Developing LNG and Gas-to-Power Alexandre Chequer Jose Valera Projects in Brazil Débora Yanasse November 2017 Tauil & Chequer Advogados in association with Mayer Brown 1
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Overview -Navigating Brazil’s opportunities for investment in gas and power projects Session 1 -Understanding Brazil’s proposed new legal framework for the gas and power industries LNG Power Session 2 Shipping Regas Regasification 3 3
Gas Industry Institutional Structure Republic Presidency CNPE MME Policy National Energy Policy Ministry of Mines and Energy Research Council Energy Company Federal Federal Regulation National Agency of Petroleum, Natural Gas and Biofuels Policy States or State & States Regulatory Agencies Regulation 4
Federal x States Jurisdiction over Gas Activities Upstream Exploration & Production Importation & Exportation Storage Processing Processing Federal Midstream & Liquefaction & Regasification Downstream Transportation Shipping Marketing State Downstream Distribution ... 5
Federal Gas Regulatory Framework FEDERAL LEGISLATION 2009 2010 2017 Gas Law (Law Gas Decree No. 11,909/09) (Decree No. regulates the 7,382/2010) processing, regulates storage, specific aspects IMPROVEMENTS TO THE GAS LAW AND GAS DECREE liquefaction, of Gas Law regasification and trade of natural gas natural gas FEDERAL REGULATION FEDERAL REGULATION 2011 2012 2013 2014 2015 2016 ANP Resolution No. MME Ordinance No. ANP Resolution No. ANP Resolution No. ANP Resolution No. ANP Resolution No. 50/2011 - 232/2012 - 37/2013 – gas 15/2014 – tariff 52/2015 - 11/2016 – third construction and authorization for gas pipeline capacity criteria for construction, party access to gas operation of LNG importation expansion transportation expansion and pipelines, gas terminals and pipelines operation of LNG capacity assignment pipelines terminals and and gas swap ANP Resolution No. ANP Resolution No. pipelines 42/2012 - sharing of 51/2013 – ANP Resolution No. ANP Resolution No. oil, gas and biofuels authorization for the 40/2016 – gas 51/2011 – register of pipelines gas carriers transportation self-producer and information to ANP self-importer ANP Resolution No. 52/2011 – authorization for gas trading 6
States Gas Regulatory Framework STATES’ LEGISLATION – GAS DISTRIBUTION SERVICES FEDERAL LEGISLATION 1995 2009 2010 Federal Gas Decree Gas Law (Law Constitution (Decree No. No. 11,909/09) Federal Constitution, art. 25, § 2º: Amendment No. 7,382/2010) 5/1995 allows States must perform directly or States to through concession the local through concession the local delegate gas delegate gas piped gas distribution services distribution Self-producer, self-importer and free consumer services to concessionaires STATES’ CONCESSIONS 1991 1997-1999 2000 2017 2018 Execution of Gas Distribution Concession Contracts Public Bid for New Studies for Privatization Gas Concession in São Privatization of 9 Process expected Paulo Privatization of Rio de Janeiro and States’ Gas to 3Q 2018 São Paulo’s Gas Concessionaires Concessionaires Different Tariff and By-pass Regulations among the States 7
Verticalized Monopoly Structure Petrobras used to have 95% of the gas market share Upstream (Natural Gas E&P) TBG TSB NTS and NTN Midstream (LNG Terminals and (Gas Transportation (Gas Transportation) Processing Plants) Services Provider) Downstream (Gas Distributon) (LPG Distributon) 8
Deverticalized Competitive Structure Upstream Midstream Downstream LNG Terminals Onshore gas fields: Juruá (AM) TBG Azulão (AM) Riacho da Forquilha (RN) TSB Buracica (BA) Miranga (BA) Offshore gas fields: Ceará Mar (CE) NTN Merluza (SP) Rio Grande do Norte Mar (RN) NTS Sergipe Mar (SE) Enchova (RJ) Pampo (RJ) Pargo (RJ) 9
