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Regulatory Challenges of Natural Gas Downstream in Brazil

  • Maria D’Assunção Costa
  • Hirdan Katarina de Medeiros CostaEmail author
  • Edmilson Moutinho dos Santos
Chapter
  • 179 Downloads

Abstract

In this chapter we describe the history of the natural gas activities in the Brazilian downstream sector. In addition, we highlight natural gas constitutional and legal frameworks, including attributions and competences of the regulatory agency. In this sense, Gas Law is compared to Brazilian challenges for the expansion of the natural gas market as well as some of natural gas regulatory risks are studied. Finally, we draw conclusions.

Keywords

Pipeline Transport Bidding Round Concession Contract Distribution Pipelines Intrastate Pipeline 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

1 History

Although there is news of natural gas from the Greeks, its commercial use became possible in 1821 with the creation of the first gas company—Fedonia Gas Light Company. In 1885, the use of natural gas was developed for heating homes and buildings, resulting, in 1891, in the building of the first exclusive gas pipeline.1 Later, in 1938, the United States issued the first regulatory standard applicable to the natural gas market.

Due to such history, the North-American industry of natural gas is substantially different from Brazil. At that time, we began to produce and distribute liquefied petroleum gas—LPG—in canisters which to date reaches the universality of Brazilian consumers in any of the municipalities of the country.

In Brazil, the history of natural gas2 has only two decades with much of it limited to the state monopoly of a single3 state agent. This scenario of a dominant economic agent reveals unique characteristics for the regulation of transportation pipelines, distribution as well as production activity, import and marketing of natural gas.

It is worth mentioning the fact that natural gas is currently the third largest source of energy used in the world as informs the Brazilian Energy Research Company—EPE (Empresa de Pesquisa Energética). In Brazil, during 2016, natural gas attended for 7.4% of total consumption by source; 11.3% of energy consumption in industry and 12.3% of the Brazilian energy matrix.

With this data, one can see the space that natural gas still has in the Brazilian energy matrix, which is dependent on legislative and regulatory security so that economic agents feel safe to develop and implement projects using this fuel.

1.1 Duties and Responsibilities

The current Federal Constitution of 1988 determined legislative powers for two federal entities: the Federal Government with powers to legislate and regulate the activities of exploration, production, transportation, import and export of natural gas and the Federated States with the authority to regulate piped gas services. It is noteworthy that the LPG cylinder distribution remains under the Federal Government’ sphere.

The gas distribution is the step starting in the transport pipeline and goes to the final consumer, be it residential, commercial, industrial or thermoelectric, explored in public service concession regime, governed by the General Concession Law, Federal Law No. 8,987 of 02.13.1995.

Historically, in Brazil the first regulatory act regulating the activities of the natural gas chain was enacted in 1986, by the Ordinance of the Ministry of Mines and Energy “MME” No. 1060, of August 8, noting that Brazil was still under the aegis of the Federal Constitution of 1969. At that time, we had the same two monopolies: the “federal” to the activities of exploration, production, transportation, import and export and the “state” and/or regional for the distribution, i.e. the federal monopolist company and state-owned enterprises of the States, at that time São Paulo and Rio de Janeiro.

The Brazilian Constitution of 1988 provided that the States should be governed by the laws they adopt, observing constitutional principles. Thus, there is a peculiar regulatory framework that economic agents are submitted to and that makes the natural gas market in Brazil very singular as provided below:

Article 25. The states are organized and governed by the Constitutions and laws they may adopt, subject to the principles of this Constitution.

Paragraph Two. The states may explore, directly or through concession, the local services of piped gas, as provided by law, it being forbidden to issue any provisional measure for its regulation.

As well noted, “The scope of local services expression of piped gas, in Article 25, paragraph 2, of the Constitution is one of the main discussions relating to the regulation of the gas industry” (Loss 2007, p. 186), being a constant challenge for the federal and state regulator in drawing up the standards.

Consequently, the Federated States when preparing their constitutions have included this exclusive competence to legislate,4 rule5 and regulate6 gas services, as well as to provide them, either directly or through concession, since they are considered public service, owned by the States of the federation (monopoly) (Sampaio 2014, p. 290) usually performed by state-owned companies (Pereira 2011, p. 282), with exceptions to the States of Rio de Janeiro and São Paulo.

It is worth noting the different ways that states have provided for these duties in their constitutions, although “before the wording of the constitutional text one can infer that the gas distribution activity falls within the scope of public services” (Costa 2006, p. 22).

It appears that although they seem similar, state assignments reflect a normative diversity that should be noted by supplying agents and/or suppliers and consumers of these locations. It is complemented with the information that “The Brazilian constitutional legislator of 1988 adopted a very peculiar division of legislative and regulatory powers to the natural gas system, assigning to two different federal entities, the Federal Government and the States, powers to institute regulatory frameworks related to the various segments of the natural gas industry.” (Mano 2010, p. 38).

We can add to this the fact that, in 1995 two amendments to the 1988 Federal Constitution were introduced, allowing private companies to explore such activities previously segregated only to state entities.

As a result of the Constitutional Amendment No. 9/1995, the Federal Law No. 9,478, of 06/08/1997 was approved (the “Petroleum Law”), in which were inserted two specific chapters dealing with natural gas in Chapter VII, regarding the transport activity and Chapter VIII, regarding import and export activities. It is true that since the enactment of the Petroleum Law, the natural gas market in upstream was, by virtue of governmental decision, translated into a public policy, under the sole command of Petrobras.7 With this approach, the natural gas market continued to be directed only to the sectors in which the Government, and not the State, had an interest.8

In this scenario, the transportation pipelines grids were under the command of Petrobras, which made expansions to the extent of the Governments that followed. During this period, private companies have not demonstrated interest in building and operating transportation pipelines, or import, as well exemplified by the gas pipeline grid.9

We should add to this the fact that there were no bidding rounds for new concession contracts granted from 2008 to 2013, which prevented the entry of new companies to produce natural gas in Brazil.

In 2013, Twelfth Bidding Round was announced, when ANP Board of Directors through an Ordinance designated a Special Bidding Commission (CEL) exclusively for this competition.10 In this time, ANP published a call-in order to presenting the offers of 240 blocks with exploratory risk, located in 13 sectors of seven sedimentary basins: Acre-Madre de Dios, Paraná, Parecis, Parnaíba, Recôncavo, São Francisco e Sergipe-Alagoas.

