2004 - Delta Natural Gas in Brazil
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2004 - Delta Natural Gas in Brazil



Overview of the natural gás sector in Brazil. Description of regulatory framework.

Overview of the natural gás sector in Brazil. Description of regulatory framework.



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2004 - Delta Natural Gas in Brazil 2004 - Delta Natural Gas in Brazil Presentation Transcript

  • CONFIDENTIAL Gas Sector in Brazil: Liberalisation and Pricing Policy Future Planning for Egypt's Gas Industry Luiz Nelson Porto Araujo Cairo, May 9th 2004 This report is confidential. It may contain confidential, proprietary or legally privileged information. No confidentiality or privilege is waived or lost by any access to it. You must not, directly or indirectly, use, disclose, distribute, print, or copy any part of this report without the written consent of Delta economics & finance.
  • Agenda • Reform of the Economy and the Energy Sector • Market Structure and Regulation • Gas Sector - Fundamentals • Tariff Review • Annex 2
  • Reform of the economy – an ongoing process Adjustments Implemented Adjustments to be Implemented • Stabilization of the inflation rate at low levels • Central Bank Independence • Redefinition of the role of the State in the economy • Social Security Reform • Liberalisation and concession of public services • Tax Reform • Comercial and financial liberalization (kick off) • Comercial and financial liberalisation (conclusion) • Fiscal Responsibility Law • Income distribution • Social policies (education, security, food) Within the context of the economic and social reforms it is relevant to notice that: • the institutional, legal and regulatory framework for the energy sector are strongly related • the regulatory environment is still under construction • the stability of the regulatory rules is still a major problem The reform of the economy has implied an entirely new approach to government production of goods and services The choice between a public or private solution to the energy sector is one of the main issues for its development Source: Delta analysis 3
  • Key issues in rebuilding the energy sector Tariff Policy Private Sector Participation Regulatory Policy • Brasil has had a long tradition • The fiscal distress in the late • Until the early 1990´s regulatory for subsidies in the economy. 1980´s implied that a new policy was non-existent – except Began a phasing-out in the late source to finance the necessary for tariff control 1980´s investments was to be sought • International experience had • Subsidies for energy sector were • International experience had already demonstrated the widespread, at a time when the already demonstrated the benefits of credible regulatory country was heavily importing oil benefits of private sector policy and agencies • Most of the energy business was participation in infrastructure • Government believed that the conducted by state owned • Private sector involvement introduction of a new regulatory companies called for a new regulatory policy policy should be associated with • Energy conservation and and agencies a change in the market structure efficiency were not seen as incentive mechanisms These issues were deeply and jointly analysed by the government and the private sector as the reform of the economy proceeded Source: Delta analysis 4
  • Guiding principles for the energy sector – 1993 promote stimulate competition private investment • competitiveness and efficiency • stability of regulatory rules • optimization of supply and demand • fulfillment of market demand Guiding • investment capacity Principles • environmental conservation • improvement of role of State as regulator • private sector involvement • quality of service • fairness of tariffs stimulate efficiency and quality of consumer service protection The guiding principles for the energy sector are an important reference for any discussion concerning its improvement. It reflects the vision for that sector. They are fundamental in a regulated business Source: Delta analysis 5
  • Institutional framework of the energy sector – regulated business Consumers Congress President Policy Ministry of Mining and Energy ANEEL ANP Regulation (electricity) (oil and gas) Regulatory State Agencies G Production Importation Consumers Councils T Consumer Protection Market D Transportation Competion Law Agencies C Distribution Institutional Agents Development Bank Planning Source: MME, Aneel, ANP; Delta analysis 6
  • Agenda • Reform of the Economy and the Energy Sector • Market Structure and Regulation • Gas Sector - Fundamentals • Tariff Review • Annex 7
