How Brazil is Betting on Both Fossil Fuels and Renewables to be a Global Energy Player
Brazil, which has delivered steady macroeconomic governance, is far from current geopolitical turmoil and has relations with both Western and Eastern trade partners. Key opportunities in energy lie in oil, solar, and biofuel, with wind and gas showing potential as well. On the risk side, Brazil suffers from poor infrastructure, a lack of market-friendly regulation, and the potential for local communities to push back against new projects.
Overview of Brazil’s energy risks and opportunities
Brazil is South America’s top destination for investments in the energy sector. Along with having abundant natural resources, Brazil benefits from the region’s geographical distance from geopolitical tensions playing out elsewhere in the world.
Brazil is a major global player in oil and gas. It is the world’s eighth-largest oil producer and the largest in Latin America.
Along with hydrocarbons, renewable energy is a major growth area in Brazil. The country’s solar and wind generation has soared in the past decade. The country already has five decades’ worth of experience producing ethanol biofuel with sugarcane, which could experience a boom if the government provides incentives to develop it.
Despite these potential growth areas, Brazil faces several risks in the energy sector. It suffers from poor infrastructure, numerous regulations and the possibility that projects could face opposition from local communities. Brazil still has significant work to do in the areas of cutting regulatory red tape and increasing its economic productivity. Protests are also a possibility, as energy projects are usually developed in low-income areas where residents may be skeptical of investors.
Opportunities: biofuel, wind, and solar
Brazil offers a stable macroeconomic outlook for an emerging market and has a rich resource endowment for both renewable energy and fossil fuels.
Numerous market analysts and business columnists see Brazil as a global frontier in oil and, more recently, biofuel. Although Brazil’s left-wing federal administration prioritizes state firm Petrobras in exploiting new oil fields, private companies will have room to operate and make profits.
Renewable energies: essential to Brazil’s electricity generation
Brazil’s energy matrix is cleaner than the world’s average. While about 39% of all energy consumed in Brazil comes from renewable sources, the global average is 17%. The vast majority of Brazil’s electricity — 93% — comes from renewable sources, mainly hydroelectricity.
In the past decade, Brazil’s wind and solar sectors have both boomed as investment costs in these areas plummeted. Brazil’s wind power generation increased almost tenfold over the past decade, while solar increased fourfold just in the past four years.
Looking ahead, International Energy Association (IEA) data from January 2024 projects 69% growth in onshore wind in Brazil until 2028, and predicts that the photovoltaic industry will triple in its baseline scenario.
Brazil bets on biofuel
The federal government has shown signs of committing to promote biofuels as a green technology that could decarbonize transportation, with fiscal incentives expected. It is also worth remembering that the agribusiness sector is the most powerful lobby in Brasília.
(IEA) forecasts that global biofuel consumption will expand 38 billion liters over 2023-2028 — a nearly 30% increase from the last five-year period. Brazil, India, and Indonesia will likely be the countries meeting this demand. Brazil, which serves as the G20 group’s president, is sponsoring an initiative to sell biofuel as a Global South solution for climate change in the transportation sector.
Aviation biofuel is expected to be a global moneymaker, as the aviation industry’s carbon emissions rely on kerosene fuel. However, the technology is largely still in the experimental phase. Standard and Poors (S&P) reported that Brazilian sugarcane ethanol producers Raizen, BP Bunge and Zilor received a sustainable aviation fuel certification, and plan to focus on the US and Japan as main markets. The private company Brazil BioFuels plans to build an aviation biofuel plant in Manaus, located in northern Amazonas state. The plant is one of only three major aviation biofuel planned plants in Latin America, S&P Global reported.
Green hydrogen: early promise
Green hydrogen is also an opportunity. However, projects are still in the early stages. Brazil’s Senate has yet to vote on a regulatory framework to support its development. However, lawmakers have shown early support for the initiative.
Brazil’s lower chamber unanimously passed a bill to create a regulatory framework for green hydrogen, with support spanning from the left and far right. This makes green hydrogen one of the rare issues spared from politicization and culture wars in Brazil last year. Since Brazil’s sunny Northeastern region is abundant in land and is one of the country’s poorest regions, state governors there likely would embrace investors bringing solar, wind and green hydrogen projects to their constituents.
