brazil's energy matrix

8/11/2019 Brazil's Energy Matrix

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Brazils Energy Matrix andProspects for Energy Integrationwith South America

Brazil in Context

Brazil Upstream Guide


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Brazil in ContextBrazils Energy Matrix and Prospects for Energy Integration with South America 3

Brazil alone is equal to half of the rest of South

America by almost any measure. Its GDP for 2009 and

estimated population at the end of that year were

US$1,573 billion and 191 million, respectively. This

makes Brazil the eight largest economy in the world.

The surface area of the country is bigger than that of

the continental U.S., excluding Alaska. These facts,

combined with its central location on the continent,

make Brazil key to any potential future energy

integration in South America.

Primary Energy Supply Matrix

The country migrated from a wood and coal-powered

economy in the 1940s to an economy powered by a

balanced mix of energy sources. This change mirrored

a population shift from rural areas to the cities and the

country is now predominantly urban.

Remarkably, Brazils renewable energy resources

account for some 47% of its primary energy supply

matrix, compared to 7% for OECD countries. And,

interestingly, even though hydropower generates

more than 70% of Brazils electricity, sugarcane

products and other renewable fuels already exceed

hydropower as a source of total Brazilian energy.

Key factors in the development of the new fuel

sources include Brazils huge potential for hydropower

generation, the founding of Petrleo Brasileiro S.A.

Petrobras, Brazils national oil company in 1953,

and the 1979 oil crisis, which stimulated Brazilian

development of sugarcane products as an alternative

fuel source.

Other fuels did not flourish to the same extent in

the 35 years up to 2005. Natural gas now makes up

8.3% of the energy supply matrix, but development

of gas production has been hampered by a

combination of the costliness of establishing the

requisite infrastructure, competition from fuel oil

and the lack of a regulatory framework. The easy

availability and abundance of gas from neighboring

Bolivia also removed the initial urgency to develop

Brazils gas reserves. Brazils nuclear program was

virtually still-born due to universal concerns about

nuclear energy security and the resulting restrictions

on project financing. It may be about to enjoy a

renaissance.

Trends in Brazils primary energy supply matrix (%)

1970 2005 2030

28

15,5

6,9

5,5

18,5

9,1

313,5

37,7

47,6

3,6

5,4

5,1

0,3

9,4

38,7

14,8

13

13,8

2,9

6,31,2

Oil and derivatives

Natural gas

CoalNuclear

Hydro Electricity

Fire wood and charcoal

Cane products

Other renewable


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Renewable Fuels

Hydro Generation

The country is blessed with one of the greatest

hydropower potentials in the world and hydro power

generation provides 77% of its electricity needs

(85% if imports are counted). Total Brazilian

hydropower potential amounts to 260 GW1of

which only 78 GW is currently exploited, by 828

hydroelectric plants. The greatest undeveloped

hydropower generation potential is in northern Brazil

(44%) with projects for new plants on the Madeira

River (UHE Jirau 3,300 MW and UHE Santo Antnio

3,150 MW), and on the Xingu River (UHE Belo

Monte 11.233 MW)2. The Madeira River projects

are expected to start operations in February 2013 and

May 2012, respectively and Belo Monte, in January

2015. Altogether some 33,000 MW of capacity,

including Belo Monte, is expected to come on

stream between 2015 and 20193.

The industry is haunted by the electricity shortage

crisis of 2001 which resulted from underinvestment in

generation capacity together with record droughts.

Environmental concerns and the long distances to

consumers are behind the delayed development of

the norths hydropower potential. However, these

issues are likely to be successfully addressed in order

to ensure the energy supply needed for Brazils

expected growth.

Power generating companies work within a model

designed by the Brazilian government to create an

investment-friendly environment. Its starting point

is the guarantee of fair remuneration for investors in

order to foster the expansion of the countrys powergenerating capacity while keeping electricity prices

at modest levels, securing the continuity and quality

of energy supplies and ensuring universal access to

and use of electricity services by all consumers.

