Regulator: Gas Market Needs Clear Rules, Competition -Brazil

Brazil needs clearer legislation to boost competition in the natural gas distribution sector and guarantee the expansion of the local gas market, the president of the association of regulatory agencies (Abra), Joao Dutra, said during the 2005 Gas Summit in São Paulo on Wednesday.

"Brazil has to choose whether it will expand its gas market through the [federal energy company] Petrobras' monopoly or whether it will grow by way of competition in transport and distribution," he said.

Brazil has some 20,000km of gas transport and distribution pipelines, of which Petrobras (NYSE: PBR) controls about 8,000km. Petrobras also has minority stakes in 19 of the 20 state-controlled gas distribution firms that have a total 11,500km of pipelines.

Petrobras produces and imports all the 45 million cubic meters a day (Mm3/d) of gas available in the country and it is also the only company with plans to expand the gas transport network. The company plans to invest US$3bn to lay 4,000km of pipelines by 2010.

Petrobras' dominance of the gas sector means it dictates prices in the country, although the government sets price ceilings, said Dutra. Prices charged to distributors in Brazil vary from US$3.05 per million BTU (MBTU) to US$3.74/MBTU for the 20Mm3/d imported from Bolivia.

Competition in distribution is the best way to reduce prices and guarantee expansion of the market, according to Dutra.

"This is what happened in Rio de Janeiro and São Paulo states, where the gas distribution sector was licensed to several different companies," he said.

Of Brazil's total average natural gas consumption of 36Mm3/d in 2004, the two states accounted for 16Mm3/d. Other states can only follow such an expansion rate by creating state regulators and holding tenders for new gas distribution concessions with detailed investment plans, he said.

"The final price of gas will be determined by striking a balance between covering operational and investment costs and guaranteeing a return on investments."


Dutra also called for the government to speed up drafting the new federal gas bill to regulate the market, allowing private companies to invest in the sector alongside Petrobras as Brazil's economy grows and demand rises.

"Petrobras has an enormous capacity to obtain financing but it will soon be limited," he said. "It has obtained financing from the Japanese and Chinese, but soon the company will have to seek financing from Mars."

A specific gas bill itself is needed, although national hydrocarbons regulator ANP oversees the gas market based on the 1996 general hydrocarbons law and power regulator Aneel has some oversight because of thermoelectric generation rules, according to Dutra.

Brazil is a greenfield area in gas but even without specific rules the gas market has grown significantly since 2000 when Bolivian imports started, he said. "Now the new law must now address the bottlenecks."

The main issue in the bill is access to the national gas transport network controlled by Petrobras. Most of Brazil's 11.1 trillion cubic feet of proven gas reserves are offshore in the Santos, Campos and Espírito Santo basins or far from the major consumption centers in areas such as the Solimões basin in the northern Amazon region, which means the gas must be transported long distances.

At the moment Petrobras dictates prices and oil companies planning to bid in the seventh hydrocarbons exploration tender scheduled for October are unsure if they will have access to the network to transport gas.

Oil companies say they need guarantees to get their fuel to market and allow consumers to make future price projections.

The federal government has been preparing the new gas bill since last year but so far no draft bill has been announced and government officials have declined to comment on the issue.

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