President Luiz Inacio Lula da Silva’s recent initiative to boost natural gas production and reduce its cost in Brazil is raising alarms over potential government intervention that could deter investments from major oil companies, including Petroleo Brasileiro SA (Petrobras), Equinor ASA, and Shell Plc.
A decree issued on Tuesday empowers Brazil’s oil regulator, the National Agency of Petroleum, Natural Gas and Biofuels (ANP), to determine the volume of natural gas that oil producers can reinject into reservoirs. This move is significant, considering that over 90% of Brazil’s oil and gas output comes from offshore fields, where transporting gas to the mainland through pipelines can involve billions of dollars in expenses. Currently, more than 50% of the natural gas produced offshore is reinjected to enhance reservoir pressure and increase oil production. The new decree could mandate a reduction in this reinjection rate, redirecting more natural gas into the domestic fuel market instead.
Lula’s administration has made it clear that increasing the supply of natural gas and lowering its price are key priorities aimed at stimulating industrial activity. However, the prospect of regulatory review over the amount of gas reinjected into offshore fields might make oil companies more hesitant to commit to new investments.
Equinor and Shell, both of which are exploring multi-billion-dollar offshore projects in Brazil, could see the economics of these ventures affected if they are compelled to invest in costly gas pipelines and reduce reinjection volumes. Shell is currently analyzing the implications of the decree and has refrained from further comment. Equinor and Petrobras, Brazil’s largest oil producer, have yet to respond to inquiries.
“There is a delicate balance between regulation and intervention,” said Andre Fagundes, an analyst covering Brazil for energy consultancy Welligence Inc. “A broad, one-size-fits-all approach could deter investment and directly impact the volume of oil and gas produced in the country.”
The potential for increased regulatory oversight could lead to uncertainty among international investors, potentially slowing down the pace of new projects in Brazil’s oil and gas sector. If the decree results in mandatory reductions in gas reinjection, the operational costs for companies like Shell and Equinor could rise, leading them to reassess their investment strategies in the region. The move underscores the broader challenge faced by Lula’s administration: balancing the need for energy affordability and industrial growth with the imperative of maintaining a favorable environment for foreign investment.
