IBP1054_19

THIRD PARTY ACCESS TO NATURAL GAS

PROCESSING PLANTS AND GATHERING
PIPELINES IN BRAZIL: TECHNICAL AND
ECONOMIC ASPECTS
Giovani Machado1, Marcelo F. Alfradique2,
Cláudia M. C. Bonelli3, Gabriel F. Costa4

Copyright 2019, Brazilian Petroleum, Gas and Biofuels Institute - IBP

This Technical Paper was prepared for presentation at the Rio Pipeline Conference and Exhibition 2019, held
between 03 and 05 of September, in Rio de Janeiro. This Technical Paper was selected for presentation by the
Technical Committee of the event according to the information contained in the final paper submitted by the
author(s). The organizers are not supposed to translate or correct the submitted papers. The material as it is
presented, does not necessarily represent Brazilian Petroleum, Gas and Biofuels Institute’ opinion, or that of its
Members or Representatives. Authors consent to the publication of this Technical Paper in the Rio Pipeline
Conference and Exhibition 2019.

Abstract

Third-party access (TPA) to gathering pipelines and natural gas processing plants (NGPPs) on
a negotiated or regulated basis is a directive established in several countries and designed in
various legal and regulatory frameworks around the world, especially in European ones, where
the natural gas sector is at a high level of maturity. In the case of Brazil, these infrastructures
are not bound to provide access to third parties, although access can be provided through direct
negotiation with the owner. This directive makes it possible to optimize the use of these
infrastructures with greater complexity, in relation to the situation where there is the use of the
facilities only by the owner, involving several issues that must be addressed in the contracts,
both in the technical and economic field. Thus, this work aims at exploring the technical and
economic aspects that emerge from TPA to gathering pipelines and NGPPs, pointing out the
challenges involved in the access and the advantages that can arise from sharing of
infrastructures and optimization of their use.

Keywords: Natural Gas Processing Plant. Gathering Pipeline. Third party access.

1. Introduction

The opening of the natural gas market and the promotion of competition involve different
legal and regulatory efforts, including the definition of mechanisms to ensure third party-access
(TPA) to so-called essential facilities through non-discriminatory arrangements. The gathering
pipelines and the natural gas processing plants (NGPPs), as well as LNG terminals, can be
considered as essential facilities in the natural gas industry (Machado et al, 2018).
The Essential Facilities Doctrine determines that the owner of an essential infrastructure
is required to provide non-discriminatory access to eligible parties to this facility at a fair price,
that is, with objective technical and economic justification. This is because the refusal may
represent restriction to competition or attempted abuse of monopoly power by the dominant
company (Pitofsky et al, 2002; Machado et al, 2018). Thus, this Doctrine has a prominent role
______________________________
1
DSc. Economist – Empresa de Pesquisa Energética (EPE)
2
DSc. Chemical Engineer - Empresa de Pesquisa Energética (EPE)
3
DSc. Chemical Engineer - Empresa de Pesquisa Energética (EPE)
4
Chemical Engineer – Empresa de Pesquisa Energética (EPE)
 Rio Pipeline Conference and Exhibition 2019

