Much like the oil industry in Brazil, the gas industry and its regulation have undergone a number of transformations that accompanied the changes in the institutional environment and its economic, political and social aspects. This institutional environment shapes the different perspectives surrounding energy regulation and policy in Brazil, particularly natural gas, varying between more or less participation on the part of the market/State and, consequently, the adoption of a competition or monopolistic model.¹

However, the point that has separated oil and natural gas regulation in Brazil over the years lies in the role given to these energy sources. Indeed, regulation of the oil industry in Brazil deserves greater attention. The history of regulation in the sector, as a rule, places natural gas in the sphere of oil regulation. Thus, there was no distinction between oil and natural gas regulation, the latter being absorbed into the principles and regulations of the former. Therefore, it can be said that natural gas regulation was an accessory, not dominant in this scenario.²

From the legal viewpoint, the prevalence of oil over natural gas persisted in both Federal Law No. 2.004/1953 (now revoked) and Federal Law No. 9.478/1997 (currently in force, henceforth called the Oil Law here). There are no specific provisions or chapters in either law regarding natural gas or even with respect to the gas industry as a whole. Natural gas was treated as a subproduct of the oil industry.³

The change in the regulatory profile of the Brazilian gas industry began with the change in the importance of this resource. During the 1990s, the increase in natural gas reserves and exploration led to a series of measures aimed at expanding its participation in the Brazilian economy.⁴ Among these initiatives was the construction of the Brazil–Bolivia Pipeline (which allowed an increase in the amount of gas available to the Brazilian market), as well as the development of a series of activities such as the use of natural gas in a number of industrial sectors and its use as automotive fuel.⁵

However, as mentioned, the growth and importance of natural gas was not accompanied at the same pace by guidelines that contemplated the specificities of this industry. In contrast to the oil industry, where links in the chain are not strictly integrated and close coordination between exploration/production and other stages of the chain is not needed to deliver the product to the final consumer, the natural gas industry does not enjoy the same flexibility since greater effort is required to coordinate the links in the productive chain, thereby causing inflexibility in the delivery of its products.⁶

The link in the natural gas chain that clearly illustrates this situation is that of transport. Due to the technical characteristics in the industry that, although slightly mitigated nowadays, still exist, the transport phase shows more flexibility and less sensitivity to the introduction of competition. Even though the transport of gas today takes on many forms (ex., pipelines and LNG, the latter by ship, boats or trucks), these options are not completely interchangeable since, from the economic viewpoint, they must consider factors such as distance, geography and demand, which does not occur in the oil industry. Moreover, since the gas industry is a network industry, with high costs and entry barriers, duplicating the transport sector is not the most economically viable solution, contributing more to lack of competition in the sector, a situation described in the economy as a “natural monopoly.”

In light of the characteristics of a natural monopoly and the concern in seeking regulatory tools to introduce competition and avoid possible anticompetitive effects (such as abuse of dominant position), regulatory authorities in different parts of the world began to adopt regulatory tools to impede abuse of dominant position by the transporter and allow competition in this segment without the need to duplicate the transport network.⁷

Although the Oil Law mentioned access to transport facilities, the provisions did not in any way match the international experience of the natural gas industry. As mentioned, regulation was not specific, not distinguishing between oil (and its derivatives) and gas.

Given the lack of specific dispositions, the Brazilian regulatory authority (National Oil, Natural Gas and Biofuels Agency—ANP) attempted to fill this “void” by arbitrating disputes between transporters and carriers and providing solutions through regulatory instruments compatible with the natural gas sector.⁸ However, from a legal perspective, the ANP initiative to regulate free access without legal relief was seen as problematic since the principle of legality in Brazil means there is an understanding that the regulatory agencies cannot act with only the general task of regulating the sector.⁹ The law must specify that the regulatory authority has this power, which was not the case here. For this reason, the nonexistence of regulations in the natural gas industry in the Oil Law caused legal uncertainty and an inauspicious environment for investment.¹⁰

These aspects of insecurity and uncertainty triggered a debate among different market agents, politicians and members of civil society, regarding the need for a specific regulation, whose mission would be to adapt the regulatory instrument to the gas sector, resulting in greater competition and, in turn, more companies for this market.