The model envisages the coexistence of two

contracting environments:

Regulated Contracting Environment (ACR Ambiente

de Contratao Regulada): In this environment, all

power generating companies (public utilities and

independent producers) will sell their output to

power distribution companies (bidding individually)

by means of auctions to be held at the Electric

Power Commercialization Chamber (CCEE Cmara

de Comercializao de Energia Eltrica) with the

lowest price prevailing.

Free Contracting Environment (ACL Ambiente

Contratao Livre): In this environment, buyers (large

energy consumers) and sellers are free to settle the

price and volume of energy put up for trading. These

transactions are held at the CCEE.

Transmission

The resources used to expand the Brazilian

transmission system have come from the private sector

and from public-private partnerships since 1999.

The 96,140 km extension of transmission lines in the

Brazilian Electricity Grid (SIN Sistema Interligado

Nacional) almost completely interconnect the country

from north to south. SIN consists of companies

operating in the south, southeast, Midwest, and

northeast regions, and in one part of the north region,

carrying approximately 97% of the domestic demand

for energy.

The rest of the country is covered by isolated systems

covering almost 50% of the Brazilian territory, located

mainly in the Amazon region and consuming only

about 3% of the energy produced in Brazil. Diesel

is an important source of energy for electric power

generation in these isolated systems, which alsotransmit energy generated in Venezuela.

Access to the national grid is a key issue for the

systems efficiency. In Brazil, it is regulated by the

Country-wide Systems Operator (ONS), and it

involves two key features:

1 Plano Decenal de Expansode Energia 2008/2017 EPE, 2009

2 Atlas de Energia Eltrica doBrazil 3 edio. ANEEL,2008.

3 Plano Decenal de Expansode Energia 2019 EPE,2010


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(i) Mandatory free access to power transmission grids;

(ii) Fixing of non-discriminatory usage and connection

rates that concomitantly provide economic signals

for determining the location of the power generation

hubs and major consumers, in addition to ensuring

remuneration for the grid owners.

ANEEL, the Electricity Industry Regulator, has

held transmission line auctions since 2004. Initial

transmission fees are determined by the winning bid

at auction. From then on, such revenues are subject

to the revenue cap system, through which the initially

permitted revenues are adjusted each year by the

inflation rate minus an efficiency factor, in order to

encourage productivity gains.

The Brazilian federal government offers special

financing terms through the BNDES (National Bank for

Economic and Social Development) as an important

investment incentive. In order to provide potential

concessionaires with information, the bank has been

disclosing the terms of loans offered prior to auction

dates.

Distribution

The electric power distribution market is serviced by a

total of 64 (private and state-owned) concessionaires

that provide public services countrywide. Overall,

60% of the energy is distributed by companies whose

control is in the hands of private capital. About 47

million consumer units are serviced, of which 85%

are residential consumers in over 99% of Brazilian

municipalities.

The regulatory framework for electricity distribution

was developed in the 1990s based on the United

Kingdom model. Since 1996, the concession

agreements for the privatized distribution utilities

have established a price cap system that consists of

an initial price cap stipulated by the regulator for the

distributors. Until the next tariff review, the price cap

is adjusted annually for inflation minus a productivity

factor (X). Tariffs are reviewed every 4 to 5 years

depending on the distributors concession contract,

and are designed to maintain economic and financial

sustainability for the concessionaires while providing

incentives for them to improve their efficiency and pass

on the attendant gains to consumers via lower prices.


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Bio Fuels

Sugar Cane Products

Compared to hydropower generation, the sugarcane

fuel industry has been relatively unstructured,

unregulated, and fragmented. Even so, it contributed

more to Brazils primary energy supply matrix in

2008 than hydropower (in terms of barrels of oil

equivalent) and produced 27.5 billion liters of ethanol

in the 2008/9 harvest, of which 4.7 billion liters were

exported. The players are Brazilian companies which

started off initially as traditional food providers. Some

of these were capable of repositioning themselves as

heavy-weight fuel producers with a competitive edge

over traditional energy companies unfamiliar with

the agro-industrial world.

At this stage of biofuel development, it is not yet

clear at which point in the industry cycle the power

to extract economic rent will reside. This may be with

the growers, the processors (who are usually the

growers), the technology owners or the distributors.

