The Brazilian Gas Law: key features and prospects

Summary

After five years of debate, Brazil’s anticipated Gas Law was enacted in March 2009 with the aim of attracting private investment and competition to the natural gas sector. The new Gas Law provides legislation for the commercialisation of natural gas and promotes a more transparent and neutral framework for investors.

Background

Both the oil and natural gas industries in Brazil have developed under the same regulatory framework set out in the current Petroleum Law 1997 which provided for a new hydrocarbon exploration and production concession regime. Other activities such as import/export, transportation and processing of oil and gas were covered only to the extent that any company established in Brazil was able to carry out such activities under the supervision of the Brazilian National Agency of Petroleum (“ANP”).

Under this regime, gas transportation was subject to the authorisation of the ANP, and was often perceived as an anti-competitive system where little information on prices and capacity was made public.

Furthermore, the natural gas chain in Brazil is highly concentrated: state-owned Petrobras controls the wholesale market and operates virtually all gas transportation pipelines. On the supply side, the legal monopoly enjoyed by Local Distribution Companies (“LDCs”) prevents end consumers from accessing the wholesale market directly.

The new Gas Law does not change the current upstream regime, nor does it change LDC monopoly rights. What it does is to create mechanisms and incentives to attract investment from new players and to develop the infrastructure needed to deliver the gas to the final consumer.

Natural Gas Transportation

Natural gas and oil commercialisation have completely different physical and financial drivers. While oil can be easily stored, shipped and transported via conventional methods, natural gas, on the other hand, requires costly pipeline infrastructure and/or LNG facilities. Taking that into account, the new Gas Law makes the following changes to the current regime:

• New Concession Regime – Although cross-border pipelines are still subject to the ANP’s discretionary authorisation regime, the domestic transportation of natural gas will now be carried out by means of a 30-year concession, preceded by a tender coordinated by the ANP. The ANP will also coordinate a public consultation to determine actual demand for capacity and set the maximum tariff applicable. At this stage, the interested parties will commit to buy capacity. This process is similar to a book building (which is very common in IPOs) and will determine the applicable tariff to be paid to the operator.
• Investment in New Pipelines – Both the Government, through the Minister of Mines and Energy (“MME”) and private companies are allowed to propose the construction and/or expansion of pipelines. Moreover, the Government will be able to use Public-Private Partnerships and/or utilise resources from specific public accounts to fund new pipelines or capacity.
• Open Access – The Gas Law provides for an express guarantee of third-party access to transport pipelines subject to (i) an exclusivity period for new pipelines defined by the MME and (ii) a 10-year exclusivity period for existing pipelines.

Downstream

The Gas Law also aims to introduce competition in the downstream sector by:

• Providing that any company established in Brazil may apply to the MME for an authorisation to import/export, store and process natural gas and to develop LNG activities in Brazil; and
• Introducing further flexibility in the downstream sector by giving consumers the right to construct a supply pipeline if the LDC is unable to do so. It further recognises the self-producer and self-importer of natural gas (i.e. companies producing or importing natural gas for their own operations). In any case, the LDC will still be entitled to a fee for the operation and maintenance of the pipeline.

Apart from these incentive mechanisms, the Gas Law also gives the MME and ANP rights to take over the management of supply of natural gas in the case of a shortage, subject to specific regulation to be implemented in the coming months.

The impact of this new piece of legislation is already being seen: a few days ago the local newspaper “O Globo” reported that a private group will invest US$1.25bn to build a combined project consisting of a LNG regasification plant that will supply a 1,000MW gas-fired power station to be operational in 2014. Worth noticing is the fact that Petrobras does not have any direct interest in the venture.

For a copy of the Gas Law (in Portuguese language), please click here