The debate, however, did not transpire in unison, without conflicts. If on one hand there were several players seeking greater participation and competition, on the other the main agent, Petrobras, did not share the same viewpoint on the matter. The concern was that applying the free access model indiscriminately would deter investment by Petrobras since for the immediate future it was the only company to invest in the expansion and construction of the pipeline grid in Brazil.¹¹

Another element to be considered in these transformations was that the rise to power of the PT government led to a more interventionist economic policy, that is, greater government involvement in terms of planning and a larger number of regulatory obligations.

The above observations reveal the context in which Federal Law No. 11.909/2009 emerged (regulated by Federal Decree No. 7.382/2010 and hereafter called the Gas Law). The Gas Law was the result of change in regulatory perspective in the gas industry and, as in all legislation, also reflected the social and historical moment in which it found itself.

Thus, despite being known as the Gas Law, it does not address all the uses and links in the natural gas chain. In the case of natural gas exploration and exploitation, these activities continue to be covered by the Oil Law (if the gas is situated in traditional areas) or by legislation related to the Presalt layer (if the gas is located in the Presalt layer or an area that the law considers strategic). If natural gas is used as an electrical energy generating source, the applicable regulation is that which governs the electrical energy sector, whose regulation is the purview of the National Electrical Energy Agency (ANEEL). Regulation of the electrical sector is based on Federal Law No. 9.427/1996 and the regulation created by ANEEL, with coordination between electrical and gas regulation.

In the present study, among the links in the transport chain, transport itself deserves more attention and will therefore be a specific topic, along with free access to infrastructures.

The Gas Law represents a more interventionist policy on the part of the Brazilian government. This is evidenced by both the expansion of regulatory agents beyond the ANP and greater planning within the industry, removing from the transporter the role and freedom to dictate expansion of the pipeline grid by autonomous decision.

After these initial considerations, the present topic will focus on two points: (a) describe and analyze the overall regulatory structure, (b) describe and analyze the specific regulation of links in the chain other than that of transport.

Similarly, in light of the regulatory peculiarities of the gas industry in Brazil, where the distribution and delivery of gas to the final consumer has different regulatory authority rule, regulation and distribution will be covered as a separate topic.

Speaking of natural gas distribution, the primary feature regarding regulation of the gas industry in Brazil is its duality. This duality is related to legislative authority, that is, the task of creating, editing and applying the guidelines to this sector of the economy. The duality lies in the fact that regulatory authority is shared by two members of the Brazilian federation: the Union and member States.

Regulation of the gas industry by the Union is aimed at maintaining the monopoly that this federal entity has over the natural gas chain in accordance with the Constitution,¹² as well as activities that, for their final purpose and systematic reading of the law, are considered under the authority of this same entity. Most gas activities are under the legal authority of the Union, which resulted in the creation of the Gas Law, and these issues are the exclusive purview of this regulatory entity, with the exclusion of other federal entities. However, given the legal and administrative authority adopted by Brazilian law, although there is a law regulating the natural gas industry, broad authority in legal matters (ex.: environmental, consumer, among others) may generate conflicts in jurisdiction over a specific issue because they are also under authority of the member States and Municipalities.

The member States, in turn, are authorized to regulate the distribution and sale of natural gas. For this reason, it is said that regulation of these sectors is a matter for the State in Brazil since (a) it varies from State to State, with different contractual aspects, respecting the provisions of the Brazilian Constitution and Brazilian law regarding public services; (b) it has its own administrative entities for this regulation (generally following the regulatory agency model).

After these initial considerations regarding the general profile of natural gas regulation in relation to the Brazilian law framework, points related to the Gas Law will be addressed specifically.

The first regulatory aspect of the Gas Law is a characterization of the legal regime under which it will be exercised in Brazil. In Brazilian administrative law, activities are generally regulated in two ways: (a) in the form of public service,¹³ (b) in the form of strictly economic activities.¹⁴ Variations from one regime to another, without considering legislative variations that each topic could have, lie in the rights and obligations assumed both by Public Power and executors of activities regulated by this Public Power.