Some players are testing the water by taking part in all

parts of the chain only to the extent needed to learn

the business.

A market changing event took place in 2008 when

COSAN, a major Brazilian ethanol producer, surprised

the market by acquiring EXXON Brazils retail fuel

distribution chain in the face of competition from

traditional fuel distribution companies. In 2010, this

move was followed by a Joint Venture between Shell

and COSANs ethanol production and fuel distribution

operations and by the announcement of Petrobrass

proposed strategic partnerships with two of the

largest Brazilian ethanol producers.

Brazils ethanol is competitive with that produced

elsewhere, but its ultimate success may depend

on other factors. These include U.S. import tariffs,

continued high oil prices, and the ability of the

industry to develop and improve its fuel efficiency

and process productivity, as well as to increase

production volumes to a suitable level for meaningful

international trading. As in the past, decreases in oil

prices may also result in an about-turn in government

policy for the sector.

More prosaic problems also face the industry,

principally in product standardization, distribution,

storage, and shelf-life. Promising investments are

being made into the genetics of sugarcane plants and

into the production of fuel from alternative crops.

While there is optimism that these initiatives will yield

results, it is still too early to know what impact these

will have on the industry.

The industry has suffered from grave public

interest allegations about encroachment on land

in the Amazon, the crowding out of food crops

by using arable land for fuel production (and the

resulting pressures on food prices) as well as about

questionable treatment of employees. The first two

allegations now appear to be less than proven,

though the industry may still have a lot of explaining

to do before it can convince the public (especially

U.S. and European taxpayers and legislators) that

this is so. As the industry rapidly becomes more

structured and more dependent on access to capital

markets, the market itself will exercise a virtuous

effect in sanitizing legal and moral abuses which

may be beyond the reach of governmentenforcement today.


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Firewood and Charcoal

The firewood and charcoal segment is even more

unstructured, unregulated, and fragmented than that

of sugarcane. It is also subject to similar public interest

complaints to that of the sugarcane sector and suffers

from the fact that it is not an environmentally clean

segment. Unlike the sugarcane segment, it is generally

felt that there is some foundation to the complaints.

Unsurprisingly, the Brazilian government sees this

sector as marginal and expects it to play a diminishing

role in the future.

Other renewable fuels

The government estimates the total required private

investment for alternative fuels at approximately

R$10.1 billion and expects to increase the share of

alternative sources of energy in the Brazilian energy

matrix from 3.1% to 5.9% by the end of the program.

Solar energy is suited to the small, isolated

communities which abound in the north of Brazil.

Wind power is thought to be more suitable for

coastal areas, principally in the northeast of Brazil.

As elsewhere, these segments are expected to be a

welcome complement to the Brazilian energy matrix,

but their characteristics make them likely to remain

relatively small niches areas.

The Brazilian federal government established a

program (PROINFA) to develop alternative energy

sources including Small Hydroelectric Plants (PCHs),

biomass, and wind power. The goal is to achieve a

total capacity of 3,300 MW. By the end of 2010, the

program is estimated to have added 1,591 MW of

generating capacity, 414 MW from PCHs, 66 MWfrom biomass and 1,110 MW from wind power. The

connection of new points of energy generation to the

grid was made feasible through federal government

support, such as incentives for PCH construction and

tax discounts for those using the transmission and

distribution systems. Additionally, the program enjoys

a 10 year credit line offered by BNDES, which finances

70% of the total investment.

Non-Renewable Fuels

Oil

In 2009, Petrobras produced 1,971 thousand barrels

per day and had a refining capacity of approximately

1,791 thousand barrels per day.

Petrobras was established in 1953 as a

government-controlled national oil company. It was

the sole concessionaire for Oil & Gas Exploration

& Production (E&P) until 19984, when the Brazilian

Federal Government introduced the first round

of competitive bids for new E&P concessions and

other players entered the Brazilian market. This

competition together with the lack of funding

from its shareholder, the government, encouraged

Petrobras to seek capital in global financial markets

and to reinvent itself as a major regional oil company,

operating primarily in the triangle between Brazil/

Argentina, the Gulf of Mexico, and Nigeria.

