Brazil stands to lose US$119 million a year in royalties by using thermal power plants

RIO DE JANEIRO, BRAZIL – Oil companies operating in Brazil believe that the government’s compulsory contracting of thermal power plants, under the rules of the Provisional Measure for the privatization of Eletrobras (ELET3), threatens to increase and encourage the use of domestic gas and may lead to a R$600 (US$119) million annual loss in royalties for the country.

According to oil and gas companies, the main issue concerns the legal definition for the construction of these natural gas-fired plants, with predetermined capacities and locations, far from the supply of the Brazilian raw material and without it being the result of a competitive model approved by the market.

The royalty loss estimate considers the possibility that contracting the 6 GW foreseen in the Provisional Measure will exclusively rely on imported gas, a scenario feared by the country’s largest oil companies.

“If the point is to encourage the consumption of domestic gas, these thermal plants are not going to do it,” Sylvie D’Apote, new natural gas director at the Brazilian Petroleum Institute (IBP), which represents oil companies in the country.

She said that part of these thermal plants could perhaps be supplied by domestic onshore gas, but more likely many would need to be supplied with imported gas, at a time when the government has been looking for ways to competitively develop the sector in the country, with the expansion of pre-salt supply.

“These forced and artificial ways of creating a market will ultimately lead to more costs,” she said.

D’Apote also pointed out that the argument that the universalization of gas consumption in Brazil is required is unsustainable, given that there are substitutes. In her opinion, it would be better for the gas market to develop naturally, where there is economic and financial justification.

“Saying that it is necessary to internalize or, even worse, universalize gas is a big lie, with no economic justification,” said the IBP director.

The devices included in the Provisional Measure, passed by the Chamber and under consideration by the Senate, determine the contracting of 6,000 MW from natural gas thermoelectric plants in predetermined locations in Northeastern states, without access to natural gas, and in Northern and Midwestern states.

D’Apote’s statements are in line with other market segments, which are also opposed to compulsory contracting.

ABRACE, which represents large industrial energy consumers, estimated that the inclusion of these obligations in the bill could lead to additional costs for consumers in the future, of about R$20 billion per year.

However, the Ministry of Economy’s Secretary of Privatization Diogo Mac Cord said on Tuesday that the issues in the Eletrobras Provisional Measure have all been solved and that the government agrees with the current text.

According to the secretary, the contracting of gas-fired thermoelectric plants had been foreseen by the government.