In this respect, the Gas Law defines the legal regime of activities as being strictly economic. The law explicitly states that natural gas activities are not legally characterized as a public service.¹⁵ This has a number of implications for the regime of rights and obligations between the Public Power and executors of activities: (a) assuming the risks of the activity lies with the executor of the undertaking, Public Power assumes no obligation to maintain profitability of the activity by tariff regulation or any responsibility for managing the undertaking; (b) decisions regarding expansion and investment in the activity are up to the executor of the activity, with no obligations imposed by the Public Power, although in the Gas Law there are mechanisms for “rationalizing” investments in operation and in expanding the transport activities of natural gas; (c) the price for the service provided (the tariff) is not authorized by the Public Power within the parameters of public service but only regulated considering other aspects.

There are two instruments provided for in the Gas Law to allow exploration of activities contained therein, defining rights and obligations: concession and authorization. In Brazilian law, concession is a type of administrative contract,¹⁶ generally preceded by a call for bids,¹⁷ while authorization is a type of administrative act defining the rights to engage in a particular conduct,¹⁸ where the oil and natural gas industries have specific characteristics that exclude them from general characterization in Brazilian administrative law.¹⁹ These represent different ways of establishing rights and obligations between Public Power and the executor of the activities, given that in administrative contracts there are generally rights and obligations between the Public Power and the executor of the services, while in authorization there is only the right given to the executor of the activity and the obligations imposed (limits, in fact) to maintain the execution of the activity, but not really rights and obligations between the Public Power and executor of the activity.

The Gas Law also contains a series of definitions on the issues it regulates.²⁰ These definitions, as mentioned above, do not only have the role of defining conceptual limits, but also exercise regulatory functions, since they delimit the authority of the Union to regulate activities and apply the respective regulatory instruments. Given the large number of decisions, they will be addressed at the opportune moment in this chapter, when the activity in question requires it.

Generally speaking, the Gas Law stipulates three regulatory entities for activities under its authority: the National Council for Energy Policy (CNPE), the Ministry of Mines and Energy (MME), the National Oil, Natural Gas and Biofuels Agency (ANP). The CNPE and MME are regulatory authorities of a more general nature. They not only regulate the petroleum, natural gas and biofuel industries but also encompass other energy sources (ex.: coal, electrical energy), as well as public policies for these sectors. The ANP is a regulatory authority for the petroleum, natural gas and biofuel industries, with features originating in the regulatory agency model. Administratively, the ANP is linked to the MME but has characteristics that endow it with certain autonomy in accordance with the provisions of current law.²¹

In the Gas Law, these regulatory entities, especially the MME and ANP, have different authority depending on the activity regulated. In light of this diversity, as explained for definitions, the authority of each entity will be discussed at the moment relative to the study of each of the regulated activities.

The first activity to be studied here is the import and export of natural gas.²² Of these activities, importation is important in the scenario of supplying the national gas supply, given that Brazil is not self-sufficient in relation to production/consumption.

The Gas Law does not contain a definition of importation and exportation, only defining the self-importer as the agent authorized to import natural gas for energy consumption or raw material for industry. This definition has positive consequences since previous regulations (the general use of the Oil Law) did not contain this disposition, giving a margin to the interpretation that to import gas a company must buy from a third party specifically authorized for this activity.

Moreover, the Gas Law provides conditions for the exercise of this activity. Importing and exporting can be carried out by a company or consortium of companies.²³ The exercise of an activity depends on obtaining authorization from the MME. However, the administrative process of obtaining authorization lies with the ANP.

The minimum condition imposed to allow the company or consortium of companies to exercise this activity is that they comply with Brazilian laws, as well as having their headquarters and management in Brazil. Thus, there is no restriction on the origin of capital or nationality of investors, but rather there are conditions in relation to the legal form of the company, which must necessarily be Brazilian. As mentioned before, these are the minimum conditions, whose regulation is defined by decree and resolutions of the ANP.