In this sense, of 26 entrepreneurial companies, 12 presented the winning offers. However, the effects and the signing of some concession contracts were suspended by the judicial legal injunction handed down in the records of the Public Civil Action No. 5005509-18.2014.404.7005.11

In 2015, ANP launched the 13th Bidding Round for the acquisition of blocks intended for the hiring of exploration and production activities of oil and natural gas. Onshore area it was offered a total of 182 blocks: 07 blocks in the Amazonas basin and 22 in the Parnaíba Basin, 71 blocks in the Potiguar basin and 82 in the Reconcavo basin. On the other hand, offshore area it was offered 84 blocks: in the Northeast, 10 blocks were included in the Sergipe-Alagoas basin, 04 in the Jacuípe’s and 09 in the Camamu-Almada’s; in the Southeast, 07 blocks were included in the Espírito Santo basin and 03 in the Campos Basin; in the South, 51 blocks in the Pelotas basin.12 The results showed 37 blocks awarded in the 13th bidding round for exploration blocks.13

In 2017, ANP announced an Agenda to new biddings. The first one was the 14th Bidding Round for exploration and production of oil and natural gas. It was offered 287 blocks located in the offshore basins of Sergipe-Alagoas, Espírito Santo, Campos, Santos and Pelotas and in the onshore basins of Parnaíba, Paraná, Potiguar, Recôncavo, Sergipe-Alagoas and Espírito Santo.14 The results showed 20 winners and 37 blocks awarded in the 14th bidding.15

Finally, in October/2017, occurred 2nd and 3rd Biddings on Pre-Salt area. Those Biddings held the production sharing contracts, the winning companies offered to the Brazilian State, the largest portion of the produced oil and natural gas. In the 2nd Production Sharing Bidding Round was offered areas adjacent to the prospects of Carcará (block BM-S-8), Gato do Mato (block BM-S-54) and the Sapinhoá Field in the Santos Basin, as well as the Tartaruga Verde Field (shared field of Tartaruga Mestiça), in the Campos Basin. In Third Production Sharing Bidding Round were offered areas located in the Santos basin: Pau Brasil, Peroba, Alto de Cabo Frio-Central and Alto de Cabo Frio-Oeste. The results showed 3 blocks awarded in each one, the 2nd and 3rd Production Sharing Bidding Rounds.16

1.2 Gas Law

In order to meet a demand of the Brazilian industrial society, the “Gas Law” was approved and enacted by Federal Law No. 11.909, of 03.04.2009, which amends the legal regime of natural gas transportation pipelines that were previously subject to “authorization” and then subject to a “concession”. It is not a provision of public service, but a concession of an economic activity, an innovation in the Brazilian legal system.

Although the Gas Law was a claim of the natural gas market, the reality has shown that both from the Government and the private sector, this law has not yet been applied to its final purpose. Until nowadays no transportation pipeline has yet been auctioned and awarded, the LNG terminals have no duty to access the flow pipelines, although there is an industry17 movement claiming for competition in the natural gas market and broad access to terminals and to flow pipelines.

In this line, in 2016, Brazilian Government launched a Program called “Gas to Growth”, in order to hear natural gas agents considering Petrobras disinvestment plan.18 The Brazilian government has indicated directives such as: adoption of the best international practices; attracting investments; increased competition; diversity agents; dynamism and access to information industry players; participation; and respect for contracts.19

After 1 year, currently, a Bill has sent to Brazilian Congress by Government in order to make institutions and law changes in Brazilian natural gas industry (Costa et al. 2017). The debate will continue during next months or maybe next years.

1.3 European Community Law and Regulation in the United Kingdom

Within the European Union, the Directive No. 2009/73 came into force, regulating the activities of transport, distribution, storage and marketing of natural gas and the integration of the European market of this commodity.

A concern of this Directive is precisely to promote the competitiveness of domestic and European natural gas markets, while determining that the carrier should be an agent independent from gas producers and traders. Thus, the article 9, 1, a), b), c) and d) provide that each undertaking which owns a transportation system be its operator, not being allowed to exercise the activity of production and marketing of natural gas, or even having the right to appoint members of boards of directors and audit committees of producers and marketers or exercise power of control over these agents.

Moreover, Article 10, 4, of Directive No. 2009/73 informed to the regulatory authorities of the Member States of the European Union the obligation to monitor compliance with Article 9 above by the carriers, by adopting a decision for the certification of a transportation system operator within 4 months from the date of notification by the operator or of the date of request from the European Commission. Once this period is ended, it is considered that the certification has been granted (Article 10, 5, of Directive 2009/73). The decision shall be immediately notified to the European Commission by the regulatory authority with all relevant information associated with it. Then, the Commission shall act in accordance with Article 3 of the Regulation (EC) No. 715/2009.

In the UK, the local regulation has been adapted to these provisions of Directive No. 2009/73. This explains the Office of Gas and Electricity Markets—OFGEM in a report sent to the European Commission in 2014, explaining that the Gas Act of 1986 was amended requiring the transmission system owner in relation to be certified as an independent of interests linked to production and marketing.20

In addition, sections 7 (3) and 7a (3) of the Gas Act provide that a license to transport cannot be granted to those who hold license for marketing or shipping, and the reverse is also prohibited:

Section 7 - Licensing of public gas transporters

(3) A license shall not be granted under this section to a person who is the holder of a license under section 7A below.

Section 7A - Licensing of gas suppliers and gas shippers

(3) A license shall not be granted under this section to a person who is the holder of a license under section 7 above.

The same rule provides to the carrier the duty to facilitate competition in the marketing of natural gas, as well as the sealing of any undue discrimination (Section 9 (1A) and (2)):

General powers and duties

(1A) It shall also be the duty of a gas transporter to facilitate competition in the supply of gas.

(2) It shall also be the duty of a gas transporter to avoid any undue preference or undue discrimination—

(a) in the connection of premises, or a pipe-line system operated by an authorised transporter, to any pipe-line system operated by it; or

(b) in the terms on which he undertakes the conveyance of gas by means of such a system.21

These notes on the community the English law and emphasize the proximity of the Brazilian regulations with European regulation.

