The Brazilian government plans to hold a new round of energy concessions in October, including exploration rights to the country’s largest oil discovery. However, numerous challenges have stymied Brazil’s energy sector, as detailed in a new Council of the Americas report Brazil’s Energy Agenda: The Way Forward.
COA Director of Energy Christian Gómez explores some of the key questions to watch on oil, gas, and renewable energy development in Brazil.
With new reserve discoveries, why is Brazilian oil production decreasing?
In 2007, Brazil discovered the pre-salt reserves in the Atlantic Ocean. These reserves are estimated to hold between 50 to 150 billion barrels of oil. This find tripled the amount of recoverable oil reserves in the country. However, Brazil has been suffering from declining oil production. In fact, production has declined for the sixteenth time in the last 17 months, which is noteworthy given the massive recoverable potential.
Brazil’s options are limited because much new investment is being diverted to maintain output, not increase it. Brazilian state oil company Petrobras, which held a monopoly in oil production until the 1990s and still operates an overwhelming majority of wells, has suffered from the maturing of older fields and depreciation of oil infrastructure. Foreign oil companies have participated in auctions to invest in the sector, but more remains to be done.
What is the latest update on the pre-salt fields?
The blocks in the pre-salt known as the “polygon” are set to be auctioned on October 21, 2013. Petrobras has determined that the risk profile of these wells is low, because they have already found oil in 70 percent of the wells drilled thus far. Therefore, Petrobras is using production-sharing agreements in which the oil remains the property of the state and companies get a share of the profits and are involved in exploration and production. In this case, Petrobras will also be the sole operator in each project and will have a 30 percent stake.
Despite these stringent requirements, foreign companies are still very interested in the pre-salt and will be bidding in October. Nevertheless, Petrobras may be overreaching and find itself under the weight of operating too many projects.
Will we see a shale gas revolution in Brazil?
The “shale gas revolution” in the United States is characterized by small- and medium-sized exploration and production companies, who are able to move and deploy resources quickly. Furthermore, land and mineral rights are more clearly defined in the United States, allowing companies to take on more risk with more upside potential as well.
Brazil is loaded with shale—it could have the fifth largest reserves in the world, and it has the third largest reserves in Latin America after Argentina and Mexico. Some have estimated that there is more shale gas in Brazil than there is oil in the pre-salt. An unconventional auction is set to take place in October, and companies will be looking to invest under a more desirable concession system.
Will hydroelectric power continue to be a mainstay in Brazil’s energy mix?
Hydro dominates Brazil’s electricity matrix, with an over 80 percent share. The downside to hydro is that is it an intermittent power source, so gaps in production must be accounted for by other types of power. During a drought that occurred in late 2012 to early 2013, reservoirs at certain hydro plants were depleted, leading to blackouts, which policymakers always find hard to swallow. In order to fill in these gaps, thermal power plants must be deployed strategically. Natural gas is also a great opportunity for Brazil for the future as a backstop to hydro.
Nevertheless, hydro will continue to dominate the electricity matrix, with several large plants coming online, such as the Belo Monte dam in the Amazon. These plants have less impact on the environment compared to other feedstocks, but there are still environmental considerations in the construction of large hydro plants.
Are wind and solar going to become competitive?
Brazil’s energy potential is infinite. From oil, gas, water, wind, and sun, the country is rich in natural resources. However, deploying the right programs to take advantage of this energy—in particular renewable sources—is where the country has fallen short.
Most notably, wind and solar development remains far behind where they could be. Solar is nascent and only contributes about 1 percent to the country’s energy matrix. Wind installations are more fully developed, with growth from only 300 megawatts in 2006 to over 2,500 megawatts in 2012.
Both wind and solar industries are being hamstrung by stringent local content rules. These rules mandate that developers purchase a large proportion of inputs for their projects in Brazil, in order to be eligible for cut rate financing by the Brazilian Development Bank. These local content requirements dramatically increase the cost of doing business and make the industries less competitive.
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