Even though authorization is granted by the MME, in much the same way as instruction regarding the administrative process, monitoring the activity is the purview of the ANP. Therefore, it is up to the ANP to verify whether importing and exporting are performed in accordance with the limits imposed by law. In regard to these limits, the Gas Law gives the CNPE the authority to also define the general conditions for importing and exporting natural gas in accordance with Federal Law No. 8.176/1991, which deals with the System of Fuel Storage. By means of this provision, for example, restrictions on the export of natural gas can be imposed if this exportation poses a supply risk to the Brazilian market.

Another activity regulated by the Gas Law is natural gas storage and the form in which it is transported.²⁴ Storage is defined by law as stockpiling in natural or artificial reservoirs, while it can be transported in liquid, gas or solid form.

These activities are related to sectors of the chain that are not explicitly listed by the Federal Constitution as forming a monopoly of the Union over the gas industry but whose regulatory authority was attributed to this member of the federation. As a regulatory issue in Brazilian law, it is a novelty, since no specific condition for its use had previously been foreseen, being encompassed in the regulation of other sectors such as transport and distribution. This new regulatory provision opens possibilities for the entry of agents and the promotion of competition and more flexible mechanisms for supplying natural gas to the Brazilian market.

Regulating storage and gas transportation exhibits different characteristics. For this reason, storage will be discussed first, followed by the forms of transport.

Similar to importation and exportation, storage must be exercised by companies or consortiums of companies in accordance with Brazilian laws, and headquartered and managed in Brazil. However, there is one difference with respect to attribution of rights: the right to storage can be attributed through concession, preceded by a call for bids, or by means of authorization.

The use of concession as an instrument to exercise the activity is reserved for cases in which the reservoir is a geological formation, that is, reservoirs of hydrocarbons returned to the Union or other nonhydrocarbon-producing geological formations. This not being the case, the exercise will be attributed by means of authorization obtained from the ANP.

The type of concession to be used is the concession of use, preceded by a call for bids. This procedure is not the same as for the transport of natural gas (which will be discussed later in this chapter) but rather that contained in the General Law of Brazilian Public Tenders (Federal Law No. 8.666/1993).

The definition of geological formations available for concession is the responsibility of the MME or the ANP (as delegated by the MME). Preparation of the bid data sheet and promotion of the bidding process lie with the ANP, although signing of the concession contract is always conducted by the ANP by delegation of the MME. As in the case of import and export of natural gas, the role of the MME is primarily to attribute exploration rights, while the ANP’s function is to provide instruments to exercise these rights and monitor activities.

With the concession of storage rights, concessionaires are obliged to offer their services to any potential agent. However, the activity is often only possible through large investments that, in the gas industry, are generally possible through long-term contracts with clauses of exclusivity and obligations related to the transport/purchase of natural gas.²⁵ Recognizing this reality, the Gas Law gives the MME the authority to define the period of storage exclusivity. This exclusivity, whose definition must be ratified by the ANP, is applicable to agents that conduct this undertaking, thereby considering the reality of the industry.

If the natural gas is imported or, in the case of domestic gas was extracted and stored for stockpiling, the Gas Law makes it clear that this gas is not considered the property of the Union. The practical consequence of this legal provision is that natural gas, under the aforementioned conditions, is not subject to government participation.

The concession to store in geological formations is not to be confused in legal terms with studies conducted to determine this potential. If a company wishes to carry out research to verify the potential of a formation in storing natural gas, it must obtain authorization from the ANP. In regard to the data obtained from exploration, the law states that they must be provided free of charge to the ANP but allows the ANP to sell them to those interested in geological data.

The form of transportation must be exercised, in accordance with law, by companies or consortiums of companies headquartered and managed in Brazil. This activity will be attributed by authorization.

The provision of this activity fills a gap that caused regulatory authority disputes. Since in Brazil gas is sometimes delivered by means of transport other than pipelines (ex: trucks), there were conflicts between the Union and member States regarding who would have authority in these situations.

In addition to resolving this impasse by transferring regulation to federal authorities, this law contains an explicit provision that the ANP regulates other forms of gas delivery.

However, if the use of these modes results in the delivery of gas for purposes of sale to final consumers, the law states that the regulation expedited by the ANP on the issue must comply with state regulations. This provision is justified since, as previously mentioned, sale to final consumers comes under state regulatory authority.

