VZCZCXRO8575
RR RUEHRG
DE RUEHSO #0688/01 3291415
ZNR UUUUU ZZH
R 251414Z NOV 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 0223
INFO RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHAC/AMEMBASSY ASUNCION
RUEHBO/AMEMBASSY BOGOTA
RUEHBR/AMEMBASSY BRASILIA 0237
RUEHBU/AMEMBASSY BUENOS AIRES
RUEHCV/AMEMBASSY CARACAS
RUEHLP/AMEMBASSY LA PAZ
RUEHMN/AMEMBASSY MONTEVIDEO
RUEHPE/AMEMBASSY LIMA
RUEHRG/AMCONSUL RECIFE 0038
RUEHRI/AMCONSUL RIO DE JANEIRO
RUEHSG/AMEMBASSY SANTIAGO
RUEHSO/AMCONSUL SAO PAULO

UNCLAS SECTION 01 OF 03 SAO PAULO 000688 
 
SENSITIVE 
SIPDIS 
STATE PASS USTR FOR KKALUTKIEWIECZ 
STATE PASS NSC RWALSH 
STATE PASS DOE RROTH 
WHA/EPSC 
EEB/ESC/IEC 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EFIN PGOV BR ETRD EINV
SUBJECT: Brazil's Natural Gas Output to Rise, but Challenges Remain 
 
REF: SAO PAULO 0031; BRASILIA 1215 
 
¶1. (SBU) Summary: The potential natural gas reserves found in 
Brazil's offshore pre-salt cluster could help boost domestic 
production and reduce Brazil's dependency on foreign natural gas, 
possibly as early as 2020. According to energy sector experts at a 
conference sponsored by Gas Energy, while the transition holds 
potential implications for Brazilian-Bolivian relations as well as 
a further solidification of Brazil's energy independence, 
challenges in infrastructure, distribution, and investment could 
impede Brazil's full utilization of these new resources. End 
Summary 
 
 
 
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Pre-salt Findings Could Reshape Natural Gas Sector 
 
--------------------------------------------- ----------- 
 
 
 
¶2. (SBU)Brazil probably will continue to depend heavily on Bolivian 
natural gas (NG) imports until substantial pre-salt NG deposits 
come on line.  Natural gas imports from Bolivia account for about 
half of total internal demand, with the other half produced 
domestically. Econoff attended a November 4 industry seminar 
sponsored by Gas Energy, a private company that assesses the 
natural gas, oil and energy sectors in Brazil and the rest of Latin 
America, in Sao Paulo where experts indicated that natural gas 
demand declined from 61 to 44 cubic million meters per day (Mm????/d) 
in 2009 due to a slowdown in industrial production from the global 
economic crisis, but demand is expected to rise with the resumption 
of economic expansion in 2010.  (Note: Sao Paulo's industrial 
complex is the most highly natural gas dependent part of the 
country, accounting for 38 percent of daily natural gas use.  End 
Note.)  Natural gas demand also declined in part due to plentiful 
rainfalls which allowed Brazil to maximize its predominant power 
source, hydropower, rather than compensating with more expensive 
natural gas. 
 
 
 
¶3. (SBU)Many in the Brazilian energy sector have looked to move 
away from dependence on Bolivian gas supply since 2006 when Bolivia 
nationalized Petrobras investments in the sector(Reftels A&B).  The 
September 2008 disruption in supply due to political protests in 
Bolivia further increased Brazilian determination to achieve some 
independence from Bolivian gas, however Brazil has a 20 year 
commitment to Bolivia to purchase a minimum of 24 million m????/d. 
To 
diversify its gas supply, Brazil has brought on line some new 
Liquefied Natural Gas (LNG) terminals and has acquired supply from 
Trinidad and Tobago. 
 