Gas Market Overview: Demand Drivers Natural Gas Demand in June/2017: 78 MM m³/day Market Distribution (MM m3/day) 45 40 35 30 30 25 20 15 10 5 0 Source: MME Natural Gas Industry Monthly Report (June 2017) 10
Gas Market Overview: Brazil x Americas Source: BP Statistic Review of the World Energy 2017 11
Gas Market Overview: Demand Projection until 2050 BUT WE ARE HERE (ACCELERATED GROWTH) WE WERE SUPPOSED TO BE SUPPOSED TO BE HERE Source: EPE – Energy Demand 2050 (January 2016) 12
Gas Market Overview: Production x Importation National Petrobras expects to increase gas 5% Production production with pre-salt exploration Bolivia Bolivia 33% 33% Importation of 30 MM m 3 /day by Petrobras Importation of 30 MM m /day by Petrobras 62% 62% Importation will reduce after 2021 Nigeria GNL Importation Trinidad and Tobago Angola 13
Gas Market Overview: Storage and Regasification Gas Market Overview: Storage and Regasification Pecém Terminal: 7 MM m 3 /day NO STORAGE FACILITIES AND 3 FRSU TERMINALS TRB Terminal: 14 MM m 3 /day Guanabara Bay Terminal: 20 MM m 3 /day Source: FGV/CERI 14
Gas Market Overview: Transportation Limited Transportation Network: ~9,400 km Petrobras controls and operates more than 7,000 km Recently sold 2,050km to Brookfield Northeast pipelines also to be sold by Northeast pipelines also to be sold by Petrobras Effective transportation unbundling => Pursuant to Gas Law, transporters may not operate in other gas activities, except for storage and operation of LNG terminals Petrobras sold a 90% stake of NTS to Brookfield for US$ 5.19 bi in 2016 15
Gas Market Overview: Distribution Concentrated Distribution Network: ~27,324 km • Concentration in the States of São Paulo and Rio de Janeiro • 22 of 26 gas distribution concessionaires are under control of the States • 19 concessionaires have Gaspetro (Petrobras + Mitsui) as shareholder • 9 concessionaires to be privatized • 9 concessionaires to be privatized (expected to 3Q 2018): Bahiagás (BA), BR (ES), (expected to 3Q 2018): Bahiagás (BA), BR (ES), Copergás (PE), MSGas (MS), PBGás (PB), Potigás (RN), SCGás (SC), Sergás (SE) and Sulgás (RS) • Gas to Grow to address some bottlenecks: • Free Market/Free Customers/Commercial By-Pass => Uneven State Laws - minimum consumption requirements vary from 10,000 to 1,000,000 m³ /day • By-Pass Fee: • No full commercial and physical by-pass • O&M Fee x Gas Movement Fee x Gas Distribution Fee 16
Gas to Grow Initiative: Transition to a Competitive Market Purpose: New legal framework for the gas market in Brazil to encourage private investments. Product: MME will submit to Congress a bill of law to amend the Gas Law by the end of 2017. Enhanced Gas Law Solution for Gas-Power Tax Issues Integration 17
Gas to Grow Initiative: Relevant Developments Activity Today Gas to Grow Processing, Offloading , No open access Negotiated open access Regasification and State tax (ICMS) inefficiencies for Symbolic exchanges and Liquefaction LNG/gas exchanges among monthly accounting terminal users Transportation Transportation Point-to-point model Point-to-point model Entry-exit model Entry-exit model No independent network Independent network operator operator State tax (ICMS) based on point- State tax (ICMS) based on to-point model (physical flow) entry-exit model (contractual flow) Distribution Uneven State laws for by-pass of Federal guidelines for consumers development of a free market Marketing No organized markets Organized markets 18
Power Industry Institutional Structure Republic Presidency CNPE National Energy Policy Policy Council CMSE MME Power Sector Power Sector Ministry of Mines and Ministry of Mines and Monitoring Energy Research Energy Committee Company Federal Electricity Regulatory Regulation Agency Grid Operation Power Trading Chamber National Grid Operador & Market 19
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