Construction activities, expansion of capacity and operation of natural gas processing or treatment units have their own regulations.²⁶ According to the law, the treatment and processing of gas consist of a series of operations that allow the sale of natural gas, complying with its various stages, given that natural gas must meet ANP specifications.

In much the same way as previously mentioned activities, these can only be conducted by companies or a consortium of companies, duly constituted under Brazilian law, with their headquarters and administration in Brazil. However, the process of Public Power attributing rights is less complicated since it only requires ANP authorization.

Just as in storage and forms of transportation, gas liquefaction and regasification,²⁷ necessary to allow the existence of natural liquefied gas activities, are not specifically included in the constitutional monopoly over the gas industry. Nevertheless, this does not prevent the Gas Law from attributing authority to the Union. The conditions to exercise the activity do not differ from those of natural gas processing or treatment units: exercised by companies or a consortium of companies, constituted in accordance with Brazilian law, have headquarters and administrative offices in Brazil, and obtain authorization from the ANP.

To conclude analysis of the general portion of the Gas Law, the legislation under study contains dispositions that deal with emergency situations such as the lack of natural gas in the Brazilian market.²⁸ In addition to being unprecedented, these provisions emerged as a result of the gas dispute with Bolivia in 2006.

Given these emergency situations, the aforementioned law allows the application of guidelines for contingency planning regarding the supply of natural gas. To be applied, there must be a proposal from the CNPE and a presidential decree. The main legal effect of applying this exception regime is to suspend the obligation to transport natural gas at the federal level. To that end, the contingency regime affects current contractual obligations, suspending gas supply clauses.

This suspension of obligations does not occur, however, absolutely or unconditionally. To that end, the Gas Law contains two important measures.

The first is the Contingency Plan. This plan must be prepared by the Federal Executive Power, consisting of a Contingency Committee coordinated by the CNPE. The plan provides conditions that guarantee the supply of natural gas and allows for contractual clauses to be modified.

The second measure is related to the impact of losses and gains incurred by the suspension of supply obligations. Once contingency has been established, the Gas Law authorizes the creation of a Liquefaction Committee/Board to allow for financial differences in the fulfillment of obligations. This entity will allow gains and losses to be balanced in the exceptional status.

As mentioned earlier, although the Gas Law involves a general regulatory guideline for the natural gas industry in Brazil, its true objective is to substantially alter the regulatory instruments available for natural gas transport by pipeline.²⁹ The lack of legal framework allowing the ANP to act on this activity in accordance with the specificities of the industry illustrates the need for legal changes.

However, these changes did not occur only to fill regulatory gaps. The Gas Law represents a new position on the part of the Brazilian State, with greater planning and intervention in the activity, the main regulatory innovation being the concession instrument.

These observations are needed, given that on the surface the law under study states that the activity of transport, like others contained in the law, does not have the characteristics and obligations of public service. However, as discussed in this topic, the regulation of transport features aspects that are closer to public service in Brazil than to economic activity. The greater liberty of the previous regime does not apply here since there are several means through which the State decisively influences investments made by agents of the market.

Once these general considerations are made with a view to understanding what is described and analyzed, the way in which the Gas Law regulates the transport of natural gas will be discussed.

The Gas Law defines transport as the carrying of gas through pipelines. Thus, the regulatory limitation over this activity arises not from the definition of the activity itself but from the type of gas pipeline through which natural gas is transported. Thus, the Gas Law states that the gas pipeline is that through which the gas is carried between the processing phase and the points of natural gas delivery to distributors. With this definition, there is regulatory self-limitation that seeks to comply with constitutional guidelines, demarcating federal and state authority and the difference between transport and distribution. Moreover, there are other types of gas pipelines foreseen by law, which will discussed in the free access topic.

Transport can only be exercised by partnership or consortium, duly constituted under Brazilian law, with headquarters and management in Brazil, and risks borne by the transport company. In this respect, the Gas Law does not exactly repeat the same formula contained in the regulation of other activities (companies or a consortium of companies). In Brazilian law, the word “company” is a generic term pertaining more to the activity than to those who exercise it.³⁰