Brazil is known to be one of the most difficult places to do business in the world, in part due to the lack of infrastructure and high costs of basic inputs, such as energy. But things may be about to change, as Petrobras assesses the impacts of its newest discovery: six natural gas fields in the north-eastern states of Sergipe and Alagoas which could generate the equivalent of one-third of Brazil’s entire natural gas production.

The discovery is being considered Petrobras’ biggest since 2006—when the deepwater pre-salt oil fields were found. Consultancy firm Gas Energy believes the estimated 20 million cubic meters of natural gas per day may generate BRL 7 billion for the company and partners each year.

</span></p> <p><span style="font-weight: 400;">For the country, the impacts may be even bigger, judging by international precedents. The increase in natural gas production due to shale gas exploitation in the U.S. has </span><a href="https://www.em.com.br/app/noticia/economia/2019/05/05/internas_economia,1051302/equilibrio-entre-oferta-e-demanda-e-o-grande-desafio.shtml"><span style="font-weight: 400;">lowered prices</span></a><span style="font-weight: 400;"> by 67 percent from 2008 to 2017, according to Brazil’s </span><a href="https://noticias.portaldaindustria.com.br/especiais/e-hora-de-abrir-o-mercado-de-gas-natural-no-brasil/"><span style="font-weight: 400;">National Industry Confederation</span></a><span style="font-weight: 400;">.</span></p> <div class="flourish-embed" data-src="visualisation/429130"></div> <p><script src="https://public.flourish.studio/resources/embed.js"></script></p> <p><span style="font-weight: 400;">For comparison, while industries pay USD 4.10 for one million BTUs of gas in the U.S., in Brazil, the cost reaches USD 11.10. Brazilian gas is also more expensive than the gas produced in Japan, United Kingdom, Mexico, and Argentina. It’s no wonder why the high prices in Brazil are seen as the major roadblock for using an energy source that can be cleaner than other fossil fuels and way more reliable—as transportation is done through pipelines, instead of on trucks. </span></p> <p><span style="font-weight: 400;">As the</span><a href="https://brazilian.report/money/2019/04/15/brazilian-industry-shrinking/"><span style="font-weight: 400;"> industry</span></a><span style="font-weight: 400;"> consumes 50 percent of Brazil&#8217;s natural gas production, while 35 percent is used for electric energy generation, lower prices would mean a significant productivity gain. </span></p> <p><span style="font-weight: 400;">Abrace, the association of Brazil’s industrial energy consumers, projects that a reduction of BRL 1 per MWh in energy costs represents a BRL 4 billion increase in Brazil’s national wealth in a decade. “Competitive prices for natural gas and electric energy may add one percent to Brazil’s GDP yearly growth and create 12 million jobs in this period,” read </span><a href="http://abrace.org.br/wp-content/uploads/2019/03/Mobilizacao-Energia-Industria_OK-002.pdf"><span style="font-weight: 400;">a letter</span></a><span style="font-weight: 400;"> from Paulo Pedrosa, Abrace’s president, to the Minister of the Economy, Paulo Guedes. </span></p> <p><span style="font-weight: 400;">On this note, Mr. Guedes himself already addressed the issue in a recent interview with newspaper </span><a href="https://economia.estadao.com.br/noticias/geral,promessa-de-energia-barata-anima-industria,70002757414"><i><span style="font-weight: 400;">Estado de S.Paulo</span></i></a><span style="font-weight: 400;">. He promised to create a “liberal shock to the energy sector” in Brazil, spurring the competition to halve gas prices. As part of that effort, Brazil’s Mining and Energy Ministry is preparing the &#8220;</span><a href="http://www.mme.gov.br/web/guest/pagina-inicial/outras-noticas/-/asset_publisher/32hLrOzMKwWb/content/nota-sobre-o-novo-mercado-de-gas-natural-"><span style="font-weight: 400;">New Natural Gas Market</span></a><span style="font-weight: 400;">&#8221; program, aiming to promote a “more open, dynamic and competitive market.”