  • Framework for private sector participation Assumptions for private sector Opportunities for private sector involvement (1997) involvement • Government does not have resources to • Franchising of electricity distributors (state invest in generation, transmission, and and federally owned). Franchising of gas distribution of electricity. The same applies distributors in São Paulo and Rio de Janeiro for the exploration of natural gas at the local • Trading of energy for free consumers level • Franchising of electricity generators (state • Macroeconomic conditions (exchange rates, and federally owned) growth, interest rates) favorable to • Expansion of generation through new investment by residentes and non-residents auctions for hydro and licenseing of thermal • Expectation of tariffs adjustments and plants economic growth • Auctions for construction of new • Regulatory framework which guarantees the transmission lines passthrough of costs together with a price • Trading of new energy/reduction of volumes cap model which gave incentives to of initial contracts productivity gains The privatization program (1990), the concession law (1995), and amendments to the constitution (1995) were an important reference for private sector involvement in the energy sector Source: Delta analysis 8
  • The dynamics of the regulatory agencies electricity telecom oil and gas ANEEL ANATEL ANP Eletrobrás: state owned Telebras: franchise Petrobras: state owned Local utilities: private owned Competition: earlier Private companies Competition: expected Competition: expected The government adopted a framework in which regulatory agencies were assigned responsabilities for different sector. The dynamics of agencies has turned out to be very different Source: Aneel, Anatel, ANP; Delta analysis 9
  • Regulation of the energy sector in practice Strengths Weakness • Regulatory framework approved by a • Lack of long-term government law passed by Congress infrastructure policies • Relatively high public image of the gas • Possibility of lock-up by regulators sector and the regulator (vis-à-vis other • Very strict service obligations, even public services) under extreme situations • Interaction between regulatory and • No independent administrative or competition laws predicted judiciary appeal instances • Rights and obligations of service providers and consumers defined before privatization (as part of concession law and concession contract) There are many challenges faced by regulators, among them lack of experience in the regulation of public services; integration of regulation and competition law; and utility integration (energy, telecom, water & sewerage) Source: Delta analysis 10
  • Agenda • Reform of the Economy and the Energy Sector • Market Structure and Regulation • Gas Sector - Fundamentals • Tariff Review • Annex 11
  • Agents Producers Transporters Distributors • Supply contracts at freely • Regulated tariffs • Regulated distribution service, agreed prices • Long term transport contracts with exclusive rights within the • Tariff adjustments predicted in area (concession contract contract anticipates free consumers after a period of time • Embryonic capacity resale market • Ceiling prices with pass-through adjustment mechanism for gas price and transportation tariff variations • 5-year Tariff Review. Adjustment by and X Factor (expected efficiency gains) The market structure of the gas sector is clearly defined. Nevertheless some adjustments are called for to improve total welfare Source: ANP; Delta analysis 12
  • Demand for natural gas Comments Demand for natural gas • Consuption growth has been increasing in % - 2003 most regions of the country and market 50 47 segments 45 • Network expansion is a major challenge 40 • The recent results of a tariff review in São 35 Paulo – for Comgas, the gas company – are 29 30 28 expected to be very relevant as a signal for 24 private investors 25 21 • New model for electricty sector is expected 20 15 to increase the demand for gas, through the 15 dispatch of thermal plants 10 6 5 0 Argentine Argentine Italy Italy Mexico Mexico USA USA Germany France Germany France Brazil Brazil Total demand for natural gas in Brazil is behind that observed in other countries. Nevethelss, growth potential is very high Source: MME, Petrobras; Delta analysis 13
  • Comgás – the most important gas company in Brazil Consumers (in thousands) Volume (in MM m3) (except for thermal generation) 416 3,30 378 2,95 329 345 2,24 1,68 2000 2001 2002 2003 2000 2001 2002 2003 Investments (in R$ MM) Network (in km) 3600 229 242 3200 2965 201 2716 103 2000 2001 2002 2003 2000 2001 2002 2003 Company growth depends on good regulation and market potential. Growth has implied consumer access, network expansion, and new investments. All contribute to more jobs, tax collection, and better service quality Source: Comgás, Delta analysis 14
  • Benefits of regulatory stability and credibility Higher consumer • significant growth in number of consumers – in all segments – with access to gas access supply. Improvement in population welfare Increased • significant growth in size of netwok, besides substituion of old pipes. Externalities in network other economic activities (production, employment, tax, etc) expansion Better and higher • private investor was able to invest the amounts necessary to fufill requirements of investments service quality and market demand. Externalities in other economic activities More • increase em jobs, both direct and indirect. Also, increase in quality of manpower. employment Improvement in population welfare (income, schooling) Better • better perfornance, lower waste of time and cost of quality. Higher efficiency and service quality lower service cost Increase in tax • increase in tax revenues. Reduction in fiscal deficits and possibility of higher collection transfers to poorer sectors Source: Comgás, Delta analysis 15
