BRAZILIAN NATURAL GAS INDUSTRY: CHALLENGES AND PROSPECTS

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1 BRAZILIAN NATURAL GAS INDUSTRY: CHALLENGES AND PROSPECTS Prof. Marcelo Colomer Energy Economics Group Institute of Economics Federal University of Rio de Janeiro Roundtable hosted by Center on Global Energy Policy Columbia University New York, May 18, 2015

2 mcm/d Natural Gas Domestic Production in Brazil Increase Constantly in last 50 th years Natural Gas Production in Brazil increase 150% between 2000 and 2014, specially on offshore basins, what explain the high cost to bring it to the market; Natural Gas Production 100,00 90,00 80,00 70,00 60,00 50,00 40,00 30,00 20,00 10,00 Natural Gas Production Oil price shocks Oil Industry liberalization 0,00 Source: ANP.

3 mcm/d However, that Increase Depends from Oil Exploration The natural gas production increase due mainly to Petrobras exploration efforts of oil; it explain why the natural gas production is mostly associated with oil production. Natural Gas Production Petrobras Parnaíba Gás Others 5% 2% 90,00 80,00 70,00 60,00 50,00 40,00 30,00 20,00 10,00 0,00 Natural Gas Production Associated Non-associated 93% Natural gas exploration business in Brazil is still in its infancy!!! Source: ANP.

4 Petrobras Control the Natural Gas Industry Most of natural gas gathering pipelines are owned by Petrobras so, Petrobras is the only natural gas supplier to the market. Other producers sells their production to Petrobras. The company is also present in all natural gas chain, as the owner and operator of the pipelines and as partner of almost all LDCs in Brazil; All imports of natural gas is done by Petrobras Natural Gas Transport Pipeline Ownership 3% 42% 55% Trasnpetro Gasbol Lateral Cuiaba Source: ANP.

5 Despite the increase in Brazilian production, the domestic supply continue insufficient 75% of Brazilian production is offshore and associated with oil, Furthermore, the weak regulation related to gathering pipelines reduces the interest of independent companies in gas market; Most of the gross production does not reach the market; In 2014, only 55% of the Brazilian gross production were available to the market; The consumption in E&P facilities and reinjection were responsible for 35% of gross production utilization; 55% Gross Production Destination 18% 5% 4% 5% 13% Reinjection E&P consumption Consumption in treatment plants Flaring Consumption in transport and storage Domestic Supply Source: ANP.

6 Mcm/d % New perspectives for Natural Gas Industry in Brazil: Presalt In 2013, the production of pre-salt accounted for 13% of total production in Brazil; According to the Brazilian government, the production of pre-salt will account for 57% of gross production of natural gas in 2023; However, uncertainties about CO2 contamination in the pre-salt reservoirs and the long distance from the coast is a barrier to the monetization of pre-salt natural gas; MME expect that only 65% of gross production will reach the market in 2023; Pre-salt Share in Natural Gas Production Natural Gas Production Forecast Pos Salt Pre Salt Total Source: AN e MME.

7 New perspectives for Natural Gas Industry in Brazil: Presalt Another uncertainty factor is the repeated delays in the construction of gathering infrastructure; Pre-salt Share Transfer Infrastructure By 2015, only the Route 1 was operating; it is expected that Route 2 begin operations in 2016 and Route 3 in 2017; The construction of the three routes will increase the transfer capacity of 40Mcm/d. This growth, however, is not sufficient to drain the presalt production; Source: Petrobras

8 Mcm/d New perspectives for Natural Gas Industry in Brazil: Onshore The Brazil has 116 bcm of natural gas reserves on land. This is 13% of the total reserves of the country; According to the MME, onshore production will reach 56MMcm/d in Of these, 14MMcm/d will be Nonconventional and 41 conventional resources; In June 2013, the EIA analyzed the potential of shale gas in only 3 basins in Brazil: Natural Gas Production Forecast Parana Basin: 81 TCF; Solimões Basin: 65 TCF; Amazonas Basin: 100 TCF Total of 246 TCF ou 6,96 TCM Offshore Onshore Conventional Onshore Non-Conventional

9 New perspectives for Natural Gas Industry in Brazil: Onshore Even with this limitation, Brazil s technically recoverable shale gas resources ranked 10th in the world; The ANP (Brazil s National Agency of Petroleum, Natural Gas and Biofuels) made an estimation of shale reserves in situ in 3 other basins not analyzed by EIA, using Barnett Shale as Analog: Parnaíba 64 TCF Parecis 124 TCF Recôncavo 20 TCF Total of 208 TCF ou 5,8 TCM = 454 Source: EIA, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States, June 2013

10 Barriers to the development of unconventional gas in Brazil Bidding rounds have been irregular and unpredictable; There is no predictability about which areas will be subject to bidding; Third party provocation mechanism to indicate areas to be auctioned is not effective; There are many areas of low level of geological knowledge and the ANP have scarce resources to investments in geological survey data; Technical and environmental regulations too complex and bureaucratic: High regulatory cost:

11 jan/11 mar/11 mai/11 jul/11 set/11 nov/11 jan/12 mar/12 mai/12 jul/12 set/12 nov/12 jan/13 mar/13 mai/13 jul/13 set/13 nov/13 jan/14 mar/14 mai/14 jul/14 set/14 nov/14 Mcm/d Demand is increasing faster than production The natural gas consumption in Brazil, goes from 27 to 100 MMcm per day between 2000 and 2014; Industrial sector used to be the mainly consumption sector. Although, Natural Gas Consumption recently changes in power sector, increased demand from natural gas power thermal plants; Other Comercial Residential Co-generation Transport Industry Power Generation Source: Abegás.

12 Brazil Natural Gas Imports Natural gas imports in Brazil increase from 6 to 51 MMcm/d between 2000 and 2014; Natural Gas Imports Until 2010, natural gas importation came mainly from Bolivia; However, since 2010, LNG imports has increase fast due to thermal demand of natural gas; The absence of storage facilities and the characteristics of thermal demand explain why Brazil buy LNG on spot market; Source: MME

13 USD/MMBtu Imports x Power Generation LNG imports are mainly used to supply peaks from thermal power plants demand, as a backup for the hydropower system; It explain the high prices of LNG cargos to Brazil. In 2014, the average price of LNG imported in Brazil was USD 14,8 per MMbtu; Although Brazilian participation in LNG market is small, he pushes the marginal spot price up Brazil: LNG Imports Brazil: LNG Price Source: MME

14 LNG Regasification Plants Brazil has 3 regasification plants with a total capacity of 41 Mcm/d: Location Regas Capacity (Mcmd) Rio de Janeiro 20 Ceará 7 Bahia 14 Location New Regas Capacity (Mcmd) Suape 14 Rio Grande do Sul 14

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