1.4 US Law: Regulation of FERC

According to the US regulation, the natural gas transportation service is regulated by the Federal Energy Regulatory Commission—FERC. Only pipelines and local distribution agents are regulated directly by the regulatory authority, staying out of the production and marketing activities. Thus, the prices relating to production and marketing activities are not administered. On the other hand, the companies providing moving services in interstate pipelines are subject to the tariff system as well as access to pipelines.

The Natural Gas Policy Act established that the FERC has jurisdiction to authorize transport operations in interstate pipeline in favor of any intrastate pipeline or local distribution company, and the rates charged should be fair and reasonable. Also the same authority shall authorize transport operations by intrastate pipeline in favor of interstate pipeline or distribution in favor of local distribution company served by interstate pipeline and the rates charged should be fair and reasonable (US Code § 3371 (a)).

It is worth commenting a substantial difference between the US and Brazil legislation because here the transport pipelines can be intrastate and/or interstate. It is enough if they are auctioned by the ANP, with the grant of concession agreement. And the distribution pipelines are part of a distribution system belonging to a company that has state jurisdiction to move natural gas in its distribution system, from a reception point to the delivery point in a final consumer.

With the enactment of FERC’S Order No. 636, the carriers were forbidden to carry gas trade. Therefore, carriers started only to exercise transportation, the movement of gas in interstate pipeline, which was essential for greater unbundling of the gas market. Incidentally, with regard to competition issues, Title 18, § 284.7, d) of the Code of Federal Regulations—CFR, prohibits the carrier from performing an act of discrimination or undue favoritism in the quality of service provided, the duration of performance, prices, customer rating (the carrier—shipper), categories, transported volumes of natural gas or any other kind of undue discrimination.

Compared to the Brazilian regulations, the US regulation is more flexible, since the supplier and the producer do not suffer direct regulation of FERC, which favors a more competitive natural gas industry. As we can see, the interstate pipelines are a reality in the United States, with permission for operations that involve them with intrastate pipelines and local distribution companies. Meanwhile, in Brazil, there are still a number of obstacles that will be discussed below.

2 Brazilian Regulatory Challenges

With the historical evolution presented above, we saw that although Brazil has a federal Gas Law, the institutional framework of Brazilian federalism allows for state regulates local services of piped gas, turning each State of the Federation into an issuer of rules that are mirrored in the purchase and sale agreements of natural gas between the distributor and the end user.

Additionally, it is worth mentioning the fact that, in Brazil, the CNPE,22 the MME, the ANP, the EPE indirectly and the state agencies or similar issue regulatory standards, although only ANP has the attribution to regulate. The other entities issue provisions of dubious legality, noting that there is no provision for attribution to regulate in the laws establishing them. Therefore, to talk about any natural gas project involves a significant tangle of rules and responsibilities that must be fulfilled by economic agents.

The expansion of the gas market from its production, import to consumption depends on a safe institutional and contractual environment due to high costs invested in any development project in the chain of natural gas. The following are some legal and regulatory challenges that must be overcome through the development of regulation, fully discussed with the agents through public hearings and consultations, either by CNPE, the Ministry of Mines and Energy “MME”, the ANP, or indirectly by EPE and/or the States.

This transparent participation in the development of regulatory standards allows developing the natural gas market that values the free and broad competition. In addition, there are still some challenges for regulation and for economic agents that need to be addressed for the implementation and the increasing development of the natural gas market with institutional security.

Additionally, as already we stressed the Program called “Gas to Growth” has many proposals that was sent to the Brazilian Congress and we are going to attend many changes in the future. Therefore, we are going to describe in following section our current system of law that is almost changing.

2.1 Flow, Transfer and Distribution Pipelines

The Brazilian law recognizes four types of pipeline: flow, transfer, transport and distribution, having their functions defined in the Gas Law. The first challenge concerns the flow pipeline, which is the pipeline that moves the crude gas from the production points to the processing units. In these units, the natural gas is processed in accordance with the ANP23 mandatory specifications for sale by distributors to final consumers. Program called “Gas to Growth” confirm those four types of pipeline, however, has introduced the essential facilities doctrine as a way to incorporate competition in natural gas industry.

These flow pipelines are of interest of the owner or similar which would prevent, in principle, access of other producers concerned, through appropriate remuneration, or when there is available idle capacity, that is, regulated access.

The challenge to be overcome is to regulate the crude gas 24 moving in such facility, so that when these pipelines when not used by the holder of full operational capacity was traded on the market the remaining capacity (idle/available) to other neighboring producers. Thus, we would overcome a great obstacle that has been present in Brazil to the explorer and producer agents while confirming the discovery of commercial reserves the producer, in many cases, cannot drain them due to lack of viable infrastructure. However, if the Bill sent to the Congress adopts the essential facilities doctrine we may have changes in this barrier.

Differently, the Gas Law provides that the gas transfer pipelines are to the exclusive use of its owner, being possible in some cases that the ANP reclassifies them for transportation activities, in order to provide the transport activity to shippers, after examining the demand studied by ANP. An example of the exercise of that power was recognized by the Federal Court where announces that:

Once can see, therefore, that while the so-called ‘transfer pipelines’ are those of specific and exclusive interest of the owner, the ‘transport pipelines’ are those that can be considered of general interest.

That being so, and considering that the documents attached to the files show that the ATALAIA-FAFEN pipeline is not used exclusively by Petrobras, we do not see any illegality in the reclassification of it. Indeed, SERGAS makes use of two delivery stations for receiving and distributing gas to its end-users, which are members of that pipeline.25

Unlike the case above, there are also conflicts between economic agents that have deployed a transfer pipeline of its exclusive interest and the piped gas distribution company that understands that this movement by pipeline would be under its concession of piped gas, and so it should receive the distribution tariff. In this case, the Federal Court of the 1st Region analyzed and judged the case in which the distributor asked for the annulment of an ANP act authorizing the company to operate the refinery light hydrocarbon transfer pipeline—HLR, claiming that the authorization would violate Article 25, Paragraph Two of the Constitution and the concession contract, which guarantees the right to exercise exclusive distribution and marketing of natural gas.

