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Developing LNG and Gas-To-Power Projects in Brazil

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Developing LNG and Gas-To-Power Projects in Brazil Developing LNG and Gas-to-Power Alexandre Chequer Jose Valera Projects in Brazil Débora Yanasse November 2017 Tauil & Chequer Advogados in association with Mayer Brown 1 Our Global Presence 1,500+ lawyers in 24 offices around the world 40 lawyers ranked, including 79 lawyers ranked including 15 in top band or higher 19 in top band or higher 148 lawyers ranked, including 43 in top band or higher 59 lawyers ranked including 7 in top band or higher Ranked #2 in BTI Client 31 lawyers ranked including 6 Service A-Team survey in top band or higher 2 Overview -Navigating Brazil’s opportunities for investment in gas and power projects Session 1 -Understanding Brazil’s proposed new legal framework for the gas and power industries LNG Power Session 2 Shipping Regas Regasification 3 3 Gas Industry Institutional Structure Republic Presidency CNPE MME National Energy Policy Ministry of Mines and Policy Energy Research Council Energy Company Federal Regulation National Agency of Petroleum, Natural Gas and Biofuels Policy States or State & States Regulatory Agencies Regulation 4 Federal x States Jurisdiction over Gas Activities Upstream Exploration & Production Importation & Exportation Storage Processing Federal Midstream & Liquefaction & Regasification Downstream Transportation Shipping Marketing State Downstream Distribution ... 5 Federal Gas Regulatory Framework FEDERAL LEGISLATION 2009 2010 2017 Gas Law (Law Gas Decree No. 11,909/09) (Decree No. regulates the 7,382/2010) processing, regulates storage, specific aspects liquefaction, of Gas Law IMPROVEMENTS TO THE GAS LAW AND GAS DECREE regasification and trade of natural gas FEDERAL REGULATION 2011 2012 2013 2014 2015 2016 ANP Resolution No. MME Ordinance No. ANP Resolution No. ANP Resolution No. ANP Resolution No. ANP Resolution No. 50/2011 - 232/2012 - 37/2013 – gas 15/2014 – tariff 52/2015 - 11/2016 – third construction and authorization for gas pipeline capacity criteria for construction, party access to gas operation of LNG importation expansion transportation expansion and pipelines, gas terminals and pipelines operation of LNG capacity assignment pipelines ANP Resolution No. ANP Resolution No. terminals and and gas swap 42/2012 - sharing of 51/2013 – pipelines ANP Resolution No. oil, gas and biofuels authorization for the ANP Resolution No. 51/2011 – register of pipelines gas carriers 40/2016 – gas self-producer and transportation self-importer information to ANP ANP Resolution No. 52/2011 – authorization for gas trading 6 States Gas Regulatory Framework STATES’ LEGISLATION – GAS DISTRIBUTION SERVICES FEDERAL LEGISLATION 1995 2009 2010 Federal Gas Law (Law Gas Decree Constitution No. 11,909/09) (Decree No. Amendment No. Federal Constitution, art. 25, § 2º: 7,382/2010) 5/1995 allows States must perform directly or States to delegate gas through concession the local distribution piped gas distribution services Self-producer, self-importer and free consumer services to concessionaires STATES’ CONCESSIONS 1991 1997-1999 2000 2017 2018 Execution of Gas Distribution Concession Contracts Public Bid for New Gas Concession in São Studies for Privatization Paulo Privatization of 9 Process expected Privatization of Rio de Janeiro and States’ Gas to 3Q 2018 São Paulo’s Gas Concessionaires Concessionaires Different Tariff and By-pass Regulations among the States 7 Verticalized Monopoly Structure Petrobras used to have 95% of the gas market share Upstream (Natural Gas E&P) TBG TSB NTS and NTN Midstream (LNG Terminals and (Gas Transportation Processing Plants) (Gas Transportation) Services Provider) Downstream (LPG Distributon) (Gas Distributon) 8 Deverticalized Competitive Structure Upstream Midstream Downstream LNG Terminals Onshore gas fields: Juruá (AM) Azulão (AM) TBG Riacho da Forquilha (RN) Buracica (BA) TSB Miranga (BA) Offshore gas fields: Ceará Mar (CE) Merluza (SP) NTN Rio Grande do Norte Mar (RN) Sergipe Mar (SE) NTS Enchova (RJ) Pampo (RJ) Pargo (RJ) 9 Gas Market Overview: Demand Drivers Natural Gas Demand in June/2017: 78 MM m³/day Market Distribution (MM m3/day) 45 40 35 30 25 20 15 10 5 0 Source: MME Natural Gas Industry Monthly Report (June 2017) 10 Gas Market Overview: Brazil x Americas Source: BP Statistic Review of the World Energy 2017 11 Gas Market Overview: Demand Projection until 2050 BUT WE ARE HERE (ACCELERATED WE WERE GROWTH) SUPPOSED TO BE HERE Source: EPE – Energy Demand 2050 (January 2016) 12 Gas Market Overview: Production x Importation National Petrobras expects to increase gas 5% Production production with pre-salt exploration 33% Bolivia Importation of 30 MM m3/day by Petrobras 62% Importation will reduce after 2021 GNL Nigeria Importation Trinidad and Tobago Angola 13 Gas Market Overview: Storage and Regasification 3 NO STORAGE FACILITIES AND 3 FRSU TERMINALS Pecém Terminal: 7 MM m /day TRB Terminal: 14 MM m3/day Guanabara Bay Terminal: 20 MM m3/day Source: FGV/CERI 14 Gas Market Overview: Transportation Limited Transportation Network: ~9,400 km Petrobras controls and operates more than 7,000 km