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Paulo Valois, a Brazilian lawyer who specializes in oil and gas industry matters, talks to BNamericas about efforts to open up the country's natural gas market and the hurdles that federal and state governments will need to clear to make this happen.
"I think this disparity [between state regulations] represents a bottleneck for players that need to get a macro view of the Brazilian natural gas market," he said.
This is the first part of a two-part interview with Valois.
BNamericas: The Brazilian government is carrying out an important program that may finally open up the country's natural gas market, but some legal and regulatory barriers may hamper this complex process. What would you say are the main ones?
Valois: I believe the most significant hurdle will be how to transform today's business model, in which Petrobras is responsible for driving Brazil's natural gas market growth, into one that allows the major state-run company to be only a participant in this same market. Whether with a minor or major percentage, but only a participant, not the ubiquitous player.
We have to understand that Petrobras is responsible for 80% of the country's natural gas production, and it is virtually the only supplier for the market, since the other producers sell their production volumes for Petrobras. There are only one or two exceptions, such as Parnaíba Gás Natural and its gas-to-power project in Maranhão state. In addition to that, Petrobras is the owner of all of the LNG regasification units operating in Brazil. The company also has equity stakes in more than 20 gas distributors all over the country, which means that it also has a lot of control over some of Brazil's demand links.
BNamericas: Could free access to essential facilities solve this problem of market concentration?
Valois: This is a discussion that needs to be had. From the regulatory point of view, there are some issues. The first one concerns free access to LNG regasification units and gas pipelines that connect production fields to the shore. Today, these are Petrobras' facilities. If other players want to use these facilities, they need to ask the owner and try to negotiate access. There is no legal or regulatory provision that makes third-party access mandatory, which by itself restrains other suppliers from entering the natural gas market.
BNamericas: Tax inconsistencies are also much cited by new entrants. Do you believe that there is a mismatch between the tax system and the operation of the natural gas market?
Valois: There are some issues that need to be resolved. First, today there are great doubts regarding the collection of ICMS tax [services tax on merchandise circulation], and one of the main ones is to know who should be charged in some gas transportation operations. For example, when Brazil is importing natural gas from Bolivia, which state should pay the ICMS tax? Should it be Mato Grosso do Sul, where the fuel first enters Brazilian territory, or maybe Santa Catarina or Rio Grande do Sul states, where, theoretically, the final consumers are located? No doubt the country needs to have this conversation.
BNamericas: Has the collection of ICMS also hampered some other typical operations of this market, such as the natural gas swap?
Valois: Yes, this is another important matter regarding Brazil's tax system. The gas swap operations that could potentially be made by companies from different states are not happening today because of two major issues: one is the inadequate link between the ICMS tax and the physical flow of natural gas; and the other is the lack of balance between local state taxes. The good news is that representatives of the Brazilian state governments have been meeting and discussing ways to address these issues, hoping to simplify the charge of taxes on natural gas, which could be helpful to the market's development.
I would also add that there is a huge disparity between state regulations. There are some important concepts, such as self-producer, independent producer, free consumer and others, that are described differently in each state regulation. Somehow, I think this disparity also represents a bottleneck for players that need to get a macro view of the Brazilian natural gas market. Companies that would try to import LNG and place it in different parts of the country, for example, would have a hard time to fit in the legislation of two or more states.
About Paulo Valois
Paulo Valois has represented clients from the oil and gas, energy, services and shipbuilding sectors, advising on matters such as tax and M&As. He started his career in 1989 as in-house counsel for Shell in Brazil. Valois is also the author of The Evolution of the Oil State Monopoly (2000).