Shell Energy Trading Brazil introduced master sales agreements (MSA) in Brazil's natural gas market in May, a model soon replicated by others. The business model's goal is to foster a more dynamic market, with short-term contracts regulated by supply and demand dynamics, according to the firm's general manager Rodrigo Soares. He talked to Argus about how the second-largest gas market supplier is navigating the market. Edited excerpts follow.
Brazil's natural gas market has struggled to move forward since the new gas law in 2021 with Petrobras dominating the market. How is Shell planning to increase its market penetration?
Although Shell Energy started just recently [in Brazil], we have a competitive advantage in the expertise gathered around the world, operating in markets that already faced this stage of maturity.
Shell has been operating in Brazil for 111 years and I have been part of this history for 30 years already. Shell Energy started operatingin 2017 trading power and we started to trade natural gas in 2022. This is a market still in the early stages of its development, but is one Shell is familiar with, given its long presence in the country.
Is that expertise the Master Sales Agreement business model?
Precisely. This global experience gives us the opportunity to stand out and contribute to the sector's development introducing the MSA, an innovative contract model. This is a nonbinding legal instrument that covers all legal matters and respects every regulatory aspect before closing any deal.
That leaves only commercial aspects — such as price, delivery and volume — to be defined and allows supply under short-term demand, which creates a more dynamic gas trading environment.
It not only facilitates migration onto the free market but also helps demystify this business environment for customers, with a range of possibilities.
Shell Energy has signed quite a few important supply contracts this year, the latest with [Espirito Santo state] distribution company ESGas.
We are involved in some landmark deals for the natural gas industry. Brazilian steel company CSN's Presidente Vargas plant in Volta Redonda, in Rio de Janeiro state, has inaugurated the free market in the region with a mix of suppliers totaling 1.35mn m³/d, with Shell supplying 50pc of it.
We are also involved in a project with Suzano in the same state, supplying 240,000 m³/d of natural gas to its factory in Aracruz, marking a complete transition to the free market.
We also signed a short-term supply of natural gas with ESGas in July. I cannot go into details on the terms of the contract, but I can tell that our privileged position as producers allows us to operate from a different perspective, offering different indexer options, customized contracts, agility in contracting and supply within one day.
ESGas said the molecule price in its Shell contract is 15pc lower than their current mix cost. How can you get such a price reduction?
Shell has operations in the pre-salt area [with 15 floating production storage and offloading vessels]. We are the second-largest producer in Brazil. Most of the gas production flows to Shell's projects abroad, but we have 5mn m³/d of associated gas to work with.
That means that we have equity gas that flows from the fields in an operation associated with crude recovery that cannot stop. We cannot store this gas.
The constant need to maintain the flow creates a need to foster a more dynamic market, capable to contract some "gas of opportunity", which must be sold.
We rely on the development of the domestic gas market as we need the demand to take our non-stop production. Therefore, fostering a more dynamic business environment is a must for our business. To do so, we are using a strategy that has been tested in other markets, which is the offering of a wide range of new products to match client's needs, hence make a case for them to migrate to the natural gas free market.
The MSA allows a mix of possibilities on indexation, speed of the deal and short-term delivery. This is still a work in progress but as more market participants replicate the model, we developed a market, which benefits everyone.
Can we expect to see a natural gas spot market in Brazil?
Definitely.
What about all the obstacles the market has been facing so far, including the regulatory framework?
In the commodities market, supply and demand are king.
