Brazil is the largest country in South America and has rapidly growing oil, natural gas, and electricity markets. Brazil's privatization plans are dramatically altering the makeup of the energy sector.

Note: information contained in this report is the best available as of June