 
 
¶4. (SBU)In continuing attempts to expand natural gas supply, over 
the long-term, Brazil is likely to gradually shift away from 
Bolivian gas imports to new domestic gas sources in the pre-salt 
deposits offshore of Sao Paulo and Rio de Janeiro states.  Experts 
from the seminar, including Sylvie D'Apote of Gas Energy, stated 
that Brazil will begin producing a small amount of natural gas from 
the pre-salt finds in 2012, with daily production from the region 
probably reaching 60 Mm????/d by 2020, or about 39 percent of total 
expected NG supply for 2020. As a result, D'Apote expects imports 
from Bolivia will then account for only 19 percent of the total 
 
SAO PAULO 00000688  002 OF 003 
 
 
expected supply, with another 29 percent coming from 
already-developed fields, and the remaining 13 percent from 
imported LNG. According to the speakers' projections, domestic NG 
demand by 2020 will be around 95 percent of the total supply, 
leaving Brazil with a limited excess NG amount of about 8 Mm????/d. 
(Note: While the pre-salt fields appear to offer a significant 
potential source of natural gas, conference presenters did not 
address the logistical challenges of tapping into natural gas 210 
miles from the Brazilian coast beneath 2 kilometers of water and 5 
kilometers of sand, rock and salt.  GOB officials however admit 
that the logistics present a real challenge to making the pre-salt 
gas reserves a viable energy supply. End Note). 
 
 
 
--------------------------------- 
 
Infrastructure Challenges Ahead 
 
--------------------------------- 
 
 
 
¶5. (SBU)Despite the bright outlook for Brazilian Natural Gas 
production, industry experts, D'Apote and Ricardo Pinto of Gas 
Energy, say infrastructure, distribution and competitiveness issues 
hamper increased adoption of domestic natural gas by industrial and 
commercial consumers.  Most importantly, inadequate infrastructure 
to transport NG and poor distribution network interconnectivity 
increase costs for Brazilian consumers and have fostered chronic 
supply disruptions.  At present, Brazil's three main regional 
markets, the South/Southeast (supplied primarily by imports from 
Bolivia), the North (supplied domestically), and the Northeast 
(supplied domestically) have only limited NG and LNG pipeline 
interconnectivity.  According to Pinto and Marco Tavares of Gas 
Energy, Brazil plans to expand its NG infrastructure network from 
the current 7.7 thousand kilometers to 9.3 thousand kilometers, but 
the cost is expected to be high and funding remains uncertain. 
 
 
 
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Regulatory Changes Needed 
 
-------------------------- 
 
 
 
¶6. (SBU)In addition to infrastructure and distribution challenges, 
industry experts such as Pinto and Tavares cite a lack of 
competition in the sector as another major impediment to expansion 
and cost-efficiency.  Brazilian natural gas is currently sold at 
around $15.58/million BTU compared to Bolivian gas prices of 
$9.57/million BTU. Seminar panelist Tavares highlighted the need to 
increase competition and dismissed the Natural Gas Law approved in 
March 2009 as ineffective in reducing Petrobras' hold on the 
industry.  Although a key objective of the law was to allow private 
companies to enter the market for gas transportation and storage, 
Petrobras remains the dominant player controlling all gas 
transportation infrastructure, most distributors, and marketing 
over 95 percent of the gas sold in Brazil.  Additionally, Petrobras 
controls the supply chain of other energy products, such as oil, 
which may be used as substitutes to NG, further boosting the price 
of natural gas. 
 
 
 
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SAO PAULO 00000688  003 OF 003 
 
 
Comment 
 
-------- 
 
 
 
¶7. (SBU)While Brazil will continue to depend on Bolivian gas to 
meet domestic demand for the immediate future, the country's 
natural gas production outlook appears promising as the pre-salt 
finds are expected to boost domestic output and diminish reliance 
on Bolivian imports over the next ten years, if Brazil is able to 
overcome the significant logistical challenges inherent in 
processing gas in the pre-salt environment.  Nevertheless, as 
industry experts note, significant investments in infrastructure 
and distribution will be needed in addition to regulatory reform to 
attract the private investment necessary to successfully develop 
the new resources.  With elections approaching, Petrobras' 
political clout, and the nationalistic tone of the current debate 
over pre-salt development legislation, near-term progress to 
broadly open the sector to private investment appears unlikely. End 
Comment. 
 
 
 
¶8.  (U) This cable was coordinated/cleared by US Embassy Brasilia 
and US Consulate Rio de Janeiro 
White