Recently sold 2,050km to Brookfield Northeast pipelines also to be sold by Petrobras Effective transportation unbundling => Pursuant to Gas Law, transporters may not operate in other gas activities, except for storage and operation of LNG terminals Petrobras sold a 90% stake of NTS to Brookfield for US$ 5.19 bi in 2016 15 Gas Market Overview: Distribution Concentrated Distribution Network: ~27,324 km • Concentration in the States of São Paulo and Rio de Janeiro •22 of 26 gas distribution concessionaires are under control of the States • 19 concessionaires have Gaspetro (Petrobras + Mitsui) as shareholder • 9 concessionaires to be privatized (expected to 3Q 2018): Bahiagás (BA), BR (ES), Copergás (PE), MSGas (MS), PBGás (PB), Potigás (RN), SCGás (SC), Sergás (SE) and Sulgás (RS) • Gas to Grow to address some bottlenecks: • Free Market/Free Customers/Commercial By-Pass => Uneven State Laws - minimum consumption requirements vary from 10,000 to 1,000,000 m³/day • By-Pass Fee: • No full commercial and physical by-pass • O&M Fee x Gas Movement Fee x Gas Distribution Fee 16 Gas to Grow Initiative: Transition to a Competitive Market Purpose: New legal framework for the gas market in Brazil to encourage private investments. Product: MME will submit to Congress a bill of law to amend the Gas Law by the end of 2017. Enhanced Gas Law Solution for Gas-Power Tax Issues Integration 17 Gas to Grow Initiative: Relevant Developments Activity Today Gas to Grow Processing, Offloading , No open access Negotiated open access Regasification and State tax (ICMS) inefficiencies for Symbolic exchanges and Liquefaction LNG/gas exchanges among monthly accounting terminal users Transportation Point-to-point model Entry-exit model No independent network Independent network operator operator State tax (ICMS) based on point- State tax (ICMS) based on to-point model (physical flow) entry-exit model (contractual flow) Distribution Uneven State laws for by-pass of Federal guidelines for consumers development of a free market Marketing No organized markets Organized markets 18 Power Industry Institutional Structure Republic Presidency CNPE National Energy Policy Policy Council CMSE MME Power Sector Ministry of Mines and Monitoring Energy Research Energy Committee Company Federal Electricity Regulatory Regulation Agency Grid Operation Power Trading & National Grid Operador Chamber Market 19 Thermo Power Regulatory Framework FEDERAL LEGISLATION 2000 2001 2004 2008 2014 2016 2017 PPT – Energy Crisis New Power Industry A-3 and A-5 New A-5 New Energy Thermoelectricity Model Law (Federal Energy Public Public Auctions – BLACKOUT Priority Program Law No. 10,848/2004) Auctions – 6 New 3 New LNG TPPs (Decree No. Creation of CCEE LNG TPPs (New LNG 3.371/2000) (replaced MAE), EPE (Petrobras’ Regas Terminals) and CMSE. New Capacity) attributions to CNPE. IMPROVEMENTS TO THE Gas-Power Integration POWER REGULATORY FEDERAL REGULATION FRAMEWORK 2000 2006 2009 2013 2017 MME Ordinance No. CNPE Resolution No. ANEEL Resolution ANEEL Resolution CNPE Resolution No. 43/2000 - Definition 4/2006 – Priority for No. 390/2009 - No. 583/2013 - 18/2017 – ANP and of TPPs under PPT LNG-to-power construction and mandatory penalty ANEEL to review projects operation of TPPs clause in the GSA of penalties for failure (revoked ANEEL TPPs in case failure in in the gas supply MME Ordinance No. Resolution No. the gas supply 215/2000 - ANEEL Resolution 112/1999) (revoked ANEEL Petrobras to supply No. 235/2006 - Resolutions No. gas for 20 years for qualification of 190/2005 and No. TPPs under PTT cogeneration TPPs 222/2006) (revoked ANEEL Resolution No. 21/2000) 20 Power Market Overview: Demand Projection until 2026 Source: EPE Power Demand Projection 2017-2026 (January 2017) 21 Power Generation Matrix • Natural gas thermoelectric generation is a back-up source, subject to merit order dispatch, but since 2012 TPPs have been dispatched on a continuous basis due to drier weather conditions/lower hydroelectric generation • In 2015, 12% of the power supply was generated by natural gas TPPs POWER GENERATION MATRIX Sources N° Plants KW % Hydro 1,267 99,394,714 61.17 Biomass 536 14,206,367 8.74 Natural Gas 162 13,003,427 8.00 Oil/Fossil Fuels 2,215 10,172,075 6.26 Importation -- 8,170,000 5.02 Wind 470 11,498,043 7.07 Coal 21 3,713,495 2.28 Nuclear 2 1,990,000 1.23 Solar 60 311,732 0.19 Source: ANEEL’s website in October 2017 22 TPP Dispatch Profile Source: AES Tietê Results 1Q 2017 23 Power Contracting Environments Free Market Regulated Market Ambiente de Contratação Livre - ACL Ambiente de Contratação Regulada - ACR • Contracting through public auctions • Free contracting with lowest price criteria • Participants: Generators, Traders and • Participants: Generators, Distributors Free/Special Customers and Captive Customers • PPAs: All terms and conditions are • PPAs: All terms and conditions are set freely negotiated, including price forth in the auction notice 24 ACR Public Auctions Overview MAIN FEATURES: Lowest energy price criteria. The ACR public auctions were primarily designed to ensure: (i) lower electricity rates to final customers; and (ii) development of different power generation sources.
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