in regulating the natural gas industry, but its application should not bring about uncertainties to
the right of property and preference rights, either allowing opportunistic behaviors (free rider
and moral hazard) that inhibit new investments (Machado et al, 2018).
Thus, TPA to gathering pipelines and NGPPs on a negotiated or regulated basis is
designed in the legal and regulatory framework of the natural gas industry in several countries
of the world. Particularly, the Directives of European Community and the regulations of their
member states provide robust reference to the application of TPA (European Community, 1998;
European Community, 2009). TPA allows optimizing the use of these infrastructures,
accelerating the recovery of invested capital and encouraging the entry of new agents in the
market, but it is more complex than the situation where only the owner of the assets uses the
facilities. Currently in Brazil, these infrastructures are not bound to provide access to third
parties, although access can be provided through direct negotiation with the owner.
The establishment of non-discriminatory TPA to gathering pipelines and NGPPs was
proposed in the country between 2016 and 2017, in line with international legal and regulatory
frameworks. In 2018, Decree No. 9,616/2018 determined that refusal of TPA to the essential
infrastructures constitutes an anti-competitive conduct and created the basis for the regulation
of TPA by National Agency of Petroleum, Natural Gas and Biofuels (ANP). Besides that,
Resolution CNPE No. 4 of April 2019 established the Brazilian Natural Gas Market
Competition Promotion Committee, which is studying TPA to essential infrastructures among
its proposals to open the market. However, Law No. 11,909 / 2009 and Law No. 9,478/1997
need to be amended to provide robust legal and regulatory arrangements for TPA (MME, 2017,
Machado et al, 2018; MME, 2019).
In this context, the technical and economic aspects that condition this access, including
eligibility criteria, should be clear. Among the technical issues that arise with TPA, the
incompatibility of the natural gas composition of a given agent with that for which the
installation is designed; the management of the outflows limited to the total capacity of the
assets and the temporality of the outflows. In the latter case, it is necessary to bear in mind the
scheduling of the deadlines for beginning and end of service delivery without any harm to the
agents, especially when there are delays and divergences between planned and realized
outflows. In the case of economic issues, the following items should be taken into account:
possible increases in CAPEX for adaptation or repair of facilities; the frequency of scheduled
maintenance, increases in OPEX that may result from third-party access and efficiency losses.
On the other hand, cash flows can be improved, considering that the facilities will have greater
degree of use by eligible clients for a large part of their useful life.
Therefore, the present study aims to analyze the technical and economic aspects
involved in TPA to gathering pipelines and NGPPs, also presenting case studies that assess the
economic impacts related to TPA to these essential infrastructures.

2. Methodology

The present work was divided in two parts: the first presents an analysis of the technical
and economic aspects involved in third party access, while the second one deals with case
studies that assess the economic impacts related to TPA to gathering pipelines and NGPPs.

3. Analysis of the technical and economic aspects involved in third party access

While non-discriminatory access to essential infrastructures is relevant to create a

competitive environment, it is necessary to observe technical and economic criteria that affect
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this access, under certain conditions of eligibility. For the construction of gathering pipelines
and NGPPs, a project is carried out taking into account the expectation of the composition of
the gas to be transported and/or processed. If natural gas from a third party is significantly
different from the one used in the project, challenges must be overcome to make the operation
viable. Table 1 summarizes the technical and economic challenges that can be faced due to the
variation in gas composition.
Table 1. Summary of technical and economic challenges due to the variation in gas composition

Effects on natural gas

Gas type Effects on gathering pipelines
processing plants
 Increased formation of liquids
Rich in liquids (C3+)  Higher probability of liquids
 Possibility of flooding of
Example: formation
fractionation column
Pre-salt with richness of 12%  Increase in OPEX
 Increase in OPEX
Rich in CO2, H2O and H2S  Corrosion (higher acidity and/or humidity)
Examples:  Higher probability of formation of hydrates
Júpiter field - 79% of CO2  Need of modules for removal
Libra field - 45% of CO2  Increase in OPEX
Source: EPE, based on MME (2017).

In relation to gathering pipelines, the right of preference to facilities should be

considered, especially in cases where expansions or adjustments are necessary in the existing
infrastructure. Figure 1 presents examples of these cases.
According to the Figure, an agent A has two interconnected platforms A1 and A2, located
in fields of the same names, which in turn are connected to natural gas processing plants (A1-2)
by means of a outflow system. This agent has a field A3 that will start production after 5 years,
and there is another agent B that has a field B1 that is scheduled to start production after two
years. If Agent B requests access to the outflow infrastructure from Agent A, would this access
be allowed for only 3 years, because after this term Agent A would have a right of preference
to use its infrastructure to outflow the natural gas from field A3? And in more complex cases,
where the natural gas specifications of field B1 and field A3 were different and needed
adaptations in the infrastructure, how would the systems be shared?
Third party access to NGPPs may also present technical and economic difficulties,
especially when there is a mixture of natural gas streams of various agents, and there are
situations in which it would be necessary to adjust the infrastructure of the plant to receive the
natural gas of the third party. The main challenges identified are (MME, 2017):
 taxation aspects of the natural gas and liquid streams of various agents;
 limit of liquid storage capacity resulting from natural gas processing of several customers
and the effects of logistics planning on the movement of produced liquids and processed
natural gas streams;
 inability to process new streams, if liquid storage is full and customers have not discharged
their liquid volumes or the previous customer has not yet fully processed the natural gas that
needed to ouflow; and
 delays in natural gas processing from a customer may incur unplanned costs for all agents
who have reserved processing capacity at the NGPPs (delay in oil production, FPSO1
chartering overhead, fines, penalties for services not performed for consumers, etc.).
Figure 2 presents the possible temporal conflicts in the use of NGPPs by more than one
client, indicating the scheduled and occurred operations. In the last case, the processing delay of the
natural gas from client 1 may incur costs for the client 2, which reserved the processing capacity.
1
Floating production storage and offloading
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Figure 1. Right of preference on gathering system

