Is Brazil a once-in-a-while opportunity for LNG suppliers?

While COVID-19 pandemic crashes oil and gas demand and climate change lowers bets on the oil and gas industry across the globe, Brazil caught the media's attention earlier this month when the U.S.-based New Fortress Energy (NFE) announced a multi-billion deal including four strategic FSRU terminal projects in the country.

The announcement not only represents trust in Brazil's current effort to open its natural gas industry to private investors, but also highlights the country as a market to potentially drive LNG demand in Latin America over the next decade.

Speaking to analysts, NFE CEO and Chairman of the Board Wes Edens said that Brazil is "the focus point" of the deal, valued at $5 billion, to acquire two subsidiaries of rival Golar LNG, a world-class LNG shipping business with a strong presence in the largest economy in South America.

In addition to the four terminals, one of which is operational and integrated with a 1,500 MW gas-fired plant in place, NFE also signed a memorandum of understanding with the state-controlled Petrobras to acquire 288 MW of PPAs and further allocate it at an under-development project to build another FSRU-to-power project, in Northeast Brazil. 

As demand for LNG in Brazil remains largely associated with gas to power plants as off-takers, Edens highlighted that the company is pursuing different avenues to develop terminals other than providing back power. "That's great, but we also think there may be opportunity to build those in partnership with other people to reduce capital expenditure."

In fact, opportunities to develop a non-thermoelectric market for LNG in Brazil already exist. The Barcarena terminal, one of the projects taken over by NFE, is just one example among them. Located on the Amazon River, the terminal is well positioned to offer cleaner-burning natural gas to a region highly dependent on more expensive diesel and Heavy Fuel Oil (HFO). 

Actually, providing access to natural gas in Brazil's countryside, the so-called interiorization plan, is a constant goal of local utilities as the extant gas grids are nearly all located in coastal cities. And yet, they are predominantly concentrated in the southeastern region.  

But it's time for a refreshment in the Brazil’s emerging gas market. As Congress wraps up the final text for the New Gas Law, the sector is about to get a regulatory boost to growth in opportunities. From there, private operators will be eligible for non-discriminatory access to gas transporting units, pipelines, and gas processing plants.

Meanwhile, natural gas pipeline companies, once controlled by Petrobras, are now in hands of global energy players, such as ENGIE and Brookfield. The pipeline companies in private hands own federally regulated interstate pipelines that connect local distribution companies. Both acquisitions followed the agreement between Petrobras and the federal competition authority CADE to divest gas transportation units and distributors.

As for LNG suppliers, the new legal framework paves the path for the development of an active natural gas storage market, which is almost nonexistent in Brazil. In addition, as the law changes the gas transportation model from "point-to-point" to "entry-exit", an active natural gas spot market with physical delivery to big consumers or distribution grids at "citigates" (gate stations) is also expected to flourish.

The new law reflects a long-time effort by IOCs, utilities companies, and large industrial buyers to shape a competitive natural gas market in Brazil. Without a sole midstream player in the room, the natural gas sector is expected to attract new investments in gas supply, from domestic producers to international traders. LNG operators and marketers, in particular, stand to benefit from periods of lower commodity prices and reduced gas-fired generation demand to supply “on-system” and “off-system” end users on spot basis.

A number of LNG distribution arrangements, including truck mounted LNG ISO-Containers to reach regions not served by pipeline, and small LNG carriers to connect hub ports throughout the Brazilian coast, are potential avenues to monetize more investment in new LNG terminals. Whether partnering with utility companies, end users, or retailers - provided further regulation to unbundle utility gas sales and delivery services - LNG distribution business is indeed likely to take off in Brazil.

Most importantly, there will be opportunities for investors in LNG terminals such as New Fortress Energy to look more broadly at the natural gas sector in Brazil rather than only seeking peak shaving projects when it comes to developing LNG business in the country.