Electricity-Starved Brazil Could Be the Next Market for U.S. Natural Gas
From The Motley Fool
The reservoirs that supply Brazil with hydroelectricity are drying up, and that could be a tremendous opportunity for for U.S. natural gas producers.
Reuters reported that the only thing preventing blackouts and electricity rationing in Brazil is a large number of natural gas- and oil-burning power plants built since the last drought in 2002. Those plants are now running overtime because hydroelectric reservoirs in some parts of the country are nearly two-thirds empty.
To make up for the lost hydropower, Brazil’s national utility, PSR, has put power plants that can generate up to 6,280 megawatts of electricity online. A lot of that electricity is being generated by natural gas.
Brazil gas imports could increase by 31%Petroleo Brasileiro, or Petrobras, the only Brazilian company that can legally import liquid natural gas, or LNG, has plans to increase its imports of gas by 31% in the near future, Bloomberg reported. Petrobras has already increased its imports by 6.1%.
Petrobras will import around 742 million cubic feet of LNG this year, energy researcher Marco Tavares told Bloomberg.
The reason the gas is being imported is that Brazil’s government has ordered utilities to switch on natural gas-burning plants to keep the lights on during the drought. Brazilian President Dilma Rousseff has taken that step because she’s facing reelection in October. Rousseff is worried that voters might blame her for the electricity shortage and say so at the ballot box.
Why Brazil could be a boon for North American natural gas producersBrazil could become a major source of revenue for North American LNG producers, such as Chesapeake Energy (NYSE: CHK ) and Devon Energy (NYSE: DVN ) , because of the way its natural gas market works.
Petrobras buys LNG on the spot market to meet domestic demand, and it doesn’t use long-term contracts. That means Petrobras has no choice but to pay whatever the spot market price is for LNG. The company has no ability to negotiate for lower prices.
The domestic demand is based on Brazilian politics. Politicians like Rousseff tell Petrobras how much gas to buy. They even subsidize the price of LNG to please the voters. Bloomberg reported that Petrobras buys LNG at $18 to $19 per thousand cubic feet and resells it for $11 to $12 in an attempt to keep electricity prices artificially low.
Brazil’s increased demand for LNG is coming at an opportune time for U.S. gas producers such as Chesapeake. There’s a strong push in Congress to allow the export of U.S. natural gas to any country that’s a member of the World Trade Organization, Reuters reported. Current U.S. law requires approval of the U.S. Department of Energy for such exports to all but a handful of countries. The idea is to punish Russia for invading Crimea by competing with its LNG.
At the same time, the U.S. Department of Energy has approved LNG exports from six plants in the past 10 months. That indicates the department is speeding up its approval process.
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