Petrobras acts to protect gas value chain as Brazil demand slumps

Petrobras’ handling of the crisis it faced as Brazilian gas demand slumped earlier this month offers valuable lessons to integrated players, Mauro Chavez, head of Latin America Gas & LNG at global natural resources consultancy Wood Mackenzie, says.

 “The Brazilian company’s experience shows the importance of adopting an integrated and coordinated approach during a period of oversupply to balance the system and mitigate material damage across the value chain,” Chavez said.

Brazil’s industrial gas demand had already started to decline in March, after coronavirus containment measures were put in place in Sao Paulo and Rio de Janeiro states. However, as lockdowns took effect across the country in the first two weeks of April, demand plunged.

Wood Mackenzie estimates Brazilian gas demand fell from 76 million cubic metres per day (mmcmd) in February to about 54 mmcmd as the impact of coronavirus lockdowns took effect.

The steep drop in industrial demand led local distribution companies (LDCs), which have gas supply contracts with Petrobras, to declare force majeure. This had implications across the gas value chain, affecting operations along the chain, production and supply chain contracts.

As a result, Petrobras elected to exempt take-or-pay and ship-or-pay clauses for LDCs.

Chavez said: “Since March, Brazil’s shrinking electricity demand, combined with high levels at hydro reservoirs, has resulted in the marginal cost of electricity dropping to zero. This slump in power demand has also hit gas consumption at thermal power plants.

“Nevertheless, Petrobras has forced thermal power operation to maintain the minimum feed gas volumes required to ensure the integrity of its upstream production. A drop in gas demand could potentially compromise the reservoirs.”

He added: “Low gas demand is already threatening pre-salt oil production, and Petrobras has taken additional steps to manage its production.”

Petrobras had already announced a production shut-in of 200,000 barrels of oil per day, mostly from higher-cost fields.

Chavez said: “This is not enough to balance low demand, forcing the company to cut other sources of domestic non-associated gas. Petrobras is also working to maintain sustainable production rates from pre-salt fields and has negotiated with its partners to increase gas reinjection levels, while maintaining minimum gas production levels to preserve reservoir integrity.”

Meanwhile, Petrobras has declared force majeure on all its supply contracts. It has also cut its gas imports from Bolivia to 10 mmcmd, 4 mmcmd below the minimum contracted quantity.

Chavez said: “The slump in gas demand offers lessons on the need for gas storage, the urgency for a liquid gas market, and the integration of the gas and power sectors.”