Decree regulating New Gas Law published

On June 4, 2021, Decree No. 10,712/2021 was published in the Brazilian Federal Government’s Official Gazette. The decree regulates Law No. 14,134/2021 (the New Gas Law), covering activities related to natural gas transportation, outflow, treatment, processing, underground storage, conditioning, liquefaction, regasification, and sales.

The New Gas Law has modernized legislation for natural gas in favor of free competition and free enterprise for a more open, dynamic, and competitive market.

Below, Mattos Filho’s specialists outline the main features of the decree, which has important legal consequences for the entire natural gas value chain.

Natural gas transportation

Authorization

The decree regulates the new framework for granting rights to transport natural gas (via new pipelines), replacing the concession-based framework provided for in the previous gas law (Law No. 11,909/2009). This provision can be considered a positive development, as it seeks to make the process faster and more efficient.

Furthermore, there is a new framework for authorizing pipeline construction to reach new consumer markets. It intends to make the process more transparent, as it now includes a period for either expressing interest in or contesting proposed pipeline construction.

The decree also defines criteria for natural gas pipelines whose diameter, pressure, and length exceed limits established by the Brazilian Agency for Petroleum, Natural Gas and Biofuels (ANP) – as provided for in Article 7, item IV of the New Gas Law. These criteria are listed below:

• Consideration should be given to promoting the overall efficiency of the networks;
• Limits may differ according to the specific purpose of the pipelines;
• Provided that technical requirements are met, pipelines intended for connecting CNG or LNG facilities to other natural gas transportation pipelines shall also be considered transportation pipelines;
• In exceptional cases, even if they meet the corresponding technical criteria, the ANP may decide not to classify certain pipelines as transport pipelines. For this to happen, the project’s influence must be restricted to local interests, and there must be no potential impacts on planning studies and coordinated development plans – whether already in existence or under development.

When permitted by applicable state-level regulations, the decree also makes it possible to directly connect transportation facilities with natural gas end-users.

Market area managers

In certain situations, a natural gas transportation system may involve more than one capacity area. With the aim of progressively reducing the number of areas and increasing virtual trading point liquidity, the ANP will regulate and supervise these areas to facilitate eventual mergers between them.

The New Gas Law provides that carrier companies that operate in the same market area must contract a manager who would be responsible for coordinating carrier operations. In turn, the decree provides that gas transportation companies shall bear certain expenses linked to the market area manager’s role – defined as operating costs, administrative costs, and capital investments necessary for providing services and carrying out business activities. These expenses fall under transportation service costs. As per ANP regulations, it is possible for companies to transfer ownership of natural gas in their custody.

Virtual trading points

Decree No. 10,712/2021 defines a virtual trading point as one within a capacity market area without a physical location that allows gas transportation companies to transfer gas titles and clear imbalances in accordance with ANP regulations.

These companies must be guaranteed access to virtual trading points without discrimination. This is done by adopting mechanisms that avoid contractual congestion at transmission entry and exit points, particularly for connected injection facility entry points. To assist in eliminating such congestion, the decree allows for both temporary and permanent compulsory cession measures in regard to transmission capacity – where contracted companies cannot prove a need for continuous use.

Underground storage

The decree includes regulations on underground natural gas storage, which the New Gas Law defines as natural gas stored in either hydrocarbon-producing or non-hydrocarbon producing geological formations. Companies must receive the ANP’s authorization to store natural gas underground, and are also responsible for the risks and costs involved. Residual extraction of liquid hydrocarbons, while natural gas is stored underground, is conducted according to a simplified framework, which removes the need for a bidding process, as per ANP regulations.

The ANP may also request the Energy Research Company (EPE) to carry out specific studies to guide the authorization of activities in the natural gas industry, coordinate the development of transportation systems, dispute resolution processes, access to essential infrastructure, underground storage projects, among others.

Questions have been clarified concerning the prohibition of removing a greater volume of natural gas than originally stored from an underground geological formation (as per the New Gas Law’s Article 23, paragraph 1). This does not apply to companies storing natural gas underground that hold production rights for oil, natural gas, and other hydrocarbon fluids in the geological formation.

