INSIGHT: Brazil’s natgas overhaul to benefit chems but crude players push indispensable

SAO PAULO (ICIS)–The Brazilian government’s decree changing natural gas regulations could potentially overhaul the market and, along the way, benefit the chemicals industry by providing it with cheaper energy and eventually with ethane-based feedstocks.

The job of a lobbyist may be well paid, but it must be a hard one most of the time. For years, Brazil’s chemicals trade group Abiquim had been lobbying for the government to pass regulations which would allow the natural gas which comes as a byproduct from crude oil production to stay within the economy, and not be just reinjected into the ground again.

To make common cause on that lobbying, Brazil’s polymers major Braskem has also been saying for years that it stands ready to expand its Duque de Caxias facilities, in the state of Rio de Janeiro, as soon as the necessary gas and derivatives were available.

For years, those demands had fallen in deaf ears.

Until 26 August, when the cabinet presided by Luiz Inacio Lula da Silva passed a decree contemplating, among other measures, higher powers for the oil and gas regulator ANP to set up the amount of gas which is reinjected into the system, for instance.

If fully implemented, the decree could completely change the natural gas market in Brazil, and ultimately benefit the chemicals industry via lower energy costs and, potentially, having more ethane, rather than crude-based naphtha, as a raw material.

In a written response to ICIS, Abiquim’s director general Andre Passos celebrated the decree and did not share the fears of some analysts, who see in giving regulators more power than traditional willingness to basically intervene the market.

REINJECT OR NOT TO REINJECT – AND WHO PAYS THE BILL
Acting on natural gas in Brazil had almost become an imperative since the US shale gas revolution changed that country’s energy landscape, making it again a net exporter and reviving the petrochemicals industry to an extent no-one could imagine just two decades ago.

In the US and Brazil, the two largest chemicals producers in the Americas, the contrast is stark: natural gas prices in the southern neighbor are around four times higher than in the US.

However, some analysts have said they are concerned about the type of action taken, arguing that giving regulators such as the ANP more power could lead to more government interventionism in the oil and gas sector, potentially denting Brazil’s crude sector attractiveness to invest.

However, lest not forget that Brazil’s crude sector is mostly dominated by one player, Petrobras, and this player is majority owned by the state: its CEO is appointed or dismissed as the President sees fit, and the crude major is effectively one more arm of the cabinet – a ministry of energy bis, so to speak.

Still, Brazil’s crude sector was meant to go towards more liberalization, not less. And this is where the decree on natural gas passed in August overreaches, according to critics, the scope of what a government should do or should not do to encourage certain economic activity.

According to the decree, the ANP will be able to mandate to crude oil players the levels of natural gas they can reinject back into the system during their crude oil extraction operations, and how much they should make available for companies and households.

In simpler words: crude producers will have to go from reinjecting most of the gas – at a very low cost – to create an infrastructure to transport that gas onshore.

For now, crude oil majors operating in Brazil have, for the most part, kept quiet about the decree. In a written response to ICIS on 29 August, Shell said it was “analyzing” the decree, without any further comment, a response it has not updated as of 3 September.

Petrobras and Equinor had not responded to a request for comment at the time of writing.

Equally, Braskem did not respond either to questions about potential petrochemicals expansions or how the decree could affect investments in crude oil and, ultimately, affect the industrial sectors if that was to happen.

Petrobras’ CEO, Magda Chambriard, said, however, the company would do “everything possible” to reinject as much gas as it is able to, but also reminded how this reinjection will only be possible in the production platforms to be started up in the future.

“On the platforms that are already there [in operation] and on those that are already being delivered, this [reinjecting more gas] will not be possible,” said Chambriard, quoted by specialized publication Offshore Energy.

Abiquim’s Passos is not concerned at all and said that the powers given to ANP is a natural step for “an aspect of oil and gas production” that was not previously covered by the regulators.

“The power to regulate will be used considering the interests of producers, consumers, and the state and, obviously, without implying a disincentive or a halt to new investments. In any case, given the magnitude of investments in oil, new investments specifically for gas would not significantly alter the competitiveness of oil exploration and production (E&P) in Brazil,” said Passos.

“Abiquim is confident that the costs associated with E&P in Brazil’s oil sector are sufficiently low to cover any additional costs that may arise.”

And to the fears about higher intervention from the government, Passos said it was a “global characteristic” of the crude oil and gas sectors to be highly regulated.

CHEMICALS CHEERS, FINALLY
Abiquim’s Passos is well aware of Petrobras’ CEO warning about the slowness in the natural gas market, and how it may take years for the changes benefiting chemicals to take place.

But, after years of unsuccessful lobbying, Passos is a happy man who says the authorities have finally a vision of what chemicals should be and what its problems are. With that, he is ready to wait.

“Nothing will be immediate. However, there is a compatibility between the time needed for greater availability of natural gas, improving the competitiveness of this raw material in Brazil, and the time required for petrochemical projects to mature – we should consider that this is a structural action with medium- and long-term impacts,” said Passos.

However, after years of lobbying for a decree like the one just passed, the trade group was understandably exultant, not least because this comes just two months after another success. In June, Abiquim and Passos as its representative were part of Lula’s entourage when he went on a state visit to gas-rich Bolivia in June.

During the visit, Brazil and Bolivia signed agreements to expand natural gas supplies, in a long-running business relationship which has made Bolivia the key supplier to the Brazil’s most populous, industrious and wealthiest states in the south via the pipeline Gasbol, the longest natural gas pipeline in South America at 3,150 kilometers (1,960 miles).

At the time, Abiquim described the agreements inked in Bolivia as a “historic” step for Brazil’s chemicals and which, together with the latest natural gas moves, could pave the way for a truly competitive sector in the global stage, said the trade group.

Agreements on fertilizers were also signed as Brazil, already one of the world’s bread baskets, continues to post a large trade deficit in that field.

According to Brazil’s government, the deals in Bolivia and the decree on the regulatory environment for natural gas could unleash investments of Brazilian reais (R) 96 billion ($17 billion) in natural gas, biomethane, and fertilizer plants, as cited by Abiquim in its statement following the decree’s passing.

SEVERAL DEALS, LITTLE RESULTS
Abiquim’s lobbying has been directed where it could make the most difference: the government and Petrobras, admittedly achieving more success with the former than the later.

In its quest for expanding natural gas supplies and lower prices, Abiquim knocked on Petrobras’ door in 2023 and formed a working group to explore solutions to the “critical situation” the chemicals industry was in.

Nothing was heard about that working group, so this year the two parties gave it another shot and singed a memorandum of understanding (MoU) aiming for the same: to find ways of making the petrochemicals industry more competitive.

So far, nothing concrete has been communicated, while chemicals remains with its operating rates at record lows as imports continue flooding Brazil and the wider Latin America, with an increase in import tariffs later this year one of the elements which, according to Abiquim, could start fixing the beleaguered Brazilian domestic chemicals production.

“Over the last few months, both teams (Petrobras and Abiquim) have been concerned about handling anonymized data from the sector. Creating a safe environment for members to access competitive natural gas is Abiquim’s focus,” said Passos.

“The high volume of natural gas consumption for the sector justifies the continuation of the negotiations. We are very pleased with the technical capacity and fairness of the process and how it has been handled by both parties.”

Front page picture: Abiquim’s director general Andre Passos (second from the right) in Brasilia on 26 August, when the new national energy and natural gas policies were signed 
Picture source: Brazil’s Ministry of Mines and Energy 

($1 = R5.64)

Insight by Jonathan Lopez