By Kevin Vermillion

Brazil is the largest economy in South America and the seventh largest in the world.[i] Moreover, Brazil is one of the BRIC (Brazil, Russia, India and China) Nations, which some postulate will overtake the G7 economies by 2032.[ii] Brazil experienced remarkable industrialization over the last six decades, but even so, the nation faces substantial challenges due to energy source volatility.[iii] The following sections analyze Brazil’s energy background and natural gas’s role in realizing true energy stability.

Brazil’s Energy Background

Brazil’s electric grid is disproportionately dependent on hydroelectric power. As of 2012, hydroelectric power accounted for 80 percent of the installed capacity for the national power grid. [iv] While hydroelectric power is a renewable source of energy, years of low precipitation have repeatedly stressed the grid, leading to price instability. Even after ramping up fossil fuel generation, Brazil was forced to implement a strict quota system to avoid load-shedding events — also known as rolling blackouts.[v] The upcoming 2014 World Cup and 2016 Olympics provide additional impetuses for investments in energy production and infrastructure.[vi] To avoid industry-obstructing scenarios, Brazil sought other viable sources of power generation. The primary fuel for this new generation was to be natural gas.

Brazil’s transition to increased natural gas power generation was far from seamless. Initially, Brazil turned to its neighbor, Bolivia, to build a natural gas pipeline (GASBOL) between Bolivia and southern Brazil.[vii] Commenced in 1997 and completed by 1999, GASBOL cost 2.15 billion USD.[viii] The future seemed bright for GASBOL, but internal political turmoil in Bolivia following its 2003-2004 economic crisis began to degrade relations between Brazil and Bolivia. After the previous president fled the country after a change in leadership, Bolivian president Evo Morales nationalized all natural gas reserves as part of a broader political movement.[ix] Although Bolivians viewed the move as patriotic, it was disconcerting for Brazil, which looked to further diversify its energy portfolio via elevated domestic natural gas production.[x]

In 2006, Brazil implemented the Natural Gas Production Anticipation Plan.[xi] The goal of the plan was to increase production of natural gas in southeast Brazil — home to much of Brazil’s industry — from 15 MMcf/day in 2008 to 55 MMcf/day in 2010. [xii] Unfortunately, an illiquid credit market and strong rains undermined that plan.

The 2008 financial crisis dampened international interest in all types of investment, including Brazilian natural gas development. Simultaneously, a robust rainy period allowed the nation to fall back on hydroelectric power, further decreasing private sector interest in natural gas production.[xiii] By 2009, instead of trebled domestic production in southeast Brazil, natural gas production in the area was about one-third of production in 2006.[xiv]

LNG’s Role in Brazil

Despite many setbacks, natural gas is now on the upswing. Owing to an initiative by the National Energy Policy Council, Petrobras — Brazil’s state-controlled oil and gas corporation — laid the groundwork for building LNG import terminals.[xv] Brazil currently has two LNG import terminals: one in Pecém, in northeast Brazil, and the other in Guanabara Bay, near Rio De Janeiro in southeast Brazil.[xvi] Petrobras signed agreements for both terminals in 2007. These terminals are floating storage and regasification units (FSRUs) that together process up to 21 MMcf/day.[xvii]

Additionally, another such terminal is currently under construction in Bahia, in eastern Brazil about halfway between the existing terminals. The Bahia terminal will add another 14 MMcf/day of processing infrastructure. Like the constructed facilities, the Bahia facility will connect to existing natural gas pipeline infrastructure in its respective region. As of 2011, the Pecém and Guanabara Bay terminals import LNG primarily from Trinidad and Tobago, Nigeria, and Qatar.[xviii]

While LNG imports have become a crucial fallback option, natural gas self-sufficiency is the ultimate goal.[xix] Brazil has made significant strides in increasing domestic natural gas production. Between 2009 and 2011, Brazil’s annual domestic production rose from 363,034 MMcf in 2009 to 850,024 MMcf in 2011 — an increase of roughly 230 percent.[xx] Nevertheless, Brazil relied on record LNG imports to meet drought-induced energy demands. In January 2013, Brazil imported over 500,000 tons of LNG — a 20 percent increase from December 2012 and an 86 percent increase from January 2012.[xxi] Moreover, Brazil paid an average of $16.50/MMBtu in January, a significant increase from $13.27/MMBtu average it paid in 2012.[xxii]

Brazil may soon become a hearty consumer of American natural gas. Recognizing robust foreign LNG demand, existing U.S. LNG terminals are looking to add export capabilities. This update is currently taking place at the Sabine Pass terminal in Louisiana.[xxiii] With U.S. spot prices hovering around $3.50/MMBtu, it is no wonder that there are over a dozen U.S. LNG export terminals in varying stages of development.[xxiv] Thus, U.S. gas might soon help power Brazil’s electrical grid. Combined with oil exploration off Brazil’s coast, it is easy to imagine a more interdependent energy relationship for the hemisphere’s two largest economies.

Conclusion

Brazil has a long way to go to build a robust, reliable grid that is not as susceptible to price shocks, but it is moving in the right direction. The LNG import terminals enable Brazil to pursue long-term and short-term energy agreements with far-away nations —ensuring that Brazil is not beholden to neighboring nations like Bolivia.[xxv] Thus, LNG imports provide certainty in gas availability, which encourages investment in natural gas-fired electricity generation. These plants, in turn, ensure a market for domestic gas, hopefully providing an incentive for increased domestic production.

Brazil witnessed immense growth in recent years despite a volatile energy supply. Increased domestic production of natural gas and increased LNG importation capacity help provide the reliability that manufacturers and large commercial electric consumers require. If Brazil’s policymakers are able to address these issues, its burgeoning economy may exceed investors’ already lofty expectations.

Kevin Vermillion graduated in 2011 from the University of Texas at Austin with degrees in Plan II Honors and History. Kevin interned with ConocoPhillips as a facilities engineer during his undergraduate career. During law school, he interned with the Railroad Commission of Texas and Mayer Brown, LLP; he will spend the upcoming summer with Jackson Walker, LLP and Bracewell & Giuliani, LLP.