Brazil: an engine for growth [NGW Magazine]
The changes to Brazil's natural gas landmark regulation is making Shell Brazil CEO Andre Araujo optimistic about the operator's gas business in the largest Latin American country.
"We are very happy to see that Brazil's federal government is aiming to improve the natural gas market in Brazil. Yet it's important to highlight competition, integration of the natural gas sector with the electricity and industrial sectors, greater integration between the federal government and state governments and removing tax barriers. At this moment it is important that we continue to promote the integration of producers, distributors and free consumers. In the state of Rio de Janeiro, Shell we offload roughly 20mn m³/day of gas. This situation will require regulatory instruments to bring legal certainty for us to transport this gas," Araujo said during a webinar on Brazil's new gas market bill late October.
The bill is a government initiative that ends the monopoly of state-run oil company Petrobras and aims to replace it with an open, competitive and dynamic natural gas market. The programme intends to monetise natural gas extracted from the pre-salt fields, and other offshore and onshore fields; attract new investments to boost natural gas infrastructure; expand natural gas in the Brazilian energy matrix; and improve the tax regime.
The bill has already been approved by Brazil's house of representatives and now it is being debated in the senate.
The government expects output to reach 267mn m³/day, while in September, to give an idea of the magnitude of the task ahead of it, the upstream regulator ANP said the country was producing 125mn m³/d, a drop of 6.2% when compared to August and a drop of 2.8% in the annual comparison.
According to Araujo, Brazil needs to work to become a more attractive country for natural gas. "The demand is here but we need to overcome obstacles. We understand that the industry is looking at natural gas as an alternative and we are aiding efforts to set more competitive prices. The current times are challenging, but I'm confident that the new natural gas bill will be approved by Brazil's congress," he said.
An energy industry researcher at the Brazilian federal university of Rio de Janeiro, professor Edimar Almeida, agrees. For him, the opening of the gas market in Brazil will facilitate the performance of the majors that are already positioned in the oil and gas industry in Brazil. "These companies produce and export oil. However, exporting gas is a more difficult strategy to implement. That is why the opening of the domestic market opens the possibility for these companies to enter the gas market in Brazil instead of selling the gas to Petrobras only," he said.
Almeida highlighted the importance of having a strong infrastructure such as power plants for anchoring the development of new gas fields. "Brazil has made great gas discoveries in the pre-salt and in other basins that need options for their commercialisation. This is due to the large volumes of gas that a power plant consumes. Selling gas to the industrial sector is basically necessary to take existing production," he said.
According to Almeida, the outlook for securing gas supply from international markets is positive, with a large supply of LNG available at attractive prices. He says the Brazilian gas market can take advantage of this trend, developing large-scale power generation projects at a very low cost.
"In other countries, this type of project would face a high regulatory and market risk. I believe that the thermoelectric investment strategy is a way to reduce the risk of operating in the gas market. With the approval of the new gas bill and its advancement, the barriers to entering the gas market tend to be reduced. When this happens, the majors will be aware of all opportunities in the gas market: selling gas to distributors, selling gas to large free consumers and even to other traders," he said.
Shell Investments
Brazil holds Shell's most valuable assets in Latin America, and its deepwater oil and gas assets, which came with the purchase of UK explorer BG in 2015, are one of the major’s ‘engines for growth’. The company's activities of operated and non-operated fields are supported by 16 producing deep-water floating production, storage and offloading vessels (FPSOs). Two additional FPSOs are expected to be brought online in the period 2020-2021 (Atapu I (P-70) and Mero 1). Shell last year produced 383,000 boe/d in Brazil.
In July Shell took a step forward to consolidate its role as an important gas supplier in Brazil. It teamed up with partners on a $500mn, 565-MW gas-fired power plant, itself taking a 29% stake. The operator is Brazilian finance group Patria Investimentos which has 51% and Japanese Mitsubishi Hitachi Power Systems Americas has 21%. It is contributing M501JAC turbines and Marlim Azul is expected to run at more than 80% baseload.
The planned Marlim Azul plant was the first project to win the energy auctions based on Brazilian pre-salt gas, with one of the most competitive variable unit costs of any gas-powered plant. Building work began in August and it is scheduled to enter operation in 2022.
This project includes a 22-km pipeline to connect it to the gas terminal in the Campos Basin and a power transmission line.
MHPS Americas CEO Paul Browning said: "The opportunity for increased energy stability using pre-salt associated gas is an energy breakthrough for Brazil that we and our partners at Patria and Shell will make happen. Together, we will deliver a change in power."
Supporting Brazil’s gas demand
Shell's strategic plan to cope with clean energy in Brazil led it to set up a division called New Energies at Shell Brasil.
This new structure works in line with its global vision of delivering more energy and in a cleaner way. The division will follow a business strategy that focuses on the generation and storage of renewable energy and natural gas, as well as on the commercialisation and optimisation, and sales to end consumers of company-branded integrated energy solutions. The director of New Energies of Shell Brasil is Guilherme Perdigao Nascimento.
"Shell Brasil is proud to reinforce the diversification of the country's energy matrix. The company is now taking another important step in the Brazilian gas market, enabling the direct sale of associated gas from its pre-salt assets, while also supporting the government's efforts to open the domestic gas market.
"We understand that Brazil needs more gas-fired thermoelectric generation to reliably meet the expected increase in energy demand in a matrix dependent on seasonal and intermittent renewable resources," he said.
Perdigao also stressed that Shell will work to improve the gas flow and gas reinjection balance in order to obtain the best productivity. "Gas flow and reinjection go together. It is always essential to find the optimal balance between the volume evacuated and that reinjected in the well, maintaining the appropriate pressure in the reservoir for the removal of oil," he explained.
In recent years, Shell Brasil has acquired several new oil and gas fields to its portfolio in the country through bidding rounds carried out by ANP. "We are working to increase the productivity of our operated and non-operated assets, whether with the arrival of new FPSOs or with the adoption of new technologies that enable more efficiency to our operations. Such measures make us very optimistic about the increase in oil and gas production in Brazil," he said.
Perdigao explained that safety protocols will be adopted to prevent Covid-19 spreading among its workforce during the power-plant’s construction. According to Perdigao, this initial process will not require a large number of workers and it should reach around 150 by the end of the year. "The expectation is to reach 1,500 workers, between 2021 and 2022," he estimates.
For the Shell Brazil CEO the South American country needs to continue working on improving the regulation of the sector. In a web conference held in August to discuss the potential of the natural gas market in Brazil, he mentioned the need for adjustments to the rules of energy auctions so that power-plants running on pre-salt gas can take part.
"This is a key, strategic step forward for Shell in Brazil as it looks to diversify its portfolio and leverage Brazil's energy transition. We have been focusing on ways of efficiently monetising the natural gas from pre-salt fields, where we have taken on an increasingly important role. The project will provide synergies across our deep-water, gas and electrical energy businesses and we have joined with partners who are committed to and aligned with our goals," said Araujo.
The effects of the pandemic on demand may mean a two-year delay in the building programme. "But the resumption of the Brazilian economy, at some point, will happen," he concluded.