Grupo de Economia da Energia

Pre-salt: an obstacle to renewable energy?

In oil, renewable energy on 28/11/2011 at 00:09

By Edmar de Almeida 

Recent accidents involving oil spillage in the Gulf of Mexico and now in the Campos Basin raise an issue on Pre-salt exploitation in Brazil: Would Brazil going through an irrelevant adventure with the imminence of substituting renewable energy sources by oil?

This question is linked to the idea that oil is a former energy and there is no worth to mobilize society’s resources in a business doomed to shrink and disappear quickly. This idea has no support nowadays.

Prediction studies of global energy matrix show oil and natural gas still prevailing in long-term horizon. According to the International Energy Agency, these energy sources, together with other fossil fuels, will account for 75% of global energy matrix in 2035, the most optimistic scenario for renewable energies.

This type of prediction is confirmed by other government agencies and major energy companies worldwide. We can say that oil and gas will keep a prominent role in the long transition to a decarbonized economy. Thus, Pre-salt is a significant comparative advantage for Brazil. Our country could take a leading role in the energy transition, not only because of its large endowment of oil and gas, but also because of its significant potential for renewable resources.

It is important to note that Brazil is a great success in offshore exploration in deep waters. Since 1980s, Brazil has made enormous economic and technological efforts in the offshore field in order to obtain oil self-sufficiency. As a result of this effort, Petrobras became a leading company in this technology and is currently the largest operator in world oil production in deep waters.

Until now, Brazil has equating success with another great challenge, which is financing the significant volume of investments required for the use of oil from Pre-salt. Much of the funds to finance these investments come from the Petrobras’ cash flow. In 2010, company’s profits and investments totaled R$ 35.2 billion and R$ 76.4 billion, respectively. This means that the Petrobras system invested R$ 210 million per day.

This effort is largely associated with the policy of aligning the prices of fuels in Brazil with international market prices. This strategy ensured a strong rise in Petrobras gains due to the increase in the price of a barrel of oil. The pricing policy adopted has generated confidence for major players in the global oil industry, as well as new Brazilian companies, risk on the future of oil and gas in Brazil.

We have to emphasize that the development of the Pre-salt is not necessarily an obstacle to renewable energy. By contrast, Brazil has the opportunity to use the economic benefits of the Pre-salt to play a key role in energy of the future. This is an ambitious challenge to be faced as part of a long-term strategy.

Brazil has already a path taken regarding the energies of the future. The big challenge is not moving back in the new context of abundant oil. What would be a reverse? Certainly, the biggest reverse would be Brazil giving up energy policy that historically has sought to promote the diversification of the domestic energy matrix, in particular toward renewable energy. The greatest danger is the temptation to adopt a new policy of cheaper fuel prices.

This policy would be a relief in the pockets of consumers and many votes indeed. But it would also represent the death of biofuels in Brazil. Likewise, the availability of natural gas at subsidized prices can create obstacles to use some expensive renewable sources for generating electricity (wind, biomass and small power plants).

In addition to a pricing policy that informs consumers and investors that renewable energies are effectively the energies of the future, Brazil still has major institutional challenges to enable the use of its potential of renewable energy. The growing strength of public opinion regarding the use of hydroelectric potential in Amazônia, without further discussion about the alternatives, reduces the possibility of choice for the energy sources to meet the country’s growth.

Brazil is the only industrialized country with a large potential for hydroelectric generation. This potential has been used until end in Europe and United States of America. By giving up to take the rest of its hydroelectric potential, Brazil will choose to use intensively other conventional energy sources such as oil, coal, natural gas and nuclear energy.

For example, by comparing Belo Monte with other alternatives for expansion of electricity supply in the coming years it is clear that if Belo Monte not happen the cost of our energy generated and the level of emissions of greenhouse gases would have a high increasing. On the one hand, there are other hydroelectric projects ready to bid in order to replace the Belo Monte project. On the other hand, at this time it is not economically feasible to replace the amount of energy to be supplied by other renewable sources (wind, biomass or small hydroelectric power plants). That is, if Belo Monte project does not occur, Brazil will necessarily increase the hiring of energy generated by natural gas and/or coal power plants.

Besides the institutional challenge of creating conditions to take advantage of renewable resources that are economically viable today, Brazil will face the challenge of becoming a player to innovate technologically the energy of the future. Brazil should include in its energy policy agenda a strategy for investing in energy of the future.

Currently, Brazil invests significantly in research and development (P&D) in oil exploration and production through the efforts of Petrobras. Brazil is also investing in technologies for the production of ethanol, particularly in agriculture, with emphasis on the role of Embrapa (Brazilian Agricultural Research Corporation). However, Brazilian P&D investments in new energy sources are still not significant without any kind of technological strategy. Brazilian government is responsible for not only providing resources, but also drawing a technological strategy for the country in this area.

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