</span></p> <div id="attachment_19357" style="width: 550px" class="wp-caption alignnone"><img aria-describedby="caption-attachment-19357" class="size-full wp-image-19357" src="https://brazilian.report/wp-content/uploads/2019/06/descobertapetroleo.jpg" alt="petrobras natural gas discovery" width="540" height="475" srcset="https://brazilian.report/wp-content/uploads/2019/06/descobertapetroleo.jpg 540w, https://brazilian.report/wp-content/uploads/2019/06/descobertapetroleo-300x264.jpg 300w" sizes="(max-width: 540px) 100vw, 540px" /><p id="caption-attachment-19357" class="wp-caption-text">Reserves in Sergipe/Alagoas discovered by Petrobras</p></div> <p><span style="font-weight: 400;">In that sense, Petrobras&#8217; discovery is helpful, because it would be explored not only by Petrobras, but also by foreign companies—which are also set to fight for transportation infrastructure contracts, as we&#8217;ve mentioned in </span><a href="https://brazilian.report/newsletters/daily-briefing/2019/06/17/june-17-2019-bndes-brazil-politics-moro/"><span style="font-weight: 400;">our June 17 Daily Briefing</span></a><span style="font-weight: 400;">. </span></p> <p><span style="font-weight: 400;">The National Petrol Agency&#8217;s </span><a href="http://www.anp.gov.br/arquivos/publicacoes/boletins-anp/producao/2019-04-boletim.pdf"><span style="font-weight: 400;">most recent report</span></a><span style="font-weight: 400;"> shows that Petrobras fields produced 98.3 percent of the entire Brazilian gas production last April. The company also owns the three plants that promote the regasification of Bolivian natural liquified gas to Brazil—accounting for </span><a href="https://static.poder360.com.br/2018/01/folder_Gas-Para-Crescer-005.pdf"><span style="font-weight: 400;"> 35 percent of national consumption</span></a><span style="font-weight: 400;">.</span></p> <div class="flourish-embed" data-src="visualisation/429123"></div> <p><script src="https://public.flourish.studio/resources/embed.js"></script></p> <h2>Side effects</h2> <p><span style="font-weight: 400;">It is important to note that, as the pre-salt develops, analysts expect substantial growth in Brazilian gas production. However, the lack of ways to bring the product to consumers is a major reason why this industry hasn’t yet enjoyed a boom. </span></p> <p><a href="https://brazilian.report/money/2019/04/30/brazil-privatizing-petrobras/"><span style="font-weight: 400;">Petrobras still controls the majority of Brazil’s distribution network</span></a><span style="font-weight: 400;">, in spite of recent divestments, such as selling a 4,500-kilometer pipeline distribution network to French group Engie. The problem is that the pipeline&#8217;s distribution capacity is already taken up by Petrobras’ production until at least 2025, as an </span><i><span style="font-weight: 400;">Infomoney</span></i><span style="font-weight: 400;"> report shows, delaying the democratization even more.   </span></p> <div class="flourish-embed" data-src="visualisation/429162"></div> <p><script src="https://public.flourish.studio/resources/embed.js"></script></p> <p><span style="font-weight: 400;">Other major oil groups in Brazil, such as Shell, BP, and Exxon, have no option other than selling their production to Petrobras, which hampers competition. To make them able to sell directly to distribution companies, it is important to foster a pipeline industry as well.</span></p> <p><span style="font-weight: 400;">Investments are eagerly awaited by north-eastern states, such as Sergipe, which would be one of the major beneficiaries of this industry. Citing data by the Ministry of Mines and Energy, Estado says that Petrobras alone would need to invest USD 2 billion this year to measure and define the reservoir, as well as building a pipeline.</span></p> <p><a href="https://www.investidorpetrobras.com.br/ptb/15007/9512_696299..pdf"><span style="font-weight: 400;">In a note to investors</span></a><span style="font-weight: 400;">, Petrobras said the company’s “2019-2023 business plan foresees the necessary budget for installing a production system and the studies for this project are in its initial phase.” A long duration test is also foreseen, to better evaluate the area’s potential, says Petrobras.

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BY Natália Tomé Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.