  • Challenges for natural gas growth • Tarrifs • Access – availability and security of supply NGV • Involvement of auto makers • Tax incentives for gas powered vehicles • Pricing of LPG – butagas (subsidized) Residential and • Access – availability and security of supply comercial • Development and introduction of new products and services • Expansion of distribution network Industrial • Pricing of fuel oil (subsidized) • Availability and security of supply; contracts (take or pay clause, interruptable etc) • Joint use with industries and large commerce • Investiments in techonology and non-interruptible supply Co-generation • Feasibility of distribution projects • Tax incentives Source: Delta analysis 16
  • Agenda • Reform of the Economy and the Energy Sector • Market Structure and Regulation • Gas Sector - Fundamentals • Tariff Review • Annex 17
  • Key dimensions of a tariff review Legal Political Nature of • Energy policy Nature of Business • Fundamentals of Regulation • Market growth potential energy – ang gas in • Framework and • Competition of particular – regulation Agenda alternative fuels • Petrobras strategic • Accountability and • Regulation of tariffs plan Independence and market access • Forecastibility of Rules • Stakeholders interests • Enforceability of Contracts • Conflict Resolution Social Economic A successful tariff review should take into account the interests of the major stakeholders involved with the business Source: Delta analysis 18
  • Tariff review – implications Operacional Expenses Maximum Investiments Margin Capital Final Tariff to Remuneration Consumer Gas Cost + Transportation Tariff reductions in general imply lower return to investment which impacts the incentives for firm growth, investment, employment, tax collection, and the expansion of the network Source: Delta analysis 19
  • Tariff review – implications (cont.) Risk of deterioration of the quality of services Worsening of the Worsening of social economic-financial involvement desequilibrium of contract Consequences of loss in cash flow in tariff reviews Limitation supply Deterioration of credit rating and increase in growth the cost of capital Limitation investments The overall limitations imposed by a badly conducted tariff review are very significant, and not only at the firm level Source: Delta analysis 20
  • Agenda • Reform of the Economy and the Energy Sector • Market Structure and Regulation • Gas Sector - Fundamentals • Tariff Review • Annex 21
  • Restructuring the energy sector – main issues Historical development • state  private and diagnostic • planning • franchising and concession • investiments • regulatory framework and tariff policy Characteristics • economics of networks of sector • hydro base and oil import • distance between generation and consumption • energy sources Restrucuturing and • state reform regulatory framework • institutional model • regulatory framework and tariff policy • transition phases • strategic positioning of utility companies New investment • regulation, risk and return decisions • new markets • competition and liberalization • consolidation Source: Delta analysis 22
  • The gas sector – development and diagnostic Historical Development Diagnostic in 1997 • Between 1953 and 1995 Petrobras monopoly • Insufficient investment to increase supply (extraction and production; transportation; and • Insufficient network (extension of pipeline grid) trading) • Need of a new tariff policy with incentive-based • Natural gas was not a priority mechanism • Until 1988 distribution activities (industrial consumers) • Petrobras monopoly was a significant constraint in were performed by Petrobras in all States except in private sector participation São Paulo and Rio de Janeiro • Starting in 1988 (with the new Constitution) the granting of distribution concessions was given to local (State) governments • The Constitutional Amendment n° 9, of 1995, redefine the State Monopoly in oil and gas The development of the gas sector openned new business opportunities for private investors. Legal and regulatory framework have changed drastically Source: Delta analysis 23
  • Privatization and regulation Electricity, Water & Sewerage, and Transportation Franchise Restructuring Regulation Telecommunications, Oil & Gas Franchise Restructuring Regulation Franchise (conception) (operation) The government has approached franchising and regulation for infrastructure differently, depending on the sector Source: Delta analysis 24
  • Investment and return in a regulated business Existence of Fundamentals Regulation Legal Framework of Regulation Existence of Legal Stability Institutional Framework Stabilization and Institutional Stability Growth State Reform Tariff Model Fiscal Stability Market Oganization Investments and Returns In Brazil, investments and returns are conditioned by Legal, Institutional and Fiscal Stability, which have to do with the state of the economy Source: Delta analysis 25
