The Analysis of Brazilian Natural Gas Market under the New Institutional Economics Approach

Abstract

The purpose of this work is to identify and explain the institutional restraints, which are present in the Brazilian natural gas market, that are mainly responsible for the supply crisis of natural gas in 2006, affecting economic considerations in the industrial and electric energy generation sectors. The analysis, based on the New Institutional Economics theory, will depict the key institutional aspects of the Brazilian natural gas industry and also introduce a discussion regarding the potential impacts of the proposal for changes in the Brazilian gas regulation, under analysis in the Senate. The main conclusions are: 1) Given the present energy policy and faced with the institutional restraints, it is expected that natural gas will play only a marginal role in the Brazilian energy mix; 2) The Brazilian gas policy should promote new gas‐fired industrial processes and technologies; 3) Both the current business strategies from the main gas players and the national energy policy do not reflect such reality; 4) The proposals for laws and regulations under discussion in the Brazilian Senate do not take those dimensions into perspective. As a consequence, the paper suggests that a continuation of the current development will lead the domestic gas industry into growing transaction costs, declining investments, loss of efficiency and productivity, which might therefore compromise the whole evolution of the industry.