to help matching the rising demand expected in the future.
Brazilian exploration and production now consider natural gas as a valuable result, pipeline projects proliferate throughout the national territory, markets start to become a tangible reality and regulations are expected to be modern and flexible. Apart from the well known Bolivia-Brazil pipeline, other important projects are gaining importance, such as the Northeastern market and the Argentina-Brazil connection, also not forgetting the old dream of bring viability to the Amazonian reserves.
The new scenario for natural gas activities in Brazil is still under construction. However, it already gives positive signs to both investors and consumers. The perspectives are therefore extremely interesting.
This paper defines, for the first time, three distinct natural gas systems within Brazil, pointing out the basic characteristics and indicators for each of them. It also outlines the approach that has been taken by the Brazilian government through its National Petroleum Agency (ANP) to regulate the natural gas sector in Brazil aiming at building a competitive market, with sound infrastructure and integrated to the other relevant systems within the South American continent1 .
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I. HISTORY AND CURRENT STRUCTURE OF NATURAL GAS IN BRAZIL
15B.1 BRIEF HISTORIC OF BRAZIL'S NATURAL GAS INDUSTRY
The development of Brazil's natural gas industry only very recently became a governmental concern and its scope national. Historically, the participation of natural gas in Brazil's energy mix never reached more than 3% of the country's total energy consumption. Although it has become common to say that this was due to the lack of supply in the country, this is only part of the story. The truth is that the national oil company — Petroleo Brasileiro S. A. — Petrobras — never paid much attention to the country's natural gas potential. Instead, it concentrated all of its efforts on the development of oil and its fuel products. Moreover, before 1986, there was a complete lack of governmental directives concerning the promotion of natural gas use among all the other energy sources available in Brazil2 . Figure 15.B.1 shows a simplified sketch of the historic evolution of Brazil's energy mix, highlighting natural gas.
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The theory and experience of natural gas markets in Brazil are, by consequence, also very recent and yet preliminary. An eloquent example is given by the following fact. Only since 1987, did Petrobras started to commercially supply natural gas to Sço Paulo, a market currently reputed to be the heart of the natural gas consumption in South America.
In fact, the actual use of natural gas in Brazil, apart from the mere reinjection in conventional oil fields at Recôncavo, Sergipe-Alagoas and Potiguar Basins (Northeastern Brazil), began in 1974 with the major discoveries in the Campos Basin (offshore Rio de Janeiro). Also, associated gas started to be used in gas turbines for power generation at the platforms. However, these usages were negligible.
In 1983, Petrobras built its first major gas pipeline. The Nordestço pipeline linking the Guamaré Terminal (RN) to the city of Cabo (near Recife, PE), with branches to Natal (RN), Campina Grande (PB) and other main cities of the Northeastern region (see Section 15.B.2). In 1984 and 1985, two other gas pipelines were completed in the state of Rio de Janeiro: the first connecting Cabiúnas terminal (that receives the production from offshore Campos basin) to Rio de Janeiro, with an extension to the Duque de Caxias Refinery (REDUC); the second which takes the incoming natural gas from Rio de Janeiro further down to the CSN steel mills in the city of Volta Redonda (RJ). During 1985 and 1986, various branches lines were also installed in the states of Pernambuco and Rio de Janeiro mainly to supply local industries.
In 1986, as a result of the discovery of the Merluza gas field (Santos Basin, offshore Sço Paulo state) and the strong environmental concerns regarding the industrial city of Cubatço (then measured as the world's most polluted atmosphere), natural gas started to be seen as a viable and cleaner alternative source of energy in the eyes of Sço Paulo's industrialists.
