Brazil prepares for the second great LNG bailout

Brazil should give up electricity for Lent, a Rio de Janeiro-based analyst told Interfax on Wednesday, with a touch of gallows humour. However, it is no laughing matter: the hydropower-dependent country has just recorded the second-driest January in 80 years, and the prospect of electricity rationing looms.

The 100 days between Carnival and kick-off for the 2014 World Cup now threaten to be the toughest period of Dilma Rousseff’s presidency. Rousseff, who has staked her political credibility on the lights staying on, is likely to write blank cheques for LNG to bail out the power sector. Analysts blame both the structural weakness of Brazil’s power sector – which affords the country little flexibility during supply tightness – and poor policy decisions for the situation.

As reservoir levels run low, costly LNG imports appear to be the country’s last resort for the second consecutive year, Mônica Souza, a manager at Sao Paulo-based Gas Energy, told Interfax. “Considering we have increased risk of rationing and the cost of not having power is very high, it makes sense to use all the resources,” she said.

Brazil spent $2.84 billion on LNG imports in drought-afflicted 2013, according to the country’s Secretariat of Foreign Trade (SECEX), which was an 83% increase on the $1.55 billion in 2012. Souza has called for Brasilia to break its reliance on spot cargoes and invest in long-term LNG contracts to meet a certain share of the market with high flexibilities for power plant supply.

Structural weakness

The country’s Energy Ministry has said Brazil’s electricity sector runs at a surplus, with total installed power capacity of 127 GW almost double demand, which has averaged 67 GW so far this year. However, total available capacity and actual generation rates often fail to match demand when reservoir levels become depleted.

Reservoirs in the country’s southeast and central-west, which account for around 70% of Brazil’s installed hydroelectricity capacity,were just under 35% full on Thursday, according to data from the country’s ONS grid operator. This is the lowest since 2001. Reservoirs would need to recover to more than 60% fullness to ease concerns over despatch, according to experts.

The fragile supply-demand situation pushed marginal operating costs in the region to more than BRL 1,685/MWh ($725/MWh) in the final week of February, according to the ONS. This is around 24% higher than the BRL 1,364/MWh level at which Brazil’s Aneel power regulator recommends ‘load-shedding’, or reducing consumption.

A second analyst expressed frustration with the short-sightedness of Brazilian energy policy. “There are other strategies [than LNG] to deal with the threat of rationing,” Roberto Pereira D’Araujo, director of Brazil’s Institute for the Strategic Development of the Electricity Sector, told Interfax. “This situation didn’t start now. As the expansion during the past eight years privileged high-cost thermal plants, which act as insurance, it was obvious that we would overuse the hydro reserve,” he said.

“The situation is very serious. I think the authorities should start a negotiated load-shedding with the electricity-intensive industries. As we are in an election year, you can imagine the reluctance to admit that something is wrong,” he added. Low flexibility

Low flexibility

Aneel brought the southern 244 MW Uruguaiana plant back online this week for two months as an exceptional measure, and cleared the commercial operation of two 172 MW turbines at the Baixada Fluminense gas-to-power facility. It is a sign Brasilia is likely to rely on its ‘back-up’ thermoelectric plants – which covered the hydropower production shortfall during last year’s drought – for electricity during 2014.

However, D’Araujo argues Brazil’s increased LNG imports and modest number of gas-fired power plants are a damaging combination, because they result in higher overall supply costs as generators turn to more expensive oil feedstock.

The share of power generation from diesel and fuel oil in Brazil has increased by nearly 300% in just two years, according to Aneel data. The plants now account for 2.7% of the country’s power, and operate 60-70% of the time, compared with Brasilia’s original target of 15% availability.

The share of hydropower generation has dropped from 91.2% in 2011 to 79.2% in 2013, while the share of thermal power has grown from 8.4% to 19.8% in the period. Gas-to-power generation is largely responsible for this growth, increasing its share from 2.7% to 11.2%.

As Brazil turns away from polluting and costly fuel oils, LNG appears to be the country’s sole flexible supply source during drought. The country is already calling upon its maximum contracted allocation of piped gas from Bolivia, as it did throughout 2013. Bolivia has a contract with Brazil until 2019 to sell its larger neighbour a minimum of 24 million cubic metres per day (MMcm/d) and a maximum of 31.5 MMcm/d. Brasilia spent $3.88 billion on Bolivian imports in 2013, according to SECEX, which was 16% higher than 2012.

Given Bolivia’s small surplus of gas, there is little room for a large increase in imports from its neighbour. Bolivian state-run YPFB and Brazilian state-run Petrobras negotiated the sale of an additional 2.2 MMcm/d to Brazil earlier this year via an interruptible contract. The gas will be sent to the Cuiabá gas-to-power plant in Mato Grosso state. The two companies are also set to sign a long-term contract for gas supply, which would run from March 2014 until December 2016.

Rousseff’s pledge to keep the lights on at any expense is also a costly promise. The president, who vowed that the power cuts of 2001 would never reoccur when she won the 2010 election, is aiming to slash power tariffs by around 20% to lighten the burden on industry and business. Her administration offered up to BRL 30 billion in compensation to utilities agreeing to renew concessions expiring in 2015-2017, but only if they cut tariffs.

This policy has hammered the companies during the drought, as they purchased or generated power from expensive fuel oil and gas. It cost Brasilia BRL 9 billion to prop up utilities in 2013, and Aneel said on 11 February that figure could increase by 62% this year.

 – Interfax