Liquefied natural gas: not a likely bet
There is a global demand for liquefied natural gas — especially as Europe looks for alternative providers to replace Russia. However, Brazil does not seem like a likely candidate to provide this commodity to Europe at the moment. This is because the Brazilian government and private investors would have to build the necessary infrastructure of pipelines and LNG export terminals — a costly task given that Brazil’s oil reserves are located deep in the ocean and far from the coastline.
Risks: government intervention, fiscal problems and protests
Brazil’s energy sector faces risks from possible government intervention and the country’s fiscal situation.
In the oil and gas market, President Luiz Inácio Lula da Silva’s administration halted the market-oriented policies pursued by former presidents Michel Temer (2016-2018) and Jair Bolsonaro (2019-2022). State-run oil and gas company Petrobras signed a memorandum to sell its nine refineries in 2019, with the idea of attracting more private investment into Brazil and fostering competition in the refinery market. During Bolsonaro’s tenure, Petrobras sold three refineries to private investors.
However, Lula’s administration has canceled plans to privatize the six remaining state-run refineries, leaving less room for private investors. In November 2023, Petrobras canceled the USD1.65 billion sale of a fourth refinery to Abu Dhabi's Mubadala fund. In February 2024, Brazil’s association of private-owned refineries warned that its members would be forced out of the market if state-run Petrobras kept its policy of selling its products 11% cheaper than the market average.
Oil and gas expert Bruno Epiro told Southern Pulse that the Lula administration’s current policy allows the state-run giant Petrobras to exert a monopoly over the refinery market, dissuading private investors from entering the Brazilian oil refining and exploration market. Epiro also says Lula’s plan to cancel privatizing state-run refineries is counterintuitive to his self-proclaimed goal of betting on energy transition.
Another risk in the oil sector comes from Environment Minister Marina Silva, who firmly opposes oil extraction in the recently discovered offshore basin, located 500 kilometers from the mouth of the Amazon River. A Petrobras report said that the new oil reserves in the Amazon rainforest could increase Brazilian reserves by 37%, Poder360 reported.
In the solar panel sector, previous federal administrations cut taxes and red tape. As a result, rapid growth followed. Although Lula da Silva’s administration undid some incentives, it seems that solar panels still offer much room for development given Brazil’s natural endowments.
Brazil’s tight fiscal situation could also pose risks to its energy sector. Finance Minister Fernando Haddad pledged to reach a zero fiscal deficit target by the end of 2024, compared to the roughly USD50 billion deficit this year. The risk is that a cash-strapped government may feel tempted to raise taxes on energy projects to meet its fiscal goals. And since all of Brazil’s 5,570 municipalities nationwide held their local elections in 2024, there is additional political pressure for the federal government and lawmakers in Brasília to focus resources on distributing benefits to companies and citizens in the form of small public works projects and subsidies.
Looking ahead: Brazil is open for business to the world
Despite the risks Brazil faces in the energy sector, one advantage is that the country is open to doing business with the entire world, despite geopolitical divides.
For example, Brazil has remained open to doing business with both the US and China, despite tensions between the countries. Even though President Lula da Silva is aligned with the China-led BRICS+ bloc and has a diplomatic neutral stance on the Russia-Ukrainian war, he does not necessarily have an anti-US stance when it comes to attracting foreign energy investments.
An Inter-American Dialogue study on Brazil’s energy sector found that in 2020 China owned (or partially owned) 304 power plants in Brazil, making up 10% of its power generation countrywide. Brazil also became a major importer of Russian diesel, as the latter country needed new buyers due to US-led sanctions.
Despite Lula’s many friendly remarks towards China’s President Xi Jinping and Russian President Vladimir Putin, Lula has also held bilateral meetings with US President Joe Biden, Germany’s Chancellor Olaf Scholz and France’s President Emmanuel Macron.
In a nutshell, Brazil is open for business with everyone. The country will continue to be one of the world’s main players in the oil and gas industry, while focusing on the myriad opportunities to develop renewable energies in the next decade and beyond.
Whether it’s Brazil or elsewhere in Latin America, Southern Pulse has the experience, network, and relationships to simplify this challenging region with honest, direct answers to your most complicated questions.
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