Ultimately, the strategic re-positioning of Petrobras

served as an incentive to accelerate its Exploration &

Production (E&P) program and led it to the discoveries

of apparently substantial reserves in the pre-salt layer,

some 6,000 plus meters below sea level.

These discoveries have led to a change in the E&P

regulatory framework in Brazil. Exploration in the

Brazilian pre-salt has resulted in the discovery of

an estimated 8 to 20 billion BOE over the past

4 years, starting with the drilling of Tupi (2006).

The announcement of the discovery of oil and gas

resources, in reservatories, in 2007, indicated the

existence of a major, new oil province in Brazil, with

estimates of significant reserves in the Esprito Santos,Campos and Santos basins, in an area known

as Pre-Salt.

4 Passed in 1997, the OilLaw 9,478 introducedregulations of the Federal

Union monopoly for oilexploration and production.In 1998 the first partnershipagreements for petroleumexploration were signedbetween Petrobras andprivate companies, underwhich Petrobras obtained 397concessions in explorationblocks of developmentand production fields fromthe Brazilian PetroleumRegulatory Agency(ANP).


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The establishment of a new institutional framework

for oil and gas exploration production in the Pre-Sal

area consists of the four following measures:

New regime (production sharing contracts) will

apply only for new E&P concessions in the Pre-Salt

area, preserving the rules for previously existing

concession contracts. Petrobras will be the operator

of all production share contracts, holding a

minimum 30% share in each consortium.

Creation of a New Public Organization, which will

be responsible for the administration of production

share contracts, as well as the trading of oil and gas

in the Pre-Salt area, preserving the Federal Unions

interests.

Creation of a New Social Fund to manage the

government take collected from these areas in

the pre-salt. The goal is for the fund to increase

social programs related to education, science and

technology and the combat of poverty.

Authorizing the Brazilian Federal Government to

subscribe for shares in the capital stock of Petrobras

through the transfer of rights (cesso onerosa)

to explore and produce oil, natural gas and other

fluid hydrocarbons in pre-salt areas not under

concession, limited to the production of 5 billion

barrels of oil equivalent.

The technical difficulties of dealing with the geology

of the finds and the resulting effects on the cost

of operating at pre-salt depths while maintaining

satisfactory safety and environmental standards are

still relatively uncertain. But, hard as it may be to cope

with such factors, the lack of human and financial

resources on the scale required to develop and

produce from the new-found reserves may turn out tobe an even greater challenge.


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The proposed regulatory framework would have

important implications for the development of Brazils

oil sector. Some analysts raise the concern that

obliging Petrobras to act as the sole operator in the

pre-salt basin would place an undesirable financial

and operational burden on the Company and

potentially slow the pace of development of

new projects, especially considering the companys

already-aggressive development plans for its existing

pre- and post-salt oil reserves.

Petrobras is expecting to invest US$33 billion in the

Pre-salt area until 2014, to include the construction

of additional port facilities, platforms, floating

production vessels and the like. Indicative of the scale

and breadth of investments which will be required

to service the pre-salt fields are the 26 contracted

Drilling Rigs plus the 28 to be built by 2020, besides

504 Supply and Special Vessels and 84 Production

Platforms5.

The investment in Post Salt fields will be even more

significant and are expected to total US$75 billion in

the same period.

Petrobras with its pre-salt discoveries is a game-

changer for the oil and gas industry. Its ambitions,

stretching well beyond its current 5-year investment

plan, make Brazil and Petrobras the epicenter of the

oil service industry as the scope of the development

work scope required will be substantial.

Even before the pre-salt finds, Petrobras was

planning to increase its refinery capacity with 4 new

oil refineries between 2010 and 2030 with a totalnominal capacity of 950 thousand barrels of oil per

day and 2 new petrochemical refineries between

2010 and 2020 with a total nominal capacity of 300

thousand barrels of oil per day.