Source: EPE, based on MME (2017).

Figure 2. Possible temporal conflicts in the use of NGPPs by more than one client
Source: EPE, based on MME (2017).
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In general terms, eligibility conditions for TPA should be detailed in infra-legal and
regulatory arrangements, taking into account usual industrial practices, including aspects
related to the composition of natural gas, preference for access to the E&P portfolio of the
original investor (not to inhibit investments) and the demarcation of liability between parties.
In this last aspect, some issues arise, such as who would be responsible for technical,
environmental and economic damages resulting from TPA - the original grantor or the third
party that caused the damage - and in which cases. In addition, the limits of liability should be
defined. In the event of failures in the operation or the need for additional investments in the
NGPPs, one must define who is responsible for the costs.
It is worth mentioning that in 2018 it was launched by the Brazilian Petroleum, Gas and
Biofuels Institute (IBP) a Good Practices Notebook containing Guidelines for Access to Natural
Gas Processing Plants. The terms and conditions for access It includes the need to specify the
natural gas to be processed, the conditions for contracting capacity, as well as recommendation
for transparency and availability of information (IBP, 2018).

4. Case studies of economic impacts related to third party access

In order to analyze the potential contribution of reduction of the idle capacity on the
cash flows from gathering pipelines and NGPPs in Brazil, two case studies were elaborated:
one referring to a gathering pipeline with 18" and 230 km of extension, and another referring
to a NGPPs with capacity to process 5.7 million m³/d of wet natural gas with high richness. It
should be noted that this would be the approximate capacity of the infrastructure needed to
outflow and process the natural gas from a field with a gross production peak of 10 million
m³/d, after the discounts related to the burning up to the limits defined in the regulation,
consumption in E&P and injection for secondary oil recovery (EPE, 2019).
Regarding the capacity in use of gathering pipelines and NGPPs, in millions of m³/d,
three scenarios were studied: (i) only natural gas of an E&P field, without TPA; (ii) if it were
initially considered the natural gas of an E&P field, but in the declining phase of this field, TPA
would be granted to customers, in the range of 1 MMm³/d per client, until the total capacity of
the facilities is completed; and (iii) if the infrastructures were always operating at full capacity,
they were able to guarantee TPA contracts that would complement the total volume. Figure 3
shows the composition of production curves considering the three different scenarios of the
case studies.
The other assumptions used to carry out the cash flows of gathering pipelines were:
CAPEX of US$ 132/m.pol, OPEX equal to 5% of CAPEX per year and WACC (Weighted
Average Cost of Capital) equal to 10% per year (EPE, 2019). For the cash flows of NGPPs, the
following were used: CAPEX of US$ 521 million, OPEX equal to 5% of CAPEX per year and
WACC equal to 10% per year, without considering the reduction of revenues from the sale of
liquids (EPE, 2018). In all cash flows, IRPJ (Income Tax) of 25% and CSLL (Social
Contribution on Net Income) of 9% were considered.
The results obtained do not include ICMS (Taxes on the Circulation of Goods and
Services), PIS (Social Integration Programs) / COFINS (Contribution for Social Security
Financing) and ISS (Services Tax).
From the cash flows of the case studies, it was possible to estimate the outflow and
processing costs, in US$/MMBtu. In Figure 4, outflow and processing costs for each of the
analyzed cases are shown: without TPA, with TPA after the onset of field decline and operating
at 100% capacity (full).

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Figure 3. Composition of production curves considering the different scenarios of the case studies.
Note: The additional clients 1, 2, 3 and 4 utilize the capacity of the gathering pipelines and/or NGPPs only after
the start of the initial customer's production decline. The full condition uses the capacity before the peak customer's
production peak is reached, in addition to the capacity unused by the other customers, until the infrastructures
operate at 100% capacity.
Source: EPE.

