INSIGHT: Nationalism tips gas investment to Brazil

27 June 2007 17:58  [Source: ICIS news]

By John Waggoner

HOUSTON (ICIS news)--Grabby nationalism is alive and well in Latin America, but investor-friendly Brazil is poised to become a regional supplier of natural gas among neighbours pursuing unstable policies.

While Venezuela and Bolivia snub their noses at foreign investors by forcing the sale of strategic petroleum assets to the state, Brazil is fast under way with a plan to lift its own significant natural gas reserves offshore and expand its distribution network in an investor-friendly environment.

On Tuesday, Brazil approved yet another round of licensing of concessions for oil and gas exploration and production.

Given the potential of these reserves, Brazil could even become an exporter of natural gas in its own hemisphere.

It is true that Brazil’s dilemma of what to do with its gas remains an imbroglio of rival domestic interests dominated by the need to develop electricity generation

But radicalisation is not on the agenda.

Natural gas is needed most urgently to supply thermal generators, but Brazilian steel mills and the growing gas-fed petrochemical industry are also important sources of demand, along with residential consumers.

The petrochemical industry still relies on liquid feeds, but naphtha is mostly imported and natural gas is now treated in parity with naphtha for tax purposes, which has encouraged the use of gas feeds despite near-term concerns about supply.

There are vast distances to cover in order to distribute the gas within Brazil and possibly the rest of the region. Reaching those markets will require capital-intensive infrastructure projects and co-operation among federal, state and municipal governments.

In an effort to define many of these parameters and lay the groundwork for continued expansion of the national distribution network, Brazil’s Chamber of Deputies on Wednesday will review the final amendments to a natural gas bill.

The likely approval of this bill will be the fruit of years of executive and legislative deliberation.

Once approved in the Chamber, the bill will then go to the Senate and onto President Luiz Inacio Lula da Silva for final ratification.

This natural gas legislation is considered the key to settling lingering regulatory questions such as the role of the state and how gas would be rationed to consumers should there be an interruption in the supply, among other things.

As elsewhere in Latin America, the state will continue to play a leading role in developing infrastructure and gas production through state-run Petrobras. This participation is virtually guaranteed since no major oil and gas infrastructure projects have ever been financed without Petrobras.

The creditworthiness of Petrobras and Brazil’s moderate policies will work smoothly with the new gas law in a legal framework that has encouraged massive investment, including revived foreign participation in upstream oil and gas – an area once taboo for foreign investors.

This will combine to permit the expansion of Brazil’s natural gas market at a time when risk-averse investors shun opportunities elsewhere in the region.

By: John Waggoner
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