Although by this time natural gas coming from Brazilian fields was already being used as fuel (methane), or in the production of ammonium, urea, methanol and fertilizers, the announcement in 1996 of a final agreement for the construction of the Brazil-Bolivia
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pipeline accelerated the interest in the development of natural gas in Brazil. However, there were still some roadblocks. Although the pipeline idea had already consumed 40 years of strategic essays, technical studies and official negotiations between the two governments, the privatization of the Bolivian oil company (YPBF) and the Brazilian constitutional reforms led to many debates and uncertainties regarding the future of natural gas in Brazil. Today, as the pipeline reaches Sço Paulo (March, 1999), major changes in the region's configuration are expected, and integration between the Southern Cone countries tends to be consolidated faster in relation to natural gas logistics than probably in any other commercial field. Therefore, natural gas may soon become a backbone of this regional integration process.
Nevertheless, the large impulse expected to result from the starting of the pipeline's operation could be dampened by Brazil's lack of tradition in regulating natural gas markets and the inexperience in establishing contracts for transportation, purchase and distribution. This area has proven to be a sensitive one for the main current players.
Although in Brazil natural gas consumption is still incipient at 10.6 million cu m/d, estimates are that it should grow to above 35 million cu m/d over the next ten years3 . Demand is expected to be driven mainly by the industrial segment and by the new gasfired thermal power plants. Given that the country's electricity demand is expected to increase at an annual rate of 5% and that there is a lack of sufficient hydroelectric projects to meet this demand these plants would provide a viable alternative. Apart from the mentioned uses, new processing capacity coming on-stream will allow third generation industries to convert gas into plastic packaging materials, etc. New ethylene and polyethylene plants in Rio de Janeiro and a glass and chemical complex in Natal will use natural gas coming from Campos and Potiguar basins, respectively.
After having neglected the possibility of employing natural gas as a significant, cheap and clean source of energy for so many years, Brazil finally expects to quickly see the results of its major efforts to increase participation of natural gas in its energy mix. The Bolivia-Brazil pipeline is expected to transform the energy mix of Brazil. Today,
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natural gas is the 12th largest energy source in Brazil, less than half the level of wood on an energy equivalent basis. The future behavior of Brazil's consumption should raise such participation from current 2% to almost 8% by 2000 and more than 14% by 2010.4 Electricity generation and industrial use will certainly drive the demand growth, as Brazil does not have the infrastructure for residential gas demand. The temperate climate in the great majority of the national territory restricts residential use for natural gas to cooking and boilers, which also does not creates significant scale for installing distribution networks in the concentrated, urban coastal cities. This reality could change with the introduction of new technologies for other residential usage of natural gas.
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15.B.2 DESCRIPTION OF THREE NATURAL GAS SYSTEMS
As it is well known, the monopoly gas supplier and transporter in Brazil until 1996 was Petrobras. Following the progressive opening up of the petroleum industry in Brazil, Petrobras is expected to share the market with private investors. Today, the domestic reserves and production figures are as shown in Figure 15.B.3.
Current production of natural gas in Brazil is about 40 million cu m/d, about 41% of which is sold commercially. In certain areas where transportation is a limiting factor, such as in the Amazon, the majority of the gas produced is re-injected (about one million cu m/d).
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To better understand the current operational framework and its future developments both strategically and physically we have defined three major natural gas systems, which we detail as follows.
15.B.2-I. SOUTHEASTERN-SOUTHERN SYSTEM: HEART OF LATIN AMERICA'S NATURAL GAS CONSUMPTION
The Southeastern-Southern System can be defined as the natural gas reserves and pipelines designed to supply and interconnect the major and secondary consuming centers of the Brazilian states of Mato Grosso do Sul (MS), Sço Paulo (SP), Paraná (PR), Santa Catarina (SC) and Rio Grande do Sul (RS). A possible expanded version of this system could be considered by adding the Rio de Janeiro (RJ), Espírito Santo (ES) and Minas Gerais (MG) sub-system, mainly supplied by the gas coming from the Campos, Santos and Espírito Santo offshore basins. To the Northwest of this same major system, three other main states may be soon incorporated: Mato Grosso (MT), Goiás (GO) and the Federal District (DF), where the capital of the country, Brasília, is situated.
To better illustrate the importance of Brazil's Southeastern...
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