However, the Panel considered that the HLR differs from natural gas defined by Article 6, II, of the Federal Law 9.478/1997. In addition, the activity performed by the authorized company was strictly speaking economic activity, while operating a pipeline with specific destination, without answering a totality of users or be required to lower tariffs and continuity of the provision of the activity, while at the distributor a public service is performed, characterized by universality, continuity and reasonable tariffs. Therefore, an understanding was set forth that there was no illegality in the ANP authorization act:

We define the natural gas as any hydrocarbon which remains in gaseous state under normal atmospheric conditions, produced directly from petroleum or gas reservoirs, including wet gas, dry, waste and rare gases (Article 6, section II of Law No. 9,478/97). The HLR is the product of processing of oil resulting from the refining process and then becomes plastic, i.e. it is used in the plastic industry. Natural gas, as I said, is found in nature so that it is used by consumers. It is not a product of petroleum refining.

Pursuant to Article 25, paragraph 2, of the Federal Constitution of 1988, Paragraph 2 - The states operate, directly or through concession, the local services of piped gas, as provided by law, being forbidden to issue any provisional measure for their regulation. This article refers to public service of gas supply. This is so because the constitutional legislator was concerned to ensure the gas supply to the population. Public service is the activity performed by the State or dealers or delegates under public law to meet essential collective needs (FC/88, Article 175). Gas local service consists in the public service of taking to the consumer fuel gas indispensable to the general population, because the energy gas is a collective need (FC/88, Article 25, §2).

The gas pipeline for the purposes of Article 25, paragraph 2 of FC/88, is not each and every input in gaseous state, transported through pipelines and is not each and every transport of any type of gas that constitutes local public service fuel gas distribution. Being the HRL derived from oil produced in its refining process, not fuel gas, having, then, energy purposes, just being raw material for the plastics industry, it is not within the scope of state exclusive local service gas distribution.26

Finally, regarding the roles of responsibilities of federal entities there is still this argument in the Supreme Court resulting from the conflict between federal and state entities and their respective competencies, which resulted in the Complaint No. 4210. This is the case related to the “GEMINI Project”. As we can see, it is a complex issue. So much so that the Supreme Court has not yet handed down a definitively ruling on that complaint which facilitates the promotion of heated discussions on the actual characteristic of the transfer, transport and distribution pipeline, as in Brazilian law there is no technical definition of these products, such as diameter, pressure, hiking, etc.

Therefore, there is still a way to go to understanding, or rather, the definition that such activity would meet the definitions of transport, transfer and distribution pipelines.

2.2 Regulation of Operational Exchange: Swap

It’s a characteristic of the gas market the interchangeability of the molecule in the moving pipelines (transport and distribution), which leads necessarily to the creation of specific regulatory and contractual arrangements.

The regulation of the Gas Law caused by Federal Decree No. 7382, of 12.2.2010 was foreseen in Article 1527 and, in the sole paragraph of Article 48,28 which provided that there might be a technical exchangeswap—of natural gas in transport pipelines among agents that hire such modality in accordance with the regulation of ANP. However, we have some obstacles to overcome, so that we can deploy this type of contract, as follows:

Very unique characteristics of Brazil portrayed in the different interests of the States, holders of the distribution activity in conjunction with the negligible and exclusive grid of transmission pipelines in control of one single operator have shown the difficulty of rolling out this type that brings countless benefits agents and extends the natural gas market. It is a fact that the ANP held a Public Consultation and Hearing No. 7/201529 to regulate this issue. In 2016, ANP enacted the Ordinance 11 because of this administrative procedure.

In fact, beyond ANP’s effort, one should pay due attention to the great difficulty of tax nature, since in Brazil each State of the Federation is empowered to legislate on the Value-added Sales Tax—VAT, including at this point the fixing of rates that are different in each State.

Thus, hiring the “swap” among the several States is part of a tangle of uncertainties on: where and who will be the taxpayer responsible for this tax, also including the claim of compensation. Added to this is the definition of collection agent. This fact cannot be solved by the ANP regulation. There is indeed an urgent need to join federal and state efforts to formulate a rule of consensus that may transit by the CONFAZ30 where it is determined the taxpayer and the recipient of this tax as a constitutional and legal solution, signing an agreement with all states.

2.3 Free Consumer

Another major question that appears in the scenario of the natural gas chain agents is the regulation that each of the Federated States shall enact on the conditions of admissibility and recognition of a potentially free consumer, free to buy natural gas from the one offering better conditions and hiring the gas moving through the distribution system. In this case, the state distributor has the right to move this gas in its distribution system by a rate derived from the public service concession contract signed with the State.

It is remarkable the growth of free consumers in the electricity market and therefore no intention to pass on to the natural gas market the lessons obtained in another sector. However, it is clear that there is still a resistance to allow large consumers of natural gas, which can buy the natural gas from those who make the best offer. With this behavior only a few Federated States are presented to date, where there is already institutional authorization for companies to buy natural gas from any producer or retailer (Table 1).
Table 1

States with regulatory framework on free consumer

States

Regulatory framework

Amazonas

Law No. 3.939/2013—Defines the free consumer as the one consuming a daily volume equal or higher than 500,000 m2/day, and acquiring the natural gas from any producer, importer or trader agent, charging a tariff and movement by the concessionaire

Decree 31.398/2011—Obligation of consuming a volume equal or higher than 500,000 m3/day

Espírito Santo

Resolution ASPE No. 04/2011—Present an average consumption of 35,000 m3/day in one single point of delivery

Maranhão

State Law No. 9.102/2009 and State Decree No. 27.021/2010—Have before GASMAR a natural gas purchase agreement in a quantity equal to or higher than 500,000 m3/day

Minas Gerais

Resolution SEDE No. 17/2013—Contracted volume in the free market of at least the equivalent to 10,000 m3/day

Mato Grosso

Law No. 7.939/2003 and Decree No. 1.760/2003—provide for the figure of the free user as an individual or entity who uses piped gas previously to the direct provision of any distribution service by the State, or even that uses a quantity equal to or higher than 1,000,000 m3/day

Mato Grosso do Sul

Ordinance AGEPAN No. 103/2013—Potential of consumption higher than 150,000 m3/day for the industry, 500,000 m3/day for the thermoelectric segment and 1,000,000 m3/day to the user of natural gas for raw material or petrochemical

Pará

State Law No. 7.719/2013—Daily capacity contracted of movement of gas in the distribution system and effectively consumed shall be equal to or higher than 500,000 m3/day, for one single delivery point

