Knock-on effects of Brazil’s gas reforms

Disagreements between producers and consumers over gas composition standards highlight unexpected costs of eliminating Petrobras’ monopoly status

WHAT: ANP has extended the public comment period for proposed changes in gas composition standards.

WHY: Producers and consumers have different ideas about the need for consistency in delivery streams and spending on new infrastructure.

WHAT NEXT: The disagreement is coming at a time when Brazil’s government is promoting increased gas consumption, which will require costly investments in infrastructure that neither side is rushing to build.

If it is axiomatic that policy reforms, even the most well-intended and best-planned of them, tend to have unintended consequences, then Brazil is currently a living illustration of that axiom. That is, the country is coming to the realisation that the gas sector reforms introduced by former President Jair Bolsonaro in 2021-2022 could not help but create new problems in the process of solving old problems.

At least one of those problems arises from the decision to open the gas industry up to competition. The sector had previously been under the exclusive control of Petrobras, the national oil company (NOC), but the Bolsonaro administration liberalised it and invited new players – new producers, new trunk pipeline operators and new distributors – to enter the market. It did so in the hope that competition would help bring prices down and attract investment.

This move succeeded, insofar as it achieved its aim of giving companies other than Petrobras the chance to bid for and win domestic gas supply contracts. However, it also occurred at a time when the make-up of domestic supplies had started to change in ways that have the potential to affect buyers negatively, causing problems that cannot be easily fixed.

Argus Media explained the situation in an article on April 24. It noted that Brazil’s National Agency of Petroleum, Natural Gas and Biofuels (ANP) had recently pushed the end date of the period for public comments on a proposed change in natural gas supply specifications back to May 15. ANP acceded to requests for a one-month extension, it said, because gas producers wanted to debate an alternative proposal.

Producers and Petrobras will benefit

The regulatory agency is apparently seeking to confirm a set of standards specifying that participants in Brazil’s gas market must supply gas consisting of at least 80% methane and no more than 12% ethane, 6% propane and 3% butane. However, Brazilian gas producers favour less restrictive standards that lift all limits on content. Producers, as represented by the Brazilian Petroleum and Gas Institute (IBP), are pushing ANP to adopt the Wobbe Index (WI), a measure used in the UK, Norway and Spain that would take account only of the calorific count of the total volume delivered, regardless of the ratio of methane to other gases.

The issue is under debate because gas reform has eliminated Petrobras’ monopoly over the gas sector. In the past, the NOC could easily subject all production streams to the same specifications, and it owned all the facilities that might be used to ensure that gas complied with standards. This is no longer true, though, as independent producers are responsible for themselves – just as Petrobras is, even though they do not necessarily have any processing units.

The IBP is now lobbying for introduction of the WI for at least two reasons. First, the new standard takes account of the fact that an increasingly large share of Brazil’s gas output has been coming from offshore fields in the pre-salt zone, especially since 2021. This is important, since natural and associated gas from pre-salt fields tends to contain higher levels of ethane than gas from other production hubs.

The second reason is then a consequence of the first. If producers that extract gas with a higher ethane content are allowed to load all of their volumes into the national pipeline network, rather than sending it to a Petrobras facility for processing prior to loading (and paying for the privilege), then they will. Moreover, they will likely continue to focus their efforts on exploiting the very same pre-salt fields that contain more ethane than the current specifications allow, meaning that ethane content will drift upward from the current 12% limit towards the pre-salt average.

This is certainly advantageous for IBP’s member companies, and it is also likely to benefit Petrobras. According to Argus Media, market participants say the NOC has asked gas producers not to lower the ethane content of gas volumes delivered to the Caraguatatuba processing unit in Sao Paulo State via the Route 2 pipeline, as the facility is not designed to separate ethane and would cost around BRL500mn ($99.88mn) to retrofit.

