Natural Gas Regulation in Brazil: a framework to Stimulate Competition in the State of São Paulo from 2011

Regulation of the natural gas industry is recent in Brazil. The agencies regulating this industry, both in Federal and state levels, were set up only in the late 90’s. Figure 1 shows the current natural gas industry organization in Brazil. This paper proposes a new regulatory framework to pave the way to competition in retail trade of natural gas in the state of Sao Paulo from 2011. At this year, a regulatory mark in the state will liberalize the retail trade for industry and electricity generation. Market planning of natural gas in Sao Paulo State is done through a market outlook. Demand is projected using simple logistic curve estimation. On the supply side, projection considers Petrobras Strategy Planning. Proposed regulatory framework considers international experience and Brazilian characteristics, both in upstream and downstream levels. Brazilian natural gas market is concentrated in the Southwest part of Brazil, and the interstate system is interconnected in the major markets. It means that a natural gas oversupply in Brazil would directly reflect in Sao Paulo State, that is located in the Sothwest. In the optimistic (aggressive) scenario considered for 2011, Brazil would have an oversupply of 0.4 bcf/day. This oversupply together with Bill 334/07 for the upstream, and the downstream framework proposed in this paper, would help competition development in the state of Sao Paulo; it would probably: 1) create a wholesale and a retail gas market; 2) stimulate risk management tools, i.e. derivative instruments; 3) promote a shift from long-term to short-term contracts between LDC’s and shippers; 4) create a spot and future markets; 5) promote a move towards spot and futures gas price indexation in mid- and long-term supply contracts. Competition would probably bring end-user prices down, as it happened in USA and th