Why Brazil’s new gas decree could dent investor confidence

The gas decree that the Brazilian government recently issued could heighten risk perception and drive away investment, according to industry experts consulted by BNamericas.

The decree is designed to increase domestic supplies of natural gas and reduce the price for end consumers, and is part of the government’s neo-industrialization efforts.

“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," energy minister Alexandre Silveira said on August 26 when the decree was signed.

According to state energy research company EPE, investments in the natural gas sector, including nitrogen fertilizer plants, could reach 94.6 billion reais (US$17bn) over the next few years. 

Brazil's oil and gas institute IBP, which represents the sector, has warned that the decree could generate legal uncertainty and increase risk perception among investors. 

Among the points of concern is the possibility of having sector regulator ANP review existing development plans, including fields that are already in production or those where a final investment decision has been made. 

The decree gives ANP this authority to evaluate the conditions for reducing natural gas reinjection in order to make more fuel available for industrial and residential consumption. Today, over half of national gas output is reinjected to recover more oil.

IBP is also worried about free market-based activities, such as the construction and operation of outflow pipelines and processing plants, becoming activities regulated by the ANP. 

Thiago Silva, a partner at law firm Vieira Rezende, considers the ANP’s power to review development plans created before the decree to be a highly concerning issue that could drive away investors. 

He pointed out that all investments in E&P projects have been made considering secondary recovery without restrictions on the use of gas.  

“Limiting the reinjection of gas in past projects would result in lower oil production and alter the economic equation of these projects, compromising the legal security of investors,” Silva told BNamericas.  

On the other hand, Silva welcomes the rule establishing that ANP will determine the requirements for remuneration of essential natural gas infrastructure, such as pipelines and processing units, with asset amortization being taken into account.  

“This way, the infrastructures will form part of a regulatory asset base, which will be regulated and transparent, preventing rates for the use of old and amortized assets from being calculated as if they were new,” he said.  

“This is an issue that has generated controversy in the context of Petrobras' UPGNs [natural gas processing units] and their respective rates, which, according to the market, are greenfield project rates, even though the infrastructure has been in use for decades.”

As for the issue of building and operating gas pipelines, Silva said that this will always be a monopolistic activity. 

“This is due to the high construction costs of pipeline networks, which often makes a monopoly the most efficient economic solution. In other words, these activities constitute a natural monopoly.”

Paulo Valois, a partner at law firm Schmidt Valois Advogados, believes that the possibility of the ANP reviewing development plans could be seen by the industry as contrary to the principle of regulatory stability that stems from Brazil’s economic freedom law. 

However, in practical terms, he views the short-term effects of the decree as limited.

“ANP will first have to carry out studies, public hearings etc. and then publish the necessary resolutions detailing the regulatory framework imposed by the decree, which will certainly take time and perhaps extend beyond this government,” Valois told BNamericas. 

Rivaldo Moreira Neto, director of consulting firm Alvarez & Marsal Infra, is also worried about the decree’s impact on future projects.

He pointed out that operators and their partners will have less project autonomy as ANP will have greater influence over the orientation of projects and their logistical alternatives.

Making the cost of access to essential infrastructure more transparent is something that Moreira Neto also views as positive. 

“Especially in the case of the UPGNs, whose conditions imposed by Petrobras are admittedly onerous,” he told BNamericas. 

Implementing the measures set out in the decree will also add work to an already overburdened ANP, while at the same time putting pressure on producers to expand supply without guaranteed demand. 

“The path to competitiveness remains linked to our market's ability to attract diverse supply and reduce Petrobras' monopolistic power, which won't necessarily occur with the measures announced by the government,” said Moreira Neto.