As such, the ANP will regulate third-party access to underground natural gas storage facilities, which is subject to transparent, objective, and non-discriminatory criteria. It may also establish deadlines and specific conditions for negotiating the access. To ensure transparency, the ANP may publicize gas pipeline and processing facility construction projects. As well as providing more access to information – even where confidentiality clauses apply to negotiations – this should enable coordination between the owners of the facilities and parties interested in accessing them.

The ANP will also establish the period in which third-party access to underground storage facilities is not mandatory, taking into consideration:

• the return on investments made by those who made the project viable;
• possible corporate relationships between the storage facility owner and companies operating in other parts of the natural gas production chain; and
• the storage facility’s relevance to the national supply of natural gas.

Natural gas distribution and sale

Definition of “piped gas supply”

Given that Law No. 11,909/2009 lacked a clear definition of piped gas distribution, this topic was widely discussed throughout debates on the bill for the New Gas Law. In particular, there were discussions on whether such a definition should go beyond covering handling services and also cover gas sales to final consumers.

The New Gas Law essentially repeats the constitutional definition of ‘piped gas distribution’ as “the provision of local piped gas services pursuant to the provisions of Article 25, paragraph 2 of the Brazilian Constitution“. However, Decree No. 10,712/2021 defines this more precisely as “services under the terms of state or district regulations which involve the sale of piped gas to captive consumers.”

Independence and autonomy

Although the decree permits corporate relationships between competing companies and piped gas distributors, it also established mechanisms to prevent anti-competitive conduct in the natural gas market. As such, the ANP can impose conditions in regard to securing authorization for activities in the natural gas industry by issuing regulations that prevent authorized companies from:

• influencing the commercial management and investment decisions of piped gas distributors;
• gaining a competitive advantage over their competitors;
• having access to sensitive information held by piped gas distributors that could influence market competition.

Information that directly concerns competitors’ core activities or otherwise gives companies a competitive advantage is considered sensitive.  This includes non-public data on costs, expansion plans, prices, discounts, competitive strategies, key clients, salaries, research and development, brands, and patents.

Furthermore, the ANP may place restrictions on companies sharing human resources, accessing or sharing information systems, interfering in decision-making processes that affect the captive market or network expansion investments.

Commercialization

Commercialization of natural gas encompasses the sale of natural gas in solid, liquid, or gaseous forms, which is transported using methods other than pipelines.

Reducing market concentration

Decree No. 10,712/2021 regulates the adoption of mechanisms for stimulating efficiency and competition. As per Article 33, paragraph 1, item II of the New Gas Law, the ANP is responsible for defining terms and conditions for its natural gas sale program, which must observe the following guidelines:

• transport capacity regarding gas released through the program at relevant points of the transport system should be assigned simultaneously with the sale of natural gas, when applicable;
• there should be no restrictions for trading the gas (and its respective transport capacity) in secondary markets;
• Contracts with daily, monthly, quarterly, or annual terms should be offered on a regular basis for gas sold through the program, at the ANP’s discretion.

Fungibility

The decree states that natural gas is a fungible product, provided that it meets the ANP’s established specifications. However, there may be an exception for mixtures of natural gas that contain gas with different quality levels. In such a situation, energy equivalence can be used to determine fungibility.

It should be noted that biomethane (a gaseous biofuel made up of methane derived from purifying biogas) and other gases interchangeable with natural gas will be considered equivalent to natural gas for regulatory purposes, provided that the ANP’s established specifications are met.

Costs and expenses

Natural gas transporters must comply with requirements regarding agents’ independence and autonomy – as well as the agents’ own requirements in respect to independence – as they both carry out competitive activities in the natural gas industry. Certification costs for such compliance are the responsibility of the regulated agents.

However, expenses associated with certifying the transporter’s independence may be transferred to the values of transport tariffs, provided the ANP has previously approved them.

Finally, gas transporters must bear the expenses necessary for transitioning Brazil’s natural gas industry to the transportation model established in the New Gas Law, which will be included in the transporters’ service costs and expenses.

For further information about the New Gas Law, please contact Mattos Filho’s Infrastructure and Energy practice area.