In mid-2016, the federal government created the Gas to Grow program, which preceded the New Gas Market program, launched in 2019. Both were designed to promote a dynamic and competitive liquid gas market that would stand up to the then deeply verticalized market dominated by a monopoly player.
The characteristics of the creation and development of the gas market in Brazil over the years have led to the existence of significant barriers in all links of the gas value chain, the overcoming of which demands, even today, continuous and coordinated efforts by the various players involved on various action fronts.
Thus, the stimulus to the new natural gas market had as its pillars, above all: promotion of competition; harmonization of state and federal regulations; integration of the gas sector with the electrical and industrial sectors; and removal of tax barriers.
In this context, the long-awaited approval of the new legal framework for natural gas in Brazil, with the publication of Law 14,134/21 (Gas Law) and, later, Decree 10,712/21 (Gas Decree), whose campaign dominated the industry scene especially in recent years, revived in the sector the enormous expectation of developing an effective natural gas market in Brazil, with dynamism, attractive potential for new players, and increased liquidity with the expansion of supply and demand.
The Gas Law and Decree brought about material advances expected by the sector, among which the following stand out:
- implementation of the inward and outward transport system;
- application of the authorization arrangement for the transport and storage of natural gas;
- expansion of the list of essential infrastructure and third party access; and
- deverticalization, with independence and autonomy in the activities of transport and distribution (although structured differently for each of these segments).
The challenges, however, were not all overcome with the publication of the new legal framework. New entrants have experienced many complexities in practice, which require them to analyze carefully whether they are to reap the benefits potentially offered by measures opening the gas market.
Among the various adversities faced by players and governments in the process of creating a liquid gas market, one of the most relevant derives from the fact that the Federal Constitution grants the states the competence to operate local piped gas services.
The states have exclusive authority to regulate and provide piped gas services, within their boundaries, to participants in the free market (free consumers, self-producers, and self-importers, referred to jointly as "free agents") and the captive market (residential and industrial consumers, among others who do not meet the requirements for joining the free market). Services may be provided directly by the state or via distribution utilities (CDLs).
The bipartition between the federal and state spheres produces an extremely material practical effect, especially for free agents and potential marketers: the multiplicity of state regulatory regimes, which brings about the most distinct of implications and developments, which agents interested in entering the free gas market must observe. In addition to the different state regulations, these agents must comply with the regulations established by the federal government, which is responsible for regulating natural gas loading and marketing activities, among others.
Currently, states are at different stages of maturity with respect to free market regulations: Amazonas, Sergipe, Bahia, Espírito Santo, Minas Gerais, Rio de Janeiro, São Paulo, Santa Catarina, and Rio Grande do Sul have recent regulations for the free market, published between 2019 and 2021; Maranhão, Mato Grosso, Mato Grosso do Sul, Pará, Paraná, and Pernambuco have less recent regulations; and Acre, Alagoas, Amapá, Ceará, Goiás, Paraíba, Piauí, Roraima, Rondônia, Rio Grande do Norte, and Tocantins have no regulations. Thus, of Brazil's 26 states, only eight have recent regulations that tend to more adequately reflect the current stage of the domestic gas market.
Main issues considered in the migration to the free market
In addition to the complexities related to compliance with the various state and federal regulations, which inevitably imposes high costs for the agent wishing to migrate to the free market, special attention must be paid to the challenges generated by the simultaneous existence and, to a certain extent, the need for compatibility of the main contracts characteristic of this market: Gas Supply Agreement (GSA); Gas Transportation Agreement (GTA), which can be incoming and/or outgoing; and Distribution System Use Agreement (CUSD).
An agent wishing to enter the gas market may opt for different contractual arrangements, such that it is not party to all three contracts mentioned, but only to two of them. A free consumer may, for example, not be responsible for contracting the transport, when this is the responsibility of its supplier. In this scenario, the free consumer would only contract CDL's gas supply (GSA) and gas distribution service (CUSD). However, exposure to several contracts, with different contracting parties in different links of the chain that are intrinsically related, substantially raises the aggregate risks of migration to the free market, requiring agents to make an integrated and careful assessment.
