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ENERGY-SOUTH AMERICA: Brazil’s New Gas Finds Could Modify Integration

Mario Osava

RIO DE JANEIRO, Sep 9 2003 (IPS) - The news that Brazil is also rich in natural gas may change the scenario in which this country is attempting to renegotiate a 10-year-old contract for gas imports from Bolivia, and could modify the thrust towards integration of South America’s energy sector.

Brazil’s state-run oil company Petrobras recently reported that according to new measurements, there are an estimated 419 billion cubic metres of natural gas in the Santos basin, off the coast of the southeastern city of Sao Paulo. An earlier estimate, first announced in April, pointed to 70 billion cubic metres.

The new assessment triples Brazil’s potential gas reserves to a total of 650 billion cubic metres. That means natural gas, which now accounts for three percent of the country’s total energy production, could account for 12 percent by 2010 – a goal that would be achieved without increasing imports of gas.

The discovery of the huge new reserves could change the current scenario in which Brazil is a major importer of natural gas surrounded by suppliers like Argentina, Bolivia, Peru and Venezuela, and promotes the integration of regional energy infrastructure, by building multiple cross-border gas pipelines.

Nevertheless, Petrobras director of exploration and production, Guilherme Estrella, said the discovery of the enormous reserves in Santos would not affect the ongoing negotiations with Bolivia in which Brazil is trying to modify the terms of the agreement under which it imports gas from that Andean country.

The price of Bolivia’s gas, which is fixed in dollars and based on international market prices, is now 30 percent higher than the cost of the gas Brazil imports from Argentina or produces itself, and the discovery of reserves in Santos will only accentuate that difference.

Although the Santos basin reserves are 130 kms off the Atlantic coast, they are located near the main gas-consuming markets in southeastern Brazil, the country’s most industrialised region, which is why the gas could cost one-third less than imports from Bolivia, said Ildo Sayuer, Petrobras director of gas and energy.

The price of the imports from Bolivia includes the cost of pumping the gas through the 3,150-km pipeline running from Bolivia’s gasfields to Sao Paulo, and the branches that run to central and southern Brazil. The pipeline cost 2.15 billion dollars to build.

The contract which Brazil wants to modify is based on the ”take-or-pay” system, under which the buyers pay for a given contracted volume of gas, even if they consume less.

Brazil is thus paying for 24 million cubic metres of gas a day, although consumption currently stands at just 14 million cubic metres.

Under the agreement signed with Bolivia in the early 1990s, imports are to steadily increase to a maximum of 30 million cubic metres a day between 2007 and 2019, when the contract expires.

But the projected rise in consumption of natural gas in Brazil did not come about, which means that under the contract as it now stands, Brazil will pay higher and higher prices for gas imports from Bolivia.

Only a few of the gas-fired thermoelectric plants that were to spring up all over Brazil, ad which would have represented a major leap in demand, were actually built. The steep prices have also undermined industry’s aim to replace traditional fuel sources with natural gas.

When the contract was originally signed, ”it seemed like a fantastic deal” that would enable Brazil to diversify its sources of energy, making up for this country’s scant reserves of natural gas, and that would give a major boost to the South American integration process, George Hawrylyshyn, who founded the Brazil Energy magazine 24 years ago, told IPS.

Take-or-pay agreements are normal in business deals of this kind, he noted, because they provide a guarantee for the suppliers and help ensure that the necessary investments are made. But perhaps ”a more in-depth study of the market” should have been carried out, to make more reliable projections of future demand, he added.

Petrobras, which recently lost its monopoly on oil exploration, production and importation, ”did not have a ‘culture of gas’, which it looked down on until then, nor did it have experience in this kind of negotiations,” he said.

But in his view, the big problem was the price fixed in dollars, which meant the cost of the gas imports was already high when the Bolivia-Brazil pipeline began to operate in June 1999, since Brazil’s local currency, the real, had crashed in January.

The devaluation also curtailed the growth of local demand for natural gas, which would have brought down costs.

The agreement with Bolivia is a stumbling block for Brazil’s energy policy, but this country will live up to the terms of the contract until it expires, although it will also continue pushing for more favourable conditions, said Mauricio Tolmasquim, executive secretary – deputy minister in practice – of the Ministry of Mines and Energy.

However, Brazil has made no headway towards that goal in the four meetings held in the past few months to renegotiate the contract with Bolivia’s state-run gas supplier, Yacimientos Petroliferos Fiscales Bolivianos.

Bolivian President Gonzalo Sánchez de Lozada stated during a visit to Brazil in April that his country did not believe the contract needed to be revised, arguing that the price of the gas exports was mainly the result of the high cost of transporting it through the pipeline, which is controlled by Petrobras.

Bolivia’s total exports to Brazil soared from 23 million dollars in 1999 to 396 million in 2002, due mainly to natural gas exports.

Estrella said it would take around eight years for the Santos basin gas reserves to begin to reach consumers, including between two and four years to assess actual reserves, and another four years to begin to develop and distribute the gas.

Nevertheless, analysts say the discovery of Brazil’s huge reserves will fuel the development of a major market for natural gas, due to the outlook of cheaper prices.

Minister of Mines and Energy Dilma Roussef said the door has opened for Brazil to begin to formulate a new national policy on gas.

Besides the new impetus for building gas-fired thermoelectric plants and for increasing residential and industrial gas consumption, the use of natural gas in cars instead of gasoline and diesel fuel will grow, since it is a cheaper and cleaner fuel. Around 600,000 vehicles already run on natural gas in Brazil.

Although authorities have not come right out and said so, the newly discovered Santos basin reserves are a new ace up Brazil’s sleeve in the negotiations with Bolivia and with other neighbours who export oil and gas, say analysts.