Rio de Janeiro

Resolution AGENERSA No. 1.250/2012—Recommends that the Granting Power signs an amendment term, determining that the minimum volume consumed shall be of 25,000 m3/day for industrial consumers and 100,000 m3/day for other agents

Pernambuco

State Law No. 15.900/2016—Daily capacity contracted of movement of gas in the distribution system and effectively consumed shall be equal to or higher than 500,000 m3/day

Sergipe

State Decree n. 30.352/2016 approve natural gas rules in this state

São Paulo

Resolutions ARSESP Nos. 231/2011 and 430/2013—The user shall consume at least 300,000 m3/month to become a free user

Rio Grande do Norte

Resolutions ARSEP n. 03, 4 and 6/2017 create auto producer, auto importer and thermoelectric segment

Elaborated by the authors

The natural gas free consumer is an agent who has the option to purchase natural gas from any producer agent, importer or retailer, in accordance with applicable state law. This is the definition given by paragraph XXXI, of Article 2, of Law No. 11.909/2009. Bill sent to the Congress adopts those agents: auto producer, auto importer and free consumer. The discussion is on the need to authorization from Federal State where those agents are or only an authorization from ANP.

2.4 State Interconnection

Another major obstacle to the expansion of the gas market and hence the expansion of the number of free consumers is the regulatory possibility to interlock the distribution systems of state distribution companies, in the borders of States.

Although we have the Gas Law governing the granting and gas transport concession contract that can cross several States, such as the Brazil-Bolivia, there is no regulation for grids of state distribution companies, which spread to the borders of the States can be interconnected to the other neighboring distribution grid, allowing a free consumer/industry—to buy gas from a producer and/or trader in another State of the Federation and receive the product in its delivery point.

With this regulated possibility, adding to the fact that the distribution systems are much broader and branched to the transport pipelines, the development of natural gas swap contracts operations would certainly contribute to the installation of the competition between producers, traders and importers for the benefit of users of this sort of energy.

In discussions on this subject, two understandings are worth mentioning: one indicating that the state interconnection could only be done through transmission pipelines to be of interest to the Federal Government or the reclassification of the pipeline. And the second, of which we agree is in the sense that there is no constitutional and legal impediment to link the distribution of two distribution companies systems because they do not transport, they only move natural gas from the city gate to the end consumer in their concession area.

The first understanding is in the Technical Note No. 004/2012/SCM, from ANP.31 According to it, the issue of interconnection between pipelines should be treated with caution, because of the division of powers made by the Federal Constitution, with regard to distribution pipelines, such as the local services of piped gas (responsibility of States—Article 25, paragraph 2), and transport (responsibility of the Federal Government—Article 177, IV).

Based on Opinion No. 44/2011/PF-ANP/PGF/AGU—Annex II to the Technical Note above mentioned—the Office of Commercialization and Movement of Oil, Natural Gas and Derivatives—SCM understood to be illegal the chances of direct connection between distribution pipelines from different States and direct service to customer by a distribution company of another unit of the federation, because it is up to the distributors to serve only within their respective States, as well as tackling the regulation concerning the transport pipelines, established by Federal Law No. 11.909/2009:

As we have previously stated, the effective implementation of any of the possibilities listed above, besides being illegal and unconstitutional, represents the failure of the Federal Law No. 11.909/09, in particular with regard to the framework of the natural gas transportation.

It also means not following the principles of market structure of the natural gas industry, which guided the regulatory framework in force. If such connections were permitted, companies interested in implementing transport pipeline projects could acquire stakes in state distributors and implement the same projects only under state regulation. For these companies, the advantages of not having to obey the dictates of Federal Law No. 11.909/09 would be:

I. no need to carry out a Public Call (to define the optimal capacity of the pipeline) and procurement (to choose the carrier to propose the lowest annual revenue);

II. implementation of vertically integrated projects, reducing competition and erecting barriers to the entry of new players, since the companies that implement such projects would not be subject to separation of transport activity from other activities of value chain of natural gas;

III. immunity to the institute of free access, which would allow the increase of its market power;

IV. immunity to the planning and proposal of transport grids by the MME;

V. immunity to the rules of bidding, so that such companies guarantee their participation in the project, even if they prove ineffective.32

Therefore, the SCM concluded that interconnection is lawful in the event of interconnection of distribution pipelines of different units of the federation by means of transport pipeline, establishing limits of marginal supply to meet reduced consumption of another State. The SCM makes the exception that the supply must be marginal in relation to the volume of natural gas distributed by local distribution concessionaire in the State in order to avoid distortion of the distribution activity, since “for low moved volumes, it is preserved economic rationality with respect to investments in pipelines grids of low pressure to industrial, commercial and residential consumers. 33

Therefore, there should be a limitation of the volume allowed to return from the distribution to transport. However, there is, in our opinion, no legal, operational and financial basis for such a conclusion. Other options are the reclassification of gas pipelines, whether from transport to distribution, or from distribution to transport. The procedure should be bound by the principles of equality of treatment of industry players, publicity, consumer protection with regard to price, quality and safety in the natural gas supply, which govern the sector regulation.

Although reportedly in the Technical Note 004/2012/SCM, the procedure should (1) ascertain whether the reclassification imposes harm to consumers, (2) ensure the publicity of the intent of pipeline reclassification, (3) verify if the physical characteristics of the pipeline are compatible with the new classification, (4) verify regulatory compliance of the valuation methodology and transfer of assets, so that the reclassification does not lead to undue increases to the consumer and (5) obtaining agreement of federal and state regulators, as the carrier and distributor.34

However, it seems unreasonable from the technical, financial and regulatory perspective that the company that distributes natural gas in neighboring municipalities of a State of the Federation cannot connect to another system that also distributes natural gas in other neighboring municipalities. Require transmission pipelines just to cross the border between the Federated States is certainly a measure that will bring more burden and more bureaucracy to free consumers, because there would be an overlap of pipelines, the distributor’s and the carrier’s. Expanding the free natural gas market is giving rational conditions of contracting with regulatory certainty for producers, suppliers and consumers.

It is important to highlight that Gas to Growth and the Bill sent to the Congress try to suggest a harmonization of this connection by ANP.

