Brazil alone is equal to half of the rest of South America by almost any measure. The surface area of the country is bigger than that of the continental u.s., excluding Alaska. Renewable energy resources account for some 47% of its primary energy supply matrix.
Brazil alone is equal to half of the rest of South America by almost any measure. The surface area of the country is bigger than that of the continental u.s., excluding Alaska. Renewable energy resources account for some 47% of its primary energy supply matrix.
Brazil alone is equal to half of the rest of South America by almost any measure. The surface area of the country is bigger than that of the continental u.s., excluding Alaska. Renewable energy resources account for some 47% of its primary energy supply matrix.
with South America Brazil in Context Brazil Upstream Guide Brazil in Context Brazils 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 3 13,5 37,7 47,6 3,6 5,4 5,1 0,3 9,4 38,7 14,8 13 13,8 2,9 6,3 1,2 Oil and derivatives Natural gas Coal Nuclear Hydro Electricity Fire wood and charcoal Cane products Other renewable 4 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 GW 1 of 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 2019 3 . 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 power generating 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 also transmit 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 Expanso de Energia 2008/2017 EPE, 2009 2 Atlas de Energia Eltrica do Brazil 3 edio. ANEEL, 2008. 3 Plano Decenal de Expanso de Energia 2019 EPE, 2010 Brazil in Context Brazils Energy Matrix and Prospects for Energy Integration with South America 5 (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. 6 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 government enforcement today. Brazil in Context Brazils Energy Matrix and Prospects for Energy Integration with South America 7 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 MW from 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 1998 4 , 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 Oil Law 9,478 introduced regulations of the Federal Union monopoly for oil exploration and production. In 1998 the first partnership agreements for petroleum exploration were signed between Petrobras and private companies, under which Petrobras obtained 397 concessions in exploration blocks of development and production fields from the Brazilian Petroleum Regulatory Agency (ANP). 8 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 to be an even greater challenge. Brazil in Context Brazils Energy Matrix and Prospects for Energy Integration with South America 9 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 Platforms 5 . 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 total nominal 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 currently being installed and has an estimated cost of US$4,5 billion dollars. 5 Business Plan 2010 2014 Petrobras 10 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 Contacts William Ballantyne Oil & Gas Leader - Brazil +55 21 3981-0650 wballantyne@deloitte.com Carlos Vivas Oil & Gas Leader Tax +55 21 3981-0482 cavivas@deloitte.com Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member rms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member rms. 2010 Deloitte Touche Tohmatsu Limited. All rights reserved.