Brazil to follow electricity move with plan to cut natgas price

Wed Dec 12, 2012 12:00pm EST

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RIO DE JANEIRO, Dec 12 (Reuters) - Brazil plans to cut the cost of domestic natural gas as it widens a campaign to force utilities and energy companies to slash power prices, Brazil's finance ministry said on Tuesday.

The plan, flagged by Finance Minister Guido Mantega during comments in Paris, is still being developed, but will require reductions in the price of gas by state-run energy company Petrobras, government officials said.

The effort is part of a broader government initiative to lower some of the world's highest energy costs and make Brazil's economy more efficient.

"We have to find a solution," Mantega said in Paris, according to a report the Agencia Folha news agency. "We don't have a solution for this, but we have to reduce the cost of gas any way we can."

Mantega said the need to take action grew more urgent because of a drop in world gas prices caused by abundant new U.S. shale-gas output.

Most recently, the government overhauled the rates charged by Brazil's electricity companies. The effort, though, caused a plunge in utility share prices and raised concern that the government will undermine the industry's ability to invest in new capacity.

To achieve its goal in gas, the government will force Petrobras, the near monopoly provider of the fuel, to take measures to ensure the cuts happen, Development Minister Fernando Pimentel said.

"This will require action from Petrobras," Pimentel said, according to Agencia Folha. "It will be done."

Pimentel declined to say what those actions will be, though Petrobras has kept supply for industrial users tight and prices high in recent years to ensure a supply of gas for thermal power stations.

The government already forces Petrobras to keep gasoline and diesel prices below world market levels, a decision that caused the company's refining and supply unit to lose more than $8 billion this year and led to its first loss in 13 years in the second quarter.

The gas-fired power plants, most of which Petrobras also operates, are needed to complement Brazil's hydrodams, which supply more than 3/4 of Brazil's electricity and must occasionally stop or slow operations to recharge their water reservoirs.

While Brazil produced a record 72 million cubic meters of natural gas a day in October, a lack of pipelines and other infrastructure and barriers to entry from companies besides Petrobras has reduced competition.

Efforts to force the price cuts have come at the expense of investors, whose shares in electricity utilities, some of them controlled but only part-owned by the state, have plunged by 50 percent or more since the rate cut plan was announced September.

A plan to offer early renewal of hydro-dam operation licenses in exchange for electricity rate cuts has led to concerns that utility revenue, profit and investment will plunge.

Last week Fitch Ratings cut the debt rating of state-led Centrais Eletricas Brasileiras, or Eletrobras, Latin America's largest utility to "BB" from "BBB" as a result of the plan.

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