3 Contractual Challenges

The purchase and sale agreements of natural gas are still to be firmly established due to the predominance of monopolistic and vertically integrated supplier that the state distribution companies use for “standard contracts” binding on the parties. The absence of a competitive market means that there is not an increase in gas contracts with the provision of the different occurrences they shall predict.

To the extent that the Gas Law created the gas marketing agent35 that needs the ANP36 authorization to pursue that activity within the Federal Government, there will certainly be an improvement in contractual relationships including the chain of financial guarantees and supply.

3.1 Agreement for Purchase and Sale of Natural Gas

Recalling that the contractual relationship pertaining to the purchase and sale of natural gas is a web (Costa 2011, p. 393) of upstream and downstream contracts, forming those so-called related contracts, whose obligations and rights are interconnected to so many obligations of the contracts related to them. The related contracts are two or more contracts which, by virtue of law, by the ancillary nature of one of them or the contractual content—implicit or explicit—are in unilateral or mutual dependence (Marino 2009, p. 99).

The doctrine considers that the contractual coalition occurs through functional and economic links between structurally different37 contracts, i.e., by a plurality of contractual legal businesses and economic operation unit (Costa and Rodrigues 2008, p. 132). Thus, the functional link caters to a social and economic purpose (Marino 2009, p. 99), which in the case of the natural gas industry contracts was the supply of consumers. The theory of related agreements has peaceful understanding also in national jurisprudence:

The interdependence, connectivity or the coalition of the contracts signed by the parties (company split, shareholders agreement and lease agreement) result clear and evident, given the unity of interests represented, especially those of an economic nature, making this plexus of covenants, which the doctrine calls related contracts; if so, although it is possible to see independently each of the contractual figures, it is clear the connection of the agreements of will, revealing the impossibility of the sealing and individualized review of just one of the pacts, when united them all in the same common economic function.38

The related contract is not a single legal transaction with several instruments, but rather a plurality of legal transactions, although entered in a single document, as it is the substance of the legal business which gives it protection, and not the form.39

With these jurisprudential and doctrinal teachings, we may see the complexity involving the contracts of purchase and sale of natural gas, especially for the industrial, thermoelectric and petrochemical industry. An example of the complexity of these contractual arrangements is the energy auctions promoted by ANEEL for the supply of electricity to the regulated market, i.e., the state electricity distribution companies.

3.2 Transportation Contracts

Natural gas transportation activity is a monopoly of the Federal Government, in accordance with Article 177, IV of the Federal Constitution.40 Article 2, XXIV, of Federal Law No. 11.909/2009 states that the natural gas transportation activity is the natural gas movement in transportation pipelines, including the construction, expansion and operation of facilities.

Until the enactment of Federal Law No. 11.909/2009, the transportation of natural gas was treated as a regulated activity, franchised to individuals through authorization from ANP (Article 56 of Law No. 9,478/1997) (Marino 2009, p. 127). The Gas Law established the figure of the transportation concession of natural gas, because of the need to stimulate the expansion of the country’s pipeline infrastructure. Through a contractual instrument by which the Grantor (Federal Government) delegates to individuals the assignment of deploying grids and operating the gas transportation activity throughout the national territory (Neto and de Azevedo 2015, p. 297).

The public purposes of transportation concession of natural gas are twofold: (1) stimulate the individual to invest in the implementation of transport pipelines and operate these grids to move the gas throughout the country, connecting the gas industry hubs (article 2, XX of Law No. 11.909/2009); (2) regulate the supply of transportation capacity and grid access, requiring prior to the granting award to make a public call to assess the demand for shipping capacity (Article 2, VII and 5, caput of Law No. 11.909/2009) and determining that the carrier ensures access to its grids to interested parties, without discrimination, or whenever there is available spare capacity (Article 32 of Law No. 11.909/2009).

When operating the transmission grid, the concessionaire performs the natural gas movement from the supply point (processing facilities, storage or other transportation pipelines) to the destination point (storage facilities, other transmission pipelines or delivery points for grids of local distributors) as the trading activity is prohibited to the transportation company that is developed by the carrier.

Thus, there is the peculiarity of the granting of transport, which is that the user of the granted activity be a regulated agent (Neto and de Azevedo 2015, p. 298). The transportation of natural gas within the Federal Government’s sphere of competence is an authorized economic activity, regulated by Resolution No. 51/2013 of ANP.

The remuneration of the carrier comes from the tariff paid by shippers’ users of the transport grid that is set by the ANP41 and, definitively, in the Bid Notice for the granting of transport concession (arts. 5, Paragraphs 2 and 13 of the Gas Law) (Neto and de Azevedo 2015, p. 301). This remuneration has the legal nature of public price, since the natural gas transport activity is an activity of the Federal Government. Thus, “it is not about individuals exercising a freely accessible activity, but of individuals playing function that constitutionally is reserved to the State” (Schirato 2011, p. 494). Regarding the economic and financial balance of the concession agreement, there is no right to rebalancing, since it is not a concession of public services (Schirato 2011, p. 495).

The regime of the properties serving the natural gas transport is governed by public law, although it is not a public service, but an economic activity of state ownership. Therefore, the public purpose related to the transportation of natural gas is what makes the properties serving the activity public properties, following the classification of these as such by the functionalist criterion (Schirato 2011, pp. 476–477).

Regarding the term of the agreement, Article 10, main section of Law No. 11.909/2009 determines that it is of 30 years, and may be extended for a period not exceeding the initial period, upon request of the dealer (1 year in advance of the date set for termination of contract). Natural gas transport concession agreement should also take into account the interests linked to federal entities, as this is a constitutionally activity monopolized by the Federal Government relevant to downstream activities (local services of piped gas). The importance of this linkage is evident in the issue of interconnection of grids, “whether to connect the transportation pipelines with the distribution grid, or the interconnection between transport grids, to the extent that Article 9 of Law No. 11.909/2009 requires such interconnection” (Neto and de Azevedo 2015, p. 305).

In addition to it, although the transport pipelines under concession or authorization (international) regime are subject to the principle of regulated access (Costa 2015, p. 203), allowing other carriers to use the available or idle capacity under regulation. It is also worth mentioning the statement that despite the opening of the industry, it can be concluded that there are still barriers to the entry for new players, particularly in the gas-moving segment (de Sá Ribeiro 2014, p. 593).

