Brazil at an energy cross-roads

New study shows potential competitive advantage of diverse energy base, and low cost pre-salt oil reserves

Today, new research – Unburnable Carbon: Is Brazil avoiding the carbon bubble? – released by Carbon Tracker Initiative in association with SITAWI – Finance for Good reveals that Brazil is at a major crossroads in its energy future. If the Brazilian government carefully manages the growth of its energy supply from both its oil and renewables sectors, it has significant, sustainable investment potential; alternatively, if Brazil creates an oil-rush around its pre-salt reserves, (new, deepwater oil reserves) it could lose its competitive advantage and expose itself to the global carbon bubble.

Domestically Brazil has not yet developed an over-reliance on fossil fuels, and has opportunities to lead low-carbon economic growth through biofuels and hydropower. It also has significant potential wind energy which is predicted to grow rapidly. This provides a sustainable energy base and a strong position from which investors could drive a low-carbon economy.
However, Brazil has exposure to increasingly competitive and risky international coal markets through Vale and CCX’s coal reserves. These are, in fact, negligible in scale when compared to the significant deep water oil reserves which not only threaten the fossil fuel intensity of its own energy mix, but will expose its capital markets to the carbon bubble if poorly managed.

Estimates of Brazilian pre-salt reserves indicate a potential for 70 to 100 billion barrels of oil equivalent (sum of oil and natural gas). This is 7-10 times the size of Brazil’s current proven oil and gas reserves and equivalent to 4-6% of total proven oil reserves globally. Currently being auctioned by the state, this pre-salt is attracting all the major fossil fuel companies of the world.

Carbon Tracker’s global analysis shows how global carbon budgets need to constrain the use of fossil fuels, whilst leaving some budget for combustion globally. This analysis reveals Brazil’s oil production is expected at low-costs, putting it in a strong position to gain some of this carbon budget and at a low risk of being stranded. However, Brazil needs to avoid over-heating its economy by allowing too rapid an expansion of this sector, pushing up the costs of extraction and increasing domestic emission from the oil and gas sector.

The process of identifying unburnable carbon creates winners and losers. The significant state interest in Petrobras, which dominates the Brazilian oil and gas sector, means the government has the key decision-making role in this delicate balancing act. It also brings a challenge for private investors, as they may have limited ability to influence the direction of the company.

Previous analysis by Carbon Tracker of the companies listed in South Africa and Australia has shown that these markets are dependent on the coal market – domestically in South Africa’s case, and the export market for Australia. The evidence in this report shows Brazil is in a strong position compared to these markets to compete for the capital of international investors. Brazil therefore has an opportunity to capitalise as carbon constraints come in.

Luke Sussams, Analyst at Carbon Tracker said: “Brazil’s oil production currently has low risk of becoming stranded and security from strong political interest. This makes them likely to be in the ‘burnable’ portion of reserves within the global carbon budget, making Brazilian oil potentially a very strong force on the international oil market. Investing in a 2°C world will have winners and losers – Brazil may be well placed to come out ahead. ”

Gustavo Pimentel, Director at SITAWI said: “Brazil’s oil reserves have a clear cost advantage internationally. If current barriers for the biofuels industry to supply domestic consumption are removed, Brazil’s oil reserves can be released to compete on the international markets, whilst still meeting domestic emissions targets.”

Mark Campanale, Founder of Carbon Tracker said: “There is great potential for Brazil’s strong renewable energy foundation to grow – a clear low-carbon energy strategy could attract investments that make Brazil’s energy supply the envy of the world.”

Notes to editors

The Carbon Tracker Initiative works to align the capital markets with climate change objectives through a number of workstreams. In 2011 Carbon Tracker released its seminal report, Unburnable Carbon, on the concept of the carbon bubble and the potential for stranded fossil fuel assets.

SITAWI – Finance for Good aims to mobilise more capital and new types of capital for social change and environmental conservation. We do this by creating innovative financial products to the social sector and by advising investors on integrating sustainability issues into decision making.

About the research

Unburnable Carbon: Is Brazil avoiding the carbon bubble? Is the fourth in the series of national Unburnable Carbon reports produced by Carbon Tracker.

Climate Change target: Governments have committed under the Cancun Accord to reducing annual emissions in line with a 2°C target (above which the level of global warming is considered to create unacceptable risks from sea level rise and other impacts), but the financial markets are assuming that emissions will carry on increasing.