  • Main markets and power connections Venezuela Integration of the energy infrastrucuture in Latin America will increase in the coming years Bolivian Gas Itaipu transmission lines Argentina pipelines Source: MME, Delta analysis 26
  • Natural gas in the southern cone • High potential for growth in gas demand in Brazil: • gas represents only 6% of the energy sources • 80% of total power generation is hidro • residential, industrial and thermal consumption Peru are likely to increase • south/southeast have best potential market Brazil • Chile, Paraguai, and Uruguai: other potential markets • Argentina: export potencial Bolivia • Future supply is expected from Bolívia (Argentina? Peru?) to Brasil • Petrobras supply position: Argentina • significantreserves in Southern Cone • controls Brazil –Bolivia pipeline • controls transportation infrastructure • Petrobras currently has an average stake of 40% in the develpment of 16 thermal plants, with eight plants in operation, or in testing, and three under construction Source: Delta analysis 27
  • Natural gas – Brazil-Bolivia pipeline Bolivian Gas Chain Transierra/ distribution pipelines Transredes TBG Transpetro GTB production compression TBG city gate consumption Brazilian Gas Chain transfer pipes transportation pipelines distribution pipelines production UPGN city gate consumption The current infrastructure for the exploration of natural gas through the Brazil-Bolivia pipeline is clearly defined Source: ANP; Delta analysis 28
  • Energy sources and penetration of natural gas Energy sources Reasons for low penetration of gas others • Significant hydro generation natural gas • Focus on exploration and production 7% of oil 6% coal • Limits on the domestic supply of gas • High cosf for the expansion of 10% 36% hydro transportation and distribution networks sugar cane • Supply of competitive fuels – sugar 11% cane, coal and fuel oil oil 30% Mostly because of geographic location and lack of incentives for natual gas the energy sources in Brazil are concentrated in hydroelectricity and oil Source: MME; Delta analysis 29
  • Supply of natural gas and infrastructure Production and Reserves Transportation Distribution Imports • Recent discoveries • Production has • Construction of • Pivate sector have tripled the total grown very rapidly Gasbol is a major participation in reserves of natural – 9,8%a.a. since landmark distribution gas 1980 e 9,0%a.a. • Additions to the initial companies has • Investments in (between 1998- pipeline allows the made a major pipelines now allows 2003) gas to reach the difference in Brazil to import gas • Since jul/99 Brazil south region of the investment, service from Bolivia has been importing contry quality, employment gas from Bolivia – • New “Network and security of nearly 14 MM m3/ Project” intends to supply to day consolidate the north consumers • “Cabiúnas Project” and south networks intends to reduce the burning of gas in flares by 5,2 MM m3/day The supply of natural gas has increased sharply as a result of major decisions taken by the government. More recently, private sector participation has also been very relevant Source: Delta analysis 30
  • Challenges for natural gas growth Regulation and • Conflicts among regulatory agencies transportation • Unbundling of networks Pricing the • The contract needs revision to take into account developments in both countries Bolivian gas Thermal power • Most power generation is still hydro based; there is insecurity as to the usage of development thermal plants Price of fuel oil in • Relative price of fuel oil and natural gas is distorted by all sort of subsidies in the domestic market former Environmental • Lack of clear cut policy for the emission of gas by vehicles Policy The challenges cover a wide range of issues. The government and the private sector are involved in exploring new opportunities to increase the usage of gas in all segments of the economy Source: Delta analysis 31
  • Tariff policy – price adjustments and reviews IGPM Review IGPM IGPM IGPM IGPM - X EFE EFE (X =0) (X >0) 0 Tariff Tariff Tariff Tariff Year Adjustment Adjustment Review Adjustment The regulatory framework for tariffs – price cap model – takes into account the economic-financial equilibrium of the concession contract Source: Delta analysis 32
  • Tariff review – managing regulation, risk and return Investment • X Factor Regulatory Tariff • Cost of capital Framework Policy • Regulatory Asset Base Regulatory Equilibrium of Risk and Return Risk the Contract of the Investiment Tariff policy is fundamental in defining the economic-financial equilibrium of the concession contract, and therefore the risk and return of the invesment Source: Delta analysis 33
  • Tariff reviews – defining the new tariffs Tariff = return on investment (RABt x Wacct)+ expenses + Required Allowed return of investment (depreciation Revenues Return + Exogenous Expenses Net Required Revenues - + Endogenous Expenses + Tariff  Review Supply and Depreciation Other Revenues Verified Revenues Source: Concession Contracts; Delta analysis 34