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Brazilian shale exploration proves promising

06th June 2012

Company controlled by Minas Gerais state says shale deposits could prove extremely lucrative for the region

View of the Unesco World Heritage city of Ouro Preto in shale-rich Minas Gerais, Brazil

Brazilian state-controlled power utility, Ceming believes natural gas from local shale deposits can fuel further growth of one of the country's industrial hotspots.

Dorothea Werneck, who chairs Cemig's board and holds a top position in the Minas Gerais government, said initial results were "very, very promising" from shale exploration there, in blocks held by companies including Royal Dutch Shell Plc and Petrobras.

Cemig CFO Luiz Rolla said shale gas could be a "turning point for the Minas Gerais economy" if its cost was as low as they expect, since it would drive expansion by companies seeking more affordable power.

"Along with the production of energy, we could have other industries using the gas in their industrial processes," Rolla said in an interview.

Cemig clients include steel maker ArcelorMittal and aluminum smelters, and Werneck saw potential for fertilizer and chemical plant developments if enough gas was available.

Minas Gerais, which translates to "General Mines" in English, has 19.6 million people and covers an area bigger than California, but smaller than Texas. It is Brazil's third-largest economy, out of 27 states, after Sao Paulo and Rio de Janeiro.

Other industrial companies with operations there include Anglo American, Fiat, Vale and Usiminas. Its mines produce about a fifth of the world's seaborne iron-ore exports.

Werneck said there was enough demand to increase Cemig's current natural gas deliveries by 10 times, if only there was more supply.

"We are now importing gas from Bolivia, which has established a minimum price that is too high," she said ahead of a meeting with investors in San Francisco, California.

Cemig, which owns 60 per cent of gas distribution company Gasmig while Petrobras holds the rest, also believes residential consumption of natural gas could grow, and it is now building out infrastructure for 60,000 households.

Apart from selling it directly, Cemig also expects natural gas-fired power will represent the bulk of its growth given the lack of potential hydropower expansion in the Amazon rainforest.

"Currently, the reservoirs are enough to supply the market for the next two years," Rolla said. "Some years ago, they were enough for five years."

China is a growing competitor for Cemig and others, with State Grid Corp of China agreeing just last week to buy Brazilian electricity transmission assets from Spanish builder ACS.
A Chinese company also ended up winning an auction for a stake in Portuguese utility EDP, which Cemig had been looking to buy.

"Apparently the returns they required for their investments are pretty low," Rolla said. "That is a big red signal for us."


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