The main sensitivities arising from the coexistence and coordination of the aforementioned contracts and regulations include:
- Prior notice for migration to the free market and withdrawal of the notice: the issuing of the prior notice by the agent to the CDL binds it to that specific term for effective migration and consequent interruption of gas supply by the CDL. The moment the prior notice is sent out must be carefully evaluated by the agents, especially focusing on the term of their supply agreement with the CDL, since any delays in the schedule planned for negotiating and executing the GSA and GTA that cause a mismatch in the start of the term of the agreements may represent a high risk of gas shortage for the agent and exposure to penalties within the scope of one or more agreements. In this scenario, the possibility of waiving prior notice is an important instrument for agents seeking more security and predictability for the migration.
- Simultaneous contracting in the free and captive market: in some states, there is still considerable uncertainty regarding certain issues involving the possibility of contracting gas in the free and captive market simultaneously, which would constitute a partially free consumer. Although simultaneous contracting is allowed in many state regulations, the lack of clarity regarding the volume to be contracted in each of the markets represents a risk for the agent. Simultaneous contracting is also a much appreciated mechanism at a time of transition, as it can mitigate the risks of interruption in gas supply cited in the prior item.
- Penalty and accumulation of penalties across contracts: the probability that the agent will suffer simultaneous penalties due to the same event in all three contracts or in at least more than one of them is considerably high, especially in a network industry. Operational issues tangential to these contracts should be particularly assessed in order to have an accurate picture of the risk pointed out. The analysis of the stacking of penalties requires special attention from the agent when weighing the costs relative to migration to the free market.
- Sale of surplus quantity: in some states, the free agent must qualify as a trader before the state and the National Petroleum, Natural Gas, and Biofuels Agency (ANP) so that it can exercise efficient management of its portfolio, selling the surplus quantity of gas. Such regulatory impositions mean more bureaucracy and costs for the agent that intends to migrate.
- Tariffs applicable to the free market: the uncertainty as to the tariffs applicable to free agents is a relevant point of attention. Regulations that give little predictability to the tariffs (one of the main elements considered in migration) tend to discourage agents from migrating.
- Construction of dedicated pipelines: the construction of dedicated pipelines is a very sensitive topic for certain agents whose projects substantially depend on the construction of certain infrastructure involving very high investments. The lack of clarity regarding the regulatory treatment in the negotiation and execution of large investments represents an additional challenge to be faced by the agent interested in the investment.
- Contracting transportation - public calls for contracting of long-term firm products: the agent should establish a migration schedule to safely and efficiently accommodate public calls for contracting of transportation. There is also the possibility of evaluating non-firm and short-term products that can, in various scenarios, help agents whose needs are met by these modalities or who want to use them in a moment of transition, pending the contracting of firm capacity through a public call.
Long road to maturity
Despite the recognized advances introduced by the Gas Law and Decree, there is still a long way to go before the Brazilian market reaches the liquidity, dynamism, and competitiveness so desired. One aspect of this path is related to the agents' own knowledge curve regarding their new roles and responsibilities in the new market configuration.
The difficulties pointed out, however, do not prevent joint development of creative solutions to meet the challenges that present themselves. Each project needs to be carefully studied so that risks are mitigated in the most efficient way. Joining the efforts of market players remains one of the most effective ways to develop solutions capable of equating or minimizing existing risks.
 For example, if an agent that has manufacturing plants located in all states of the Southeast Region wants to become a free consumer of gas in these states, it must observe the following regulations: Arsesp Resolution No. 1061/20, for the State of São Paulo; Agenersa Resolution No. 4142/20, for the State of Rio de Janeiro; Headquarters Resolution No. 17/13, for the State of Minas Gerais; ARSP Resolution No. 46/21 and State Law No. 11,173/20, for the State of Espírito Santo; in addition to ANP regulations for gas loading and marketing and sale.