Cablegate: Brazil's Natural Gas Output to Rise, but Challenges Remain

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RR RUEHRG
DE RUEHSO #0688/01 3291415
ZNR UUUUU ZZH
R 251414Z NOV 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 0223
INFO RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHAC/AMEMBASSY ASUNCION
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RUEHBR/AMEMBASSY BRASILIA 0237
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RUEHPE/AMEMBASSY LIMA
RUEHRG/AMCONSUL RECIFE 0038
RUEHRI/AMCONSUL RIO DE JANEIRO
RUEHSG/AMEMBASSY SANTIAGO
RUEHSO/AMCONSUL SAO PAULO

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E.O. 12958: N/A
TAGS: ECON ENRG EFIN PGOV BR ETRD EINV
SUBJECT: Brazil's Natural Gas Output to Rise, but Challenges Remain

REF: SAO PAULO 0031; BRASILIA 1215

1. (SBU) Summary: The potential natural gas reserves found in
Brazil's offshore pre-salt cluster could help boost domestic
production and reduce Brazil's dependency on foreign natural gas,
possibly as early as 2020. According to energy sector experts at a
conference sponsored by Gas Energy, while the transition holds
potential implications for Brazilian-Bolivian relations as well as
a further solidification of Brazil's energy independence,
challenges in infrastructure, distribution, and investment could
impede Brazil's full utilization of these new resources. End
Summary

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Pre-salt Findings Could Reshape Natural Gas Sector

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2. (SBU)Brazil probably will continue to depend heavily on Bolivian
natural gas (NG) imports until substantial pre-salt NG deposits
come on line. Natural gas imports from Bolivia account for about
half of total internal demand, with the other half produced
domestically. Econoff attended a November 4 industry seminar
sponsored by Gas Energy, a private company that assesses the
natural gas, oil and energy sectors in Brazil and the rest of Latin
America, in Sao Paulo where experts indicated that natural gas
demand declined from 61 to 44 cubic million meters per day (Mm????/d)
in 2009 due to a slowdown in industrial production from the global
economic crisis, but demand is expected to rise with the resumption
of economic expansion in 2010. (Note: Sao Paulo's industrial
complex is the most highly natural gas dependent part of the
country, accounting for 38 percent of daily natural gas use. End
Note.) Natural gas demand also declined in part due to plentiful
rainfalls which allowed Brazil to maximize its predominant power
source, hydropower, rather than compensating with more expensive
natural gas.

3. (SBU)Many in the Brazilian energy sector have looked to move
away from dependence on Bolivian gas supply since 2006 when Bolivia
nationalized Petrobras investments in the sector(Reftels A&B). The
September 2008 disruption in supply due to political protests in
Bolivia further increased Brazilian determination to achieve some
independence from Bolivian gas, however Brazil has a 20 year
commitment to Bolivia to purchase a minimum of 24 million m????/d.
To
diversify its gas supply, Brazil has brought on line some new
Liquefied Natural Gas (LNG) terminals and has acquired supply from
Trinidad and Tobago.

4. (SBU)In continuing attempts to expand natural gas supply, over
the long-term, Brazil is likely to gradually shift away from
Bolivian gas imports to new domestic gas sources in the pre-salt
deposits offshore of Sao Paulo and Rio de Janeiro states. Experts
from the seminar, including Sylvie D'Apote of Gas Energy, stated
that Brazil will begin producing a small amount of natural gas from
the pre-salt finds in 2012, with daily production from the region
probably reaching 60 Mm????/d by 2020, or about 39 percent of total
expected NG supply for 2020. As a result, D'Apote expects imports
from Bolivia will then account for only 19 percent of the total

SAO PAULO 00000688 002 OF 003

expected supply, with another 29 percent coming from
already-developed fields, and the remaining 13 percent from
imported LNG. According to the speakers' projections, domestic NG
demand by 2020 will be around 95 percent of the total supply,
leaving Brazil with a limited excess NG amount of about 8 Mm????/d.
(Note: While the pre-salt fields appear to offer a significant
potential source of natural gas, conference presenters did not
address the logistical challenges of tapping into natural gas 210
miles from the Brazilian coast beneath 2 kilometers of water and 5
kilometers of sand, rock and salt. GOB officials however admit
that the logistics present a real challenge to making the pre-salt
gas reserves a viable energy supply. End Note).

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Infrastructure Challenges Ahead

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5. (SBU)Despite the bright outlook for Brazilian Natural Gas
production, industry experts, D'Apote and Ricardo Pinto of Gas
Energy, say infrastructure, distribution and competitiveness issues
hamper increased adoption of domestic natural gas by industrial and
commercial consumers. Most importantly, inadequate infrastructure
to transport NG and poor distribution network interconnectivity
increase costs for Brazilian consumers and have fostered chronic
supply disruptions. At present, Brazil's three main regional
markets, the South/Southeast (supplied primarily by imports from
Bolivia), the North (supplied domestically), and the Northeast
(supplied domestically) have only limited NG and LNG pipeline
interconnectivity. According to Pinto and Marco Tavares of Gas
Energy, Brazil plans to expand its NG infrastructure network from
the current 7.7 thousand kilometers to 9.3 thousand kilometers, but
the cost is expected to be high and funding remains uncertain.

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Regulatory Changes Needed

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6. (SBU)In addition to infrastructure and distribution challenges,
industry experts such as Pinto and Tavares cite a lack of
competition in the sector as another major impediment to expansion
and cost-efficiency. Brazilian natural gas is currently sold at
around $15.58/million BTU compared to Bolivian gas prices of
$9.57/million BTU. Seminar panelist Tavares highlighted the need to
increase competition and dismissed the Natural Gas Law approved in
March 2009 as ineffective in reducing Petrobras' hold on the
industry. Although a key objective of the law was to allow private
companies to enter the market for gas transportation and storage,
Petrobras remains the dominant player controlling all gas
transportation infrastructure, most distributors, and marketing
over 95 percent of the gas sold in Brazil. Additionally, Petrobras
controls the supply chain of other energy products, such as oil,
which may be used as substitutes to NG, further boosting the price
of natural gas.

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Comment

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7. (SBU)While Brazil will continue to depend on Bolivian gas to
meet domestic demand for the immediate future, the country's
natural gas production outlook appears promising as the pre-salt
finds are expected to boost domestic output and diminish reliance
on Bolivian imports over the next ten years, if Brazil is able to
overcome the significant logistical challenges inherent in
processing gas in the pre-salt environment. Nevertheless, as
industry experts note, significant investments in infrastructure
and distribution will be needed in addition to regulatory reform to
attract the private investment necessary to successfully develop
the new resources. With elections approaching, Petrobras'
political clout, and the nationalistic tone of the current debate
over pre-salt development legislation, near-term progress to
broadly open the sector to private investment appears unlikely. End
Comment.

8. (U) This cable was coordinated/cleared by US Embassy Brasilia
and US Consulate Rio de Janeiro
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