Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Electricity-Starved Brazil Could Be the Next Market for U.S. Natural Gas

By Daniel Jennings - Mar 31, 2014 at 9:47AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Brazil's electricity shortage demonstrates the potentially huge global and regional market for U.S. natural gas.

The reservoirs that supply Brazil with hydroelectricity are drying up, and that could be a tremendous opportunity for for U.S. natural gas producers.

Reuters reported that the only thing preventing blackouts and electricity rationing in Brazil is a large number of natural gas- and oil-burning power plants built since the last drought in 2002. Those plants are now running overtime because hydroelectric reservoirs in some parts of the country are nearly two-thirds empty.

To make up for the lost hydropower, Brazil's national utility, PSR, has put power plants that can generate up to 6,280 megawatts of electricity online. A lot of that electricity is being generated by natural gas.

Brazil gas imports could increase by 31%
Petroleo Brasileiro, or Petrobras, the only Brazilian company that can legally import liquid natural gas, or LNG, has plans to increase its imports of gas by 31% in the near future, Bloomberg reported. Petrobras has already increased its imports by 6.1%.

Petrobras will import around 742 million cubic feet of LNG this year, energy researcher Marco Tavares told Bloomberg.

The reason the gas is being imported is that Brazil's government has ordered utilities to switch on natural gas-burning plants to keep the lights on during the drought. Brazilian President Dilma Rousseff has taken that step because she's facing reelection in October. Rousseff is worried that voters might blame her for the electricity shortage and say so at the ballot box.

Why Brazil could be a boon for North American natural gas producers
Brazil could become a major source of revenue for North American LNG producers, such as Chesapeake Energy ( CHKA.Q ) and Devon Energy ( DVN 0.43% ), because of the way its natural gas market works.

Petrobras buys LNG on the spot market to meet domestic demand, and it doesn't use long-term contracts. That means Petrobras has no choice but to pay whatever the spot market price is for LNG. The company has no ability to negotiate for lower prices.

The domestic demand is based on Brazilian politics. Politicians like Rousseff tell Petrobras how much gas to buy. They even subsidize the price of LNG to please the voters. Bloomberg reported that Petrobras buys LNG at $18 to $19 per thousand cubic feet and resells it for $11 to $12 in an attempt to keep electricity prices artificially low.

Brazil's increased demand for LNG is coming at an opportune time for U.S. gas producers such as Chesapeake. There's a strong push in Congress to allow the export of U.S. natural gas to any country that's a member of the World Trade Organization, Reuters reported. Current U.S. law requires approval of the U.S. Department of Energy for such exports to all but a handful of countries. The idea is to punish Russia for invading Crimea by competing with its LNG.

At the same time, the U.S. Department of Energy has approved LNG exports from six plants in the past 10 months. That indicates the department is speeding up its approval process.

Two companies that could benefit
A big beneficiary of this process could be Chesapeake, which has major shale gas holdings in Texas and Louisiana and the Marcellus Shale in the Northeast. These holdings are close to the Atlantic and Gulf coasts, from which it would be easy to export LNG to Brazil.

Chesapeake is already an interesting value play because it reported a trailing annual revenue of $17.51 billion on Dec. 31. For those who don't trust Chesapeake, there's Devon Energy, which has major holdings in the Barnett Shale in North Texas. Devon reported a trailing annual revenue of $10.40 billion on Dec. 31.

A Brazilian bonanza for U.S. natural gas producers is hardly a sure thing. Brazil has a neighbor, Bolivia, that is a major gas producer. The Latin American Herald Tribune reported that Petrobras just signed a deal to import 1.06 billion cubic feet of natural gas from Bolivia. There's also a possibility that Congress might not approve natural gas exports. Finally, it might start raining again in Brazil and fill up the hydroelectric reservoirs, which will eliminate the need for the gas in the first place.

Despite these possibilities, natural gas is still a very strong investment because the world needs electricity, and natural gas is one of the main fuels burned to produce it. Demand for natural gas will be high for the foreseeable future because people want to keep the lights on and the air conditioner humming. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
Petroleo Brasileiro S.A. - Petrobras Stock Quote
Petroleo Brasileiro S.A. - Petrobras
$10.63 (1.53%) $0.16
Devon Energy Corporation Stock Quote
Devon Energy Corporation
$41.77 (0.43%) $0.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.