Gas

Brazil had 12.9 trillion cubic feet (Tcf) of proven natural

gas reserves in 2009. The Campos and Santos Basins

hold the majority of reserves. Natural gas production

has grown slowly in recent years, mainly due to a lack

of domestic transportation capacity and low domestic

prices. In 2008, Brazil produced 446 billion cubic feet

(Bcf) of natural gas, mostly unchanged from 2007.

The largest share of Brazils natural gas production

occurs from offshore fields in the Campos Basin in Rio

de Janeiro state. Most onshore production occurs in

Amazonas and Bahia states.

The discoveries in Brazils offshore Pre-Salt areas have

generated considerable excitement. Along with their

potential to significantly increase oil production in the

country, the Pre-Salt areas are estimated to contain

sizable natural gas reserves as well, which allow the

country to be self-sufficient in the gas market.

Until then, one of Petrobrass solutions to assure

energy supply security was to install two floating

re-gasification plants through January 2009, so as to

accelerate the importation of LNG (Liquefied Natural

Gas). These plants, one in the North West (Pecem)

and the other in Rio de Janeiro, have a total capacity

of 21 million cubic meters per day.

Nuclear

The Brazilian constitution prohibits private sector

operation of nuclear energy plants. Brazil has

two controversial plants in Rio de Janeiro and the

government announced the start of construction on

a third plant in mid-2009, on the same site as that of

the previous two. Angra 3, the third plant is currentlybeing installed and has an estimated cost of US$4,5

billion dollars.

5 Business Plan2010 2014 Petrobras


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The minister for Mines and Energy also has announced

the construction of 50 nuclear power plants over

the next 50 years with planned total incremental

electricity generation of 60,000 MW. Curiously, only

4 such plants are scheduled to be built within the next

20 years (until 2028), two of which are planned to be

in northeast Brazil and two in southeast Brazil.

Forecast Energy Investment in Brazil

through 2030

In summary, Brazil plans to reach 2030 with its Primary

Energy Supply Matrix still broadly in line with its

current profile. In other words, just under half of its

energy supply will continue to come from Renewable

Fuels, despite expecting to grow the total supply by

154% in the 25 year planning period then ending.

This considerable achievement will require estimated

cumulative spending in excess of US$800 billion

shown as below.

Prospects for South American Energy

Integration

Political and economic stability are conditions

precedent to any serious regional energy integration

and South America can be no exception to this rule.

Naturally, any perception that there may be populist

governments with undemocratic tendencies would

generate concern about enforceability of multilateral

agreements of the type needed to establish

trans-continental cooperation.

In recent years, the prospects for integration appear

to have receded rather than progressed. Events in

Bolivia and in Argentina have reduced cross-border

gas trading. Paraguay is the one country which is fully

integrated with Brazil because of the common interest

in the 12,600 MW Itaipu hydro-electric dam which

spans the border between the two countries. But

Paraguay is now intent on renegotiating with Brazil

its existing energy supply contractual arrangements,

providing further doubt as to the durability of

commercial treaties on the continent.

Geography also presents natural impediments to

energy integration. Brazil has the Amazon to the

North and the Andes to its West, physically impeding

access to its neighbors on those borders. While

Venezuela has offered to share in a transcontinental

pipeline to supply gas to Brazil and the Southern

Cone, the practical challenges of geography and

distance alone make experts believe this offer to lack

substance. Venezuela does provide a small quantity of

electricity to part of the Brazilian Amazon region

using an independent transmission system.

Regrettably, present circumstances would suggest

that South American Energy Integration appears to be

a remote possibility for the near future, though, most

Brazilians would hope that it could become a reality

within the 2030 planning time-frame adopted by the

Brazilian Federal Government.

Source : Matriz Energtica Nacional 2030 MME 2007

Accumulated Investment by Segment: 20062030 (%)

Oil and derivatives

Natural gas

Sugarcane

Electricity

48,8

11,8

3,7

35,6

US$ 803 billion


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Contacts

William Ballantyne

Oil & Gas Leader - Brazil

+55 21 3981-0650

[email protected]

Carlos Vivas

Oil & Gas Leader Tax+55 21 3981-0482

[email protected]


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