Consumers will bear the cost

In other words, gas producers stand to benefit from the proposed new standard because it will give them a way to boost gas delivery volumes without taking any extra steps. Meanwhile, Petrobras also stands to benefit because it will not have to spend any money to build a new ethane separation facility.

But there will be problems for some of the other participants in the gas sector. Argus Media noted that Brazil’s glass and ceramic producers were concerned about changes in the composition of gas supplies and were therefore lobbying for maintaining existing standards and compelling Petrobras to update the Caraguatatuba plant. Their argument, the news service said, was that fuel with a higher WI could cause the torches in their ovens to work more quickly – and that this change might have a negative impact on the quality of finished products.

Additionally, Argus Media said, manufacturers of ceramic materials have been complaining that they would need to make costly investments in their furnaces if they knew the composition of fuel supplies was likely to vary. And the complaints would probably not stop there; an engineering source consulted by NewsBase pointed out that operators of gas-fired thermal power plants (TPPs) would also have to adjust their compression and combustion systems to ensure their ability to provide the optimum mix of fuel and air.

Likewise, NewsBase’s source noted, variations in composition can pose complications for facilities that use gas as feedstock, such as petrochemical or fertiliser plants. The most straightforward means of overcoming this hurdle, the source said, is to break all of the feedstock down into methane and then build it up again into longer-chain hydrocarbons as necessary. Once again, though, this would be a costly option for the gas buyers concerned.

Meanwhile, the Brazilian Chemical Industry Association (Abiquim) says there are other costs to IBP’s proposal, such as the possibility that adopting the WI standard could cause carbon dioxide emissions to rise by up to 7%. At the same time, Argus Media reported, other Brazilian industry associations claim that the shift in fuel composition standards could make turbines operate less efficiently and reduce the operating life of machinery.

Who covers the cost?

IBP argues, though, that its proposal would not have any negative consequences. The industry group has pointed to ANP’s decision to issue a special authorisation in 2020 bringing minimum methane content levels down from 85% to 80%, arguing that this shift did not cause any harm to residential or industrial gas consumers.

It bears mentioning, however, that Brazil’s gas sector has changed since 2020 – and not just because of Bolsonaro’s reforms. First, as noted above, the composition of the gas is changing because the country is sourcing a larger portion of domestic production from offshore pre-salt fields.

Second, demand is rising. Data from BP’s Statistical Review of World Energy show that gas consumption levels shot up to 40bn cubic metres in 2021, up 29% on the 2020 figure of 31 bcm. This increase was due in large part to a severe drought that struck in 2021, leading the country’s hydroelectric power plants (HPPs) to cut production, gas-fired TPPs to ramp up output to meet energy demand and LNG importers to step up shipments to keep the power stations running. However, demand has remained strong. Even after the drought ended and gas-fired TPPs reduced fuel use, overall consumption levels remained high, and data from the International Energy Agency (IEA) for the January-October period of 2022 indicate that last year’s consumption total is likely to be higher than the 2020 figure, even if it is slightly below 2021.

Additionally, Bolsonaro’s successor, Luiz Inacio Lula da Silva, is talking about making changes in the gas sector – not so much in the sense of reversing reforms but in the sense of turning the industry into a jobs programme. Specifically, Lula wants Brazilian oil and gas producers to stop re-injecting so much of their associated gas back into pre-salt fields to boost reservoir pressure and maintain output levels over time. Instead, he wants them to send more of it to shore for loading into the national pipeline network so that it can be delivered to domestic users, and he is particularly keen to see it going to enterprises operating under state-owned Petrobras’ umbrella, such as petrochemical and fertiliser plants.

For this to happen, however, there will need to be more pipelines built to link the pre-salt fields to onshore gas transportation networks – and thus far, ANP, Petrobras and independent producers have yet to reach a definitive agreement on how to cover the cost of such an endeavour. Once again, then, Brazil’s gas sector may be heading for a situation in which the desire for change stalls out in the face of reluctance to foot the bill on the part of the affected parties.