Lula's plans to reduce Brazil gas prices ignite controversy

The Brazilian government has announced a series of measures aimed at reducing natural gas prices for consumers, which could impact the attractiveness of certain projects in the sector.

These plans include increasing the domestic supply of natural gas by changing the regulations for gas-producing companies and implementing a gas aid program for low-income families.

“When we decided to create a gas policy, it was because gas should be an essential item in the basic basket for Brazilians, many of whom can't afford a cylinder of gas that Petrobras sells at 36 reais [US$4.70] but is sold at 120-140 reais in some states," said President Luiz Inácio Lula da Silva.

The government has approved the expansion of the Auxílio Gás program, which is expected to cost 13.6 billion reais by 2026 and benefit 20 million families.

“We will increase the availability of natural gas for domestic production of nitrogen fertilizers, petrochemical products, and other key sectors, reducing our dependence on foreign inputs. This will enhance the social and economic benefits of national natural gas production," Alexandre Silveira, minister of mines and energy, said in a release.

The government announced a controversial measure that amends the 2021 gas law, affecting how oil companies produce and sell natural gas. This includes changes to transportation, flow, storage, and sales regulations. 

One of the more controversial changes is the obligatory reduction of natural gas reinjection during oil production, compelling companies to sell the gas in the domestic market. Oil companies argue that reinjection is crucial for improving the efficiency of oil output and they say the new regulation could lower Brazil’s oil production.

Oil and gas regulator ANP will now have the authority to regulate how much gas companies can reinject. Currently, over 50% of the natural gas produced is reinjected, partly due to infrastructure limitations and partly as a strategy to maximize oil production.

The government argues that these measures are intended to balance the national gas market, increase supply and stabilize prices for consumers.

The government has also issued a resolution to ensure state-produced natural gas reaches consumers. This allows PPSA, a state-owned company controlled by the mines and energy ministry, to manage the flow and processing of the natural gas volumes that the federal government is responsible for under production-sharing agreements.

Adriano Pires, founding partner and director of Brazilian infrastructure consultancy CBIE, expressed mixed views on the government’s actions. 

“There are positive aspects, like the resolution allowing PPSA to increase gas supply through auctions, which could help reduce prices. However, the new gas market decree is confusing and seems overly interventionist, potentially violating existing laws," he said.

Local Content

Lula and Silveira also signed a bill to allow the transfer of surplus local content between existing oil and gas exploration and production contracts. This is intended to encourage higher-than-required levels of domestic contracting, boosting Brazilian industry.

“Guided by sustainability, we’re ensuring that Brazil benefits from its oil and gas potential. This measure stimulates investment, creates jobs, and strengthens the economy, building a more sustainable and prosperous future," Silveira said.

The government believes this bill could provide greater flexibility in investment decisions and encourage companies to invest more in domestic content, potentially generating significant employment and income. It is estimated that achieving a proportion of 20% local content in a basic project for an oil production platform could attract investments of around 3.25bn reais.

Pires acknowledged that the local content bill is conceptually sound, especially for Petrobras, but warned against potential amendments by congress that might lead to even higher local content requirements.

Although some of the government's measures are positive, Pires did highlight the broader trend towards increased state intervention in the natural gas sector. "The government seems to prefer intervention over free market solutions, which is a philosophical stance," he said.

Energy transition

Meanwhile, Lula introduced the national energy transition policy (PNTE), recently approved by the national energy policy council (CNPE). The government projects that the country could attract 2 trillion reais in investments in the green economy over the next decade.

“We cannot waste this opportunity of the energy transition. Brazil has already missed many chances, but we have everything we need – natural resources, skilled labor, and technical expertise. We can achieve whatever we set out to do," said Lula.

He emphasized that Brazil already holds a leading global position in the use of clean energy and can further enhance its standing. “We're respected because 80% of our electricity is renewable, and 51% of our total energy matrix is already renewable. We can reach 100%."