3,50
Outflow and processing costs (U$S/MMBtu)

3,00

2,50

2,00

1,50

1,00

0,50

-
Outflow Processing

No TPA With TPA Full

Figure 4. Results of TPA case studies

Note: estimates based on concept screening level analyses, with -20% to -50% and +30% to +100% precision.
Source: EPE.

In the cases studied, it was observed that third-party access, up to the limit of 100%
capacity of gathering pipelines and NGPPs, has the potential to reduce the outflow and
processing costs for all customers by up to about of 50%, for those cases where only an owner
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who has an individual E&P project uses the facility.

5. Conclusions

Given the technical and economic aspects exposed, it is possible to conclude that the
eligibility conditions for third party access to pipelines and NGPPs should be detailed in
transparent and non-discriminatory mechanisms, considering usual industry practices,
preference access by the E&P portfolio of the original investor and the demarcation of
responsibility between the parties.
Due to the mentioned technical and economic aspects, the infralegal framework to be
proposed must be foreseen: the conditions of access to the infrastructure (availability of spare
capacity, technical specifications, financial constraints, etc.); transparency and publicity of the
main information required for third party access (including the definition of the electronic
bidding system and capacity allocation); standardization of contracts and principles of
calculation of tariff of access that ground the negotiation between the parties.
Any denial of access must be fair and motivated, duly substantiated in a public and
objective manner, based on relevant technical and/or economic aspects. In addition, the legal
and regulatory framework should provide for the resolution of disputes and conflicts mediated
by ANP and/or independent arbitration.
Once these aspects have been considered, and with the satisfactory operation of the TPA
system, it is observed that there is potential to reduce the cost of outflow and processing for all
customers. According to the case studies, these costs can be reduced by up to 50% in relation
to the situation in which there is no TPA.
It is important to notice that sharing fees might be charged by owner of the facility to
the eligible users. However, we observed that the individual costs for the third party users will
be lower than the costs involved in the construction of new gathering pipelines and NGPPs,
what can present opportunities and advantages for TPA. It should be noted that the estimates
of CAPEX and OPEX used in the study were based on literary sources and may vary
considerably given the specific facilities. Given the specificities of the projects, the estimates
can range between negative 20% to 50% and positive 30% to 100% related to the reference
case, according to AACE (American Association of Cost Engineers).

6. References

EPE, Empresa de Pesquisa Energética. Compilação de correlações de custos de equipamentos.

Instalações industriais de gás natural, Rio de Janeiro, ago. 2018.
EPE, Empresa de Pesquisa Energética. Informe: Custos de Gás Natural no Pré-Sal Brasileiro,
abr. 2019.
EUROPEAN COMMUNITY. Directive 98/30/EC of the European Parliament and of the
Council concerning common rules for the internal market in natural gas, 1998.
EUROPEAN COMMUNITY. Directive 2009/73 of the European Parliament concerning
common rules for the internal market in natural gas and repealing Directive 2003/55/EC,
2009.
IBP, Brazilian Petroleum, Gas and Biofuels Institute. Caderno de Boas Práticas. Diretrizes
para acesso a unidades de processamento de gás natural – UPGN, Rio de Janeiro, set. 2018.
MACHADO, G., BONELLI, C.M.C., RANGEL, H.P.G. Doutrina de infraestruturas essenciais
e o acesso de terceiros a gasodutos de escoamento, unidades de processamento de gás natural

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e terminais de GNL. In: Rio Oil and Gas Expo and Conference 2018, Rio de Janeiro, set.
2018
MME, Ministério de Minas e Energia. Escoamento, Processamento e Regaseificação de GNL.
In: Gás para Crescer - Subcomitê 1, abr. 2017
MME, Ministério de Minas e Energia. Comitê de Promoção da Concorrência do Mercado de
Gás Natural no Brasil realiza sua 1ª. reunião ordinária, abr. 2019
PITOFSKY, Robert; PATTERSON, Donna; HOOKS, Jonathan. The essential facilities
doctrine under United States antitrust law, Antitrust Law Journal, v. 70, p. 443-462, 2002