The domestic natural gas market in Brazil has grown significantly in recent years. Demand has expanded at annual rates of around 15 percent over the last five years, and now totals about 48 million cubic metres per day. Distribution networks have also expanded quite rapidly, at about 18 percent per year between 2000 and 2005 – from 5.6 to 13 thousand kilometres covering various states. At the same time, there’s been a boom in conversions of motor vehicles to run on natural gas (NGVs), from less than 150 thousand vehicles nationwide in 2000 to over a million by the end of 2005. The number of industrial users of natural gas is also growing continuously, and an extensive network of gas-powered thermoelectric power plants has been installed, with a total capacity of 9.1 gigawatts according to ANEEL, the National Electrical Energy Agency.

The sustained development of this market will essentially depend on a significant expansion of supplies, domestic as well as through imports. Further growth will also demand heavy investments, especially to expand the pipeline network which has been practically stagnated since the construction of the Brazil-Bolivia pipeline. In fact, there are already serious problems in order to meet current demand in certain regions of Brazil.

In the northeast for example, scarcity of natural gas is the norm as potential clients are unable to depend on gas for lack of supplies. Brazilian oil and gas giant Petrobras is unable to fulfil contracted deliveries to existing thermoelectric plants. These imbalances slip by virtually unnoticed now because of excess capacities in other types of electricity generation, which result from lower than expected demand for electricity because of the slow rates of economic growth in recent years, plus the fact that reservoirs in hydro plants are filled to near-capacity.

But the current scenario makes it urgent to attract investors in order to expand the availability of natural gas, as well as the pipeline network throughout the country. And to accomplish that, it will be necessary to break the de facto monopoly situation held by Petrobras in the Brazilian natural gas market. Although legal restrictions to private investments that existed prior to 1997 were removed, Petrobras is still responsible for 95 percent of all domestic natural gas production, as well as the distribution of about 90 percent of all imported gas. Petrobras controls the main routes and key portions of the domestic pipeline network, and is a shareholder in most state-government owned distribution companies. It also controls the refining and importation of oil and related products which compete with natural gas.

Without changes to that situation, Brazilian society will remain at the mercy of the pace and corporate priorities of Petrobras before domestic natural gas reserves are properly dealt with and the existing pent-up demand for gas adequately looked after. In that respect, it is vital that the natural gas sector get its own set of legal and regulatory standards. Brazil’s so-called "Oil Law" (number 9.478/97) does not take into consideration technological and economic characteristics that are specitic to natural gas. The law has proved particularly inappropriate to promote competition in the sale and distribution of natural gas, as well as to attract investments for the transportation infrastructure.

Where gas sales are concerned, the main barrier is a set of negotiated rules of access by third parties to gas pipelines. This has often led to conflict between the various players involved, requiring intervention from ANP, the national petroleum regulatory agency. Negotiations between Petrobras subsidiaries and other interested parties have been characterized by a multitude of difficulties that have made access to the distribution infrastructure unfeasible.

The current business model provides no transparency regarding the way Petrobras deals with its subsidiaries which operate the pipeline network. The case of Transpetro, the subsidiary that operates pipelines in the southeast, northeast and northern regions, is emblematic: details of transportation contracts between Petrobras and Transpetro are not known. This lack of transparency and absence of a method that provides quick and predictable access to information restricts private sector investments in gas production, inhibits the expansion of supplies and generates higher costs that consumers end up having to pay for in the medium run.

Not only is there less competition in gas sales and distribution, but the industry ends up hurt by inadequate transportation networks. The “Oil Law” states in its article 56 that any company or group of companies can be authorized by ANP to construct any mode of natural gas transportation system. In reality, a system of authorizations does not provide enough security for the private sector to seriously consider investing in pipelines.

The legal system of authorizations for the construction of gas pipelines and negotiated free access to the transportation infrastructure are the two legal pillars which support the Petrobras monopoly in Brazil’s natural gas sector. The introduction of free access to pipelines in a system controlled by ANP, mandatory separate accounting and corporate practices covering the relationship between Petrobras and its subsidiaries, and a new legal framework for those who transport and distribute natural gas, in effect making them concession holders, are all key elements that will provide enough guarantees to attract more private investments into the Brazilian natural gas sector.

Petrobras frowns on these suggestions, alleging they will impose limits to its freedom to operate and reduce incentives to new investments. That view is a mistake. The “freedom” Petrobras doesn’t want harmed is not in the best interests of society, because it inhibits competition as well as further development of the gas market. It should be noted that in the debates that led to the opening of the oil market in Brazil, sectors within Petrobras and its labour unions alleged that the process would bring losses and a weakening of the company. But the exact opposite has happened since the “Oil Law” was passed in 1997: Petrobras has set new records for productivity and profitability. The situation repeats itself now, as Petrobras reacts to changes in the gas sector in order to protect a situation that can only be described as one of monopoly and privilege. Surely the introduction of specific laws for natural gas will have as it main beneficiaries Petrobras and Brazilian consumers.

(Published Info.Com, March 11, 2006)

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