New Fortress going full throttle in Brazil with gas shortage opportunity

The acute energy shortage generated by this year’s drought in central and southern Brazil is being hailed as an opportunity by New York-based New Fortress Energy (NFE), one it intends to seize with four terminals under development.

"Brazil is a huge market that has significant challenges on the energy front and that presents massive organic opportunities for us," said CEO Wes Edens in the company’s Q2 earnings call with investors.

He added: "95% of the cities in Brazil are not on natural gas, and … we'll have four [liquefied natural gas] terminals by this time next year to actually bring it from north to south.”

NFE first burst into Brazil’s LNG market with the US$2.18bn acquisition of Hygo Energy Transition, which was completed in April, as well as a parallel US$251mn agreement for regional player Golar LNG to merge with NFE.

Though the move came with a high price, Edens said he believes it matches the “gigantic” opportunity the company sees in the Brazilian market.

The Hygo deal transformed NFE into a leading gas-to-power player in Brazil with an operational floating storage regasification unit (FSRU) terminal and a 50% interest in a 1.5GW power plant in Sergipe state, as well as three other FSRU terminals with associated power opportunities that are advancing through development and construction.

The company has also moved quickly to develop three additional LNG terminals, all coupled with gas-to-power generation projects, in the coastal hubs of Barcarena, Santa Catarina and Suape. 

All three have operational start dates in 2022 and come at a time when Brazil’s gas supply has been pushed to the limits by what is considered to be the worst drought in 100 years. 

The scenario spells opportunity, Edens said, with Brazil being 65-75% dependent on hydro power. The latest drought has also come at the tail of a downward trend in water supply over the last seven years that has resulted in emergency reactivation of thermo plants that are pressuring prices and supply.

Source: NFE

The drought, Edens said, has forced gas supplies onshore to provide electricity, sparking “massive gas shortages and the prices reflect that.”

“It's a bit of a mess. And that bit of a mess creates an unbelievable competitive dynamic,” he added, particularly with added gas production from pre-salt fields “not coming any time soon.”

Source: NFE 

The big picture

“The big picture in Brazil is that you've got a massive country. It has been served by a monopoly, by [state-owned oil and gas firm] Petrobras historically, but it's actually really changed,” said Edens.

“We have a lot more flexibility than a state-owned monopoly that is basically charging people kind of various fees that don't need to be there, a total lack of flexibility,” he said.

NFE also has a price advantage with cargoes purchased for all committed supply across the company for the next seven years under Henry Hub pricing that largely escaped this year’s surge in LNG pricing.

Talking about the four sites, managing director and head of the Brazil operations, Andrew Dete, said on the call: “These are terminals that are really thoughtfully located to take advantage of all of the kind of trends we're seeing, which is high transport costs, high molecule costs, et cetera.”

“Suape is at the end of the kind of coastal pipeline system in the northeast and in a region that needs energy, needs gas, and is traditionally economically kind of worse off than the rest of Brazil,” said Dete. 

And in the south, with the Santa Catarina terminal and the Sergipe assets acquired through the Hygo deal, Dete said these are at a position near “the end of the Bolivia pipeline system and the Bolivian gas is drying up.”

Project updates

On the electricity side, the Golar Power 1.5GW plant is up and running, receiving capacity payments and dispatching 100% of availability.

The Suape 288MW gas-to-power plant, by the company’s estimate, will be the next thermal power plant to come online in Brazil when it activates in the fourth quarter of 2022, said Edens.

Meanwhile, the 605MW Barcarena power plant is scheduled to go online in the first quarter of 2025.

On the gas side, the Barcarena LNG terminal’s contract for engineering, procurement and construction (EPC) has been executed. 

Pipeline construction is set to be completed by February 2022, with LNG supply via the pipeline to start in March of the same year. The site has a forecasted year-end 2022 run rate volume of 1.3Mg/d (million gallons per day).

NFE is negotiating a supply contract of around 1Mg/d, starting in 1Q23 at the Barcarena terminal, and is exploring other LNG and hydrogen opportunities in the region under a MOU signed with Norsk Hydro.

The company has also signed an LNG supply contract with state-owned gas distribution company Gas do para for 89,000g/d to supply three initial sites starting in the first quarter of 2022, Dete said, adding this contract offered “lot of room to grow.” 

The EPC contract for the Santa Catarina LNG terminal has been signed with engineering firm Tenenge and the offshore terminal is due for completion in January 2022, with first gas supply via ISO containers and pipeline to start in March of the same year.The site has a forecasted year-end 2022 run rate volume of 2.4Mg/d.

NFE has already achieved a number of commercial milestones at Santa Catarina, signing an 66,000g/d supply contract with SCGas and another 50,000g/d contract in the works with a pulp-and-paper mill in Minas Gerais state.

Santa Catarina has also been selected for the negotiation phase of the CP22 coordinated public tender by five gas distribution companies in the south of Brazil, with a total volume potential as high as 1Mg/d starting in the first quarter of 2022, according to NFE. 

With the power plant coming online in November 2022 in Suape (pictured), completion of the LNG terminal and pipeline is scheduled for Q1 of 2022, and NFE has already executed gas supply agreements for up to 1.4Mg/d, including an industrial customer in northeast Brazil.

NFE has executed small-scale contracts amounting to 30,000g/d with off-grid applications in partnership with Copergas, the gas distribution company for Pernambuco state, also starting in the first quarter of 2022.

Like Santa Catarina, Suape is also engaged in the CP21 tender and the site has an estimated year-end 2022 run rate volume of 2.8Mg/d.