Natural Gas Holds Potential For Power Mix
BMI View: Brazil's power sector continues to feel the pain of being overly dependent on an unreliable electricity source. Frequent droughts have pushed up spot electricity prices, with the 2014 season being one of the worst on record. These weather developments have the potential for both economic drag and political implications. As such, we believe that the government may finally be realising the importance of developing more thermal capacity to provide base load electricity, and expect natural gas to be the fuel of choice.
We believe that the current drought in Brazil could prompt the construction of new gas fired power capacity. Electricity shortages due to low water levels at reservoirs have resulted in frequent price surges. This is because the lack of hydropower generation has increased the reliance on expensive LNG imports to fuel peaking thermal power plants, with the 2014 drought resulting in record high prices (see, 'Power Sector Aid Package To Delay Post-Election Tariff Hikes', 17 March). However, despite Brazil's vulnerabilities, investment into new capacity over recent years has remained focused on hydropower, and more recently wind power, due to the low cost of operating these projects. By comparison, investors have failed to propose natural gas projects. This is due to the relative cost of operating such plants, brought on by a lack of domestic supply and long term affordable LNG import contracts.
However, we could see natural gas beginning to play a bigger role in the power mix. Around 1.7GW of new capacity is due to come online in 2014 and these power plants, proposed a number of years ago, are being developed by Petrobras, Electobras and Eneva (formerly part of MPX Energia). At the same time, Petrobras brought online a new LNG import terminal, at Bahia, in January 2014, which will help secure feedstock over the short term. In addition, our Oil & Gas team forecast an uptick in natural gas production, which will help to cut the cost of feedstock. Although investment into infrastructure and a ramp up in exploration is necessary to fully support a roll out in natural gas capacity, we could see this as the first step. Brazil has substantial natural gas reserves, which have frequently been overlooked in favour of the higher profile pre-salt potential. The US Energy Information Administration estimates that Brazil holds around 13.97 trillion cubic feet (tcf, 395 billion cubic meters) of proved reserves, not including the country's substantial shale potential, with 245tcf (6.94 trillion cubic meters) in technically recoverable gas resources.
|Prices Reflect Vulnerabilities|
|Mercado Atacadista de Energia Southeast/Central Brazil Electricity Cost/Medium Use, BRL/MWh|