Finally, we must highlight that Gas to Growth and the Bill sent to the Congress has suggest a change from concession contract to authorization system. So, in the future maybe we have enormous change in the Gas Law regime.

4 Systemic Risks

From what was presented in the previous items it is clear that there are several risks that should be addressed or assumed by the contracting agents of the activities of the Brazilian natural gas market. Some of them can be discussed and/or evaluated by economic agents of the industrial chain to scale the safeguards that should be equated to minimize such risks. We commented below the risks we understand are most significant in the planning and development of a project that includes natural gas.

4.1 Regulatory Risk

The regulatory risk has at least four concepts in literature. The first treats the regulatory risk as the risk of regulation, once uncertainties related to the regulatory process and the tariff review brings a greater risk to companies than in a competitive environment. The second treats it as the risk of the regulatory regime, assessing the difference of risk inherent in several regulatory models. The third concept corresponds to the institutional risk, which evaluates the role of institutional variables on the risk or the expected return of businesses, taking into account the characteristics of the institutional environment in which they operate, in addition to specific aspects of the company or the market.

Finally, the fourth approach treats the regulatory risk as political or regulatory risk of interventions, in which the goal is to measure the effect of specific government interventions on variables such as systematic risk, volatility and expected return. By mentioning these four perspectives, Gabriel Fiuza de Bragança states that regulatory risk is a concept that encompasses several dimensions, it is necessary to deal with each of them, whenever possible (Fiuza de Bragança 2015, p. 74).

The regulatory risk is within the political risk, which is linked to the decisions of the Executive Branch, the National Council of Energy Policy “CNPE”, the MME and the ANP, adding in the Brazilian case the regulations of each of the States of the Federation.

The intricate relationship between state and federal regulators considering that each of them has its own interest. In addition to it is the real fact that Brazil has a producer that holds a monopoly42 in fact of the production and import of piped gas to the present which inhibits incoming future market associated with the fact already presented above of this agent holding the property of the pipelines and the flow of LNG terminals.

Currently, we are attending enormous possibilities to change rules in this industry. In fact, regulatory risks are high and in the middle term, we do not see solutions. Both, Gas to Growth and the Bill have new rules regarding the current Brazilian natural gas regime. In addition, we may say that Gas Law may be revoked. Thus, in this scenario we may discuss and contribute in order to make improvements and to create a real market for natural gas in Brazil.

4.2 Tax Risk

Uncertainty in the chain of tax obligations in the production since it involves government participation,43 the REPETRO program, the different VAT rates and the willingness of Municipalities of always adding some taxes to producers, carriers, distributors, etc.

As commented above some obstacles to the implementation of technical exchange—swap—between economic agents—producers, traders and consumers is the disparity in rates that are charged to taxpayers in each State of the Federation. The vagueness of taxes in a project of production, transportation, disposal or distribution considering the three federal entities that can tax these activities—Federal Government, States and Municipalities—makes economic planning always poor because at any moment new burdens can arise that were not foreseen at the start of the operation.

4.3 Market Risk

The natural gas has a feature that demands care of regulatory bodies because it is a fuel that in Brazil, has several competitors, such as ethanol for vehicles, biomass and fuel oil for industries and thermoelectricity, LPG for domestic use, and electricity for heating and air conditioning. In this scenario, the cost for the agents is one of the obstacles to increased consumption and the implementation of LNG import projects.

Excluding the need to use natural gas for some companies as raw material and other as essential input to the quality control of products, competition/comparison with other energy submits the natural gas to delicate projection exercises. Imagine that natural gas will be sold at any price is one of the major pitfalls that public officials have incurred in recent years.

Added to this the natural gas as an industrial input also suffers from the fluctuations of the market and the economy, i.e. the consumption surfs the same wavelength with industrial and services demand. Consequently, when we cross a decrease in economic activity phase a decrease in demand also occurs and there may be a shift to other energy modality with more adherent price at the economic moment. Finally, as already stressed, Gas to Growth and the consequent Bill contributes for market risks.

5 Conclusion

In this chapter, we move towards presenting: (1) the evolution of the natural gas industry in Brazil that have just a little more than two decades and has yet to acquire maturity in order to be compared to that of other States in the Northern Hemisphere; (2) constitutional and legal framework in Federal and State levels considering the uncertainties of the legislature; (3) regulatory and contractual challenges facing the State and Federal levels, including the unpredictability of the decisions of the Brazilian courts as demonstrated above; and (4) presenting the Program Gas to Growth, a Bill and legal changes for future.

For all these reasons, we conclude that there will still be a long legal and marketing route in order to deploy and develop the natural gas market to full competition among producers, importers, retailers and consumers agents.

Footnotes

  1. 1.

    Available at: http://naturalgas.org/overview/history. Access on 08.06.2015.

  2. 2.

    We should remind that until the beginning of 1990, the piped distribution solely in the States of São Paulo and Rio de Janeiro was of gas produced as of the gasification of the liquid naphtha derived from petroleum.

  3. 3.

    Petrobras has been the single producer and carrier. The distribution companies are State controlled. The full competition has been occurring in the sale of vehicle natural gas VNG to the final users in the gas stations of several flags.

  4. 4.

    The State of Pará and Santa Catarina have regulated these services through State Law No. 7.719/2013 and State Law No. 9.493/1994, respectively.

  5. 5.

    The States of Amazon and São Paulo regulated these services through Regulatory Decree No. 30.776/2010 and Regulatory Decree No. 43.889/1999, respectively.

  6. 6.

    One should mention the standards issued by the state regulatory agencies that have jurisdiction to regulate the piped gas services.

  7. 7.

    Petróleo Brasileiro S.A. (Petrobras), a mixed-capital company organized in 1953.

  8. 8.

    According to the Natural Gas Industry Follow-up Monthly Bulletin produced by the Ministry of Mines and Energy, considering data from August 2017, the Total Offer to the Market reaches a sum of 100.6 million of m3/day, distributed as follows: 76.4 of sales of the state distributors, 13.9 used by Refineries and Fertilizers Companies and 9.16 of Direct Thermal Consumption of Producer and Free Consumers. Available at: http://www.mme.gov.br/documents/1138769/0/Boletim_Gas_Natural_nr_126_AGO_17.pdf/570f9d68-8388-4008-a706-1b929685d171. Access on 31.10.2017.

  9. 9.
  10. 10.

    Available at: http://www.brasil-rounds.gov.br/round_12/index_e.asp. Access on: 31.10.2017.

  11. 11.

    All blocks are located in the SPAR-CS sector of the Paraná basin. Including concession contracts for the PAR-T-300 blocks and PAR-T-309 blocks PAR-T-271, PAR-T-272, PAR-T-284, PAR-T-285, PAR-T-286, PAR-T-297, T-PAR 298, PAR-T-308 and PAR-T-321. In addition, by judicial decision, the Board of the ANP overturned the signing of the concession agreement for the PN-T-597 block, located in SPN-O sector of the Parnaíba Basin. Available at: http://www.brasil-rounds.gov.br/round_12/index_e.asp. Access on: 31.10.2017.

  12. 12.
  13. 13.
  14. 14.
  15. 15.
  16. 16.
  17. 17.
  18. 18.

    Available at: http://www.rcgilex.com.br/static/files/working_paper.pdf. Access on: 31.10.2017.

  19. 19.

    Available at: http://www.rcgilex.com.br/static/files/working_paper.pdf. Access on: 31.10.2017.

  20. 20.

    Office of Gas and Electricity Markets—OFGEM. 2014 Great Britain and Northern Ireland National Reports to the European Commission, 2014, p. 62. Available at: https://www.ofgem.gov.uk/sites/default/files/docs/2014/08/national_report_2014_updated_0.pdf. Access on 08/18/2015.

  21. 21.

    Available at: http://naturalgas.org/regulation/market/. Access on: 08.18.2015.

  22. 22.
  23. 23.

    ANP Resolution No. 16/20.

  24. 24.

    Non-processed gas to attend the ANP specifications.

  25. 25.

    Regional Federal Court of the 2nd Region, 7th Specialized Class, Civil Appeal No. 2005.51.01.017234-4, J. 10/20/2010).

  26. 26.

    Regional Federal Court of the 1st Region, 5th Class, Civil Appeal No. 0000490-90.2010.4.01.3400/DF, J. 08/01/2012.

  27. 27.

    Article 15. The operational exchange of natural gas, called swap, must be requested to shippers by the interested carriers under the regulation established by ANP. § 1. Revenues from operating exchange should be reversed to reduce transportation fees and to cover the additional costs of the shipper and its return on invested capital to be approved by the ANP. § 2 The ANP will establish the new tariff to be paid by shippers considering the provisions of § 1. § 3. The new tariff established by the ANP for the agent to apply for the swap, under § 2, shall not be less than the existing tariffs, albeit in reverse flow.

  28. 28.

    Article 48. It secured the third-party access to transport pipelines, subject to the period of exclusivity. Sole paragraph. Operational exchange of natural gas, referred to in Article 15, is considered as third-party access to transport pipelines.

  29. 29.

    The original text and the suggestions of interested economic agents are available on the website: http://www.anp.gov.br/?pg=76970&m=&t1=&t2=&t3=&t4=&ar=&ps=&1438365655099. Accessed on 08/31/2015.

  30. 30.

    The Council shall promote the conclusion of agreements to effect the grant or revocation of exemptions, tax incentives and tax benefits mentioned in item II of Article 155 of the Constitution, in accordance with the provisions of § 2, item XII, letter “g” in the same article and Complementary Law No. 24 of January 7, 1975.

  31. 31.

    National Agency of Petroleum, Natural Gas and Biofuels—Superintendence of Commercialization and Movement of Oil, Derivatives and Natural Gas. Interconnection and Reclassification of Pipelines: Regulation, Investment, Coordination and Cooperation between EU and Brazilian States. Technical Note 004/2012/SCM. April 2012. Available on the Internet: http://www.anp.gov.br/SITE/acao/download/?id=59994. Accessed on 31.10.2017.

  32. 32.

    National Agency of Petroleum, Natural Gas and Biofuels - Superintendence of Commercialization and Movement of Oil, Derivatives and Natural Gas, op. cit., pp. 20 and 21.

  33. 33.

    National Agency of Petroleum, Natural Gas and Biofuels—Superintendence of Commercialization and Movement of Oil, Derivatives and Natural Gas, op. cit., p. 14:15.

  34. 34.

    National Agency of Petroleum, Natural Gas and Biofuels—Superintendence of Commercialization and Movement of Oil, Derivatives and Natural Gas, op. cit., p. 16.

  35. 35.

    It should be informed that the concession agreement of Comgás in São Paulo, and of CEG in Rio de Janeiro when they were privatized.

  36. 36.

    Resolution ANP no 52/2011. Authorization for marketing at the federal level requiring the federal state to also authorize, at the state level the marketing of natural gas, like São Paulo, with ARSESP Resolution No. 230 of 05.26.2011.

  37. 37.

    Ibidem, p. 127.

  38. 38.

    Superior Court of Justice, AgRg in REsp No. 1206723/MG, J. 05/17/2012.

  39. 39.

    Superior Court of Justice, REsp 1127403/SP, J. 04/02/2014.

  40. 40.

    Article 177—The following are monopoly of the Federal Government […] IV—ocean transportation of crude oil of domestic origin or of basic petroleum products produced in the country, as well as transport, through pipelines, of crude oil, oil products and natural gas of any origin.

  41. 41.

    The ANP Resolution No. 15/2014 regulates the criteria for calculation of transport rates related to the firm Transport Services, interruptible and extraordinary of natural gas.

  42. 42.

    There is several information on the production and import of natural gas by other agents but not yet confirmed.

  43. 43.

    Among them, we highlight the royalties and special participation.

Notes

Acknowledgments

The authors are grateful to Daniel Rehem Gama, lawyer graduated from the University of São Paulo School of Law and specialized in energy regulation.

References

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Copyright information

© Springer International Publishing AG, part of Springer Nature 2018

Authors and Affiliations

  • Maria D’Assunção Costa
    • 1
  • Hirdan Katarina de Medeiros Costa
    • 2
    Email author
  • Edmilson Moutinho dos Santos
    • 2
  1. 1.Assunção ConsultoriaSao PauloBrazil
  2. 2.Institute of Energy and EnvironmentUniversity of Sao PauloSao PauloBrazil

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