Alvopetro harnesses its first mover advantage in Brazil's competitive gas landscape

Brazil’s energy landscape has seen some incredible changes in the past few years.

In 2021, Brazil implemented the New Gas Law, a significant reform aimed at transforming its natural gas sector. The legislation sought to break the monopoly of Petrobras (NYSE:PBR), the state-run oil company that previously dominated the entire gas supply chain.

Key features of the law include the unbundling of services, which mandates the separation of production, transportation, and distribution, thereby promoting competition. Additionally, the law requires open access to gas pipelines, allowing third-party companies to use the same infrastructure, which is expected to lower barriers for new entrants and enhance market dynamics.

Corey Ruttan and the team at Canadian-listed Alvopetro Energy Ltd (TSX-V:ALV, OTC:ALVOF) have been in Brazil since 2014, developing its onshore gas prospects in the state of Bahia. Alvopetro was the first independent company in Brazil to deliver specified natural gas into the local market, a feat it accomplished in July 2020.

Ruttan, who leads Alvopetro as CEO, believes the Brazilian economy is showing promising developments, particularly with local distribution companies in Bahia extending their networks to attract new clients.

“Petrobras (NYSE:PBR) divesting their entire onshore inventory of gas assets is the single biggest thing that’s happened in the Brazil gas market,” Ruttan told Proactive. “The landscape looks a lot different today.”

Strategic assets in the Recôncavo basin

Currently Alvopetro operates both upstream and midstream natural gas assets in the state of Bahia. It holds interests in several assets in Brazil's Recôncavo Basin, including the Caburé and Murucututu natural gas fields, exploration assets Block 182 and 183, and the Bom Lugar and Mãe-da-lua oil fields, covering over 22,000 acres. The firm is fortunate to have a large industrial complex located just 15 to 20 kilometers south of its operating area, which is directly connected to the local distribution company. In the near term, Alvopetro aims to increase production by about 50%, which would fill most of its current gas plant capacity.

Achieving this goal will involve securing increased firm volumes with the local distribution company, which would establish a higher baseline of monthly cash flows, Ruttan said. To reach its near-term production target of approximately 3,000 barrels of oil equivalent per day, the company expects to drill one to two more wells with similar success to its 183-A3 well. That well is producing about 2.1 million cubic feet per day, along with approximately 50 barrels per day of condensate. Together, that totals around 400 barrels of oil equivalent per day.

Alvopetro is moving forward with plans to drill another well later this year. “What's also great is that this is a 100% working interest project,” Ruttan said. “We have three well pads ready to go, and it's all pipeline-connected, so it can be brought into production right away.”

The company is certainly benefitting from strong natural gas prices, which have increased nearly 9% since the beginning of 2024. Higher prices have helped Alvopetro to post operating margins of over 90%, which is not typical in the industry. The effective royalty rate is relatively low, at under 3%. And with natural gas production generally less costly than oil, operating costs per barrel of oil equivalent are under $6, resulting in industry-leading operating netbacks and margins.

“When you take our netback per BOE (barrel of oil equivalent) and divide it by the total price received, our ratio is around 90%,” Ruttan explained. “Additionally, our project qualifies for a 15% income tax rate, which makes it even more attractive when you consider that some peers operate in regions where tax rates range from 30% to as high as 50%.”

Supply side growth

Alvopetro’s immediate focus is primarily on growing the supply side.

“In the Brazilian economy, there’s a strong emphasis on expanding infrastructure,” Ruttan said.

“Brazil has been actively working to expand and liberalize this market, and we’re proud to have pioneered these efforts by delivering on this vision even before the open-market regulations were fully established.”

And with growth in natural gas-fired power plants to complement Brazil’s existing hydroelectric, solar, and wind capacity, Alvopetro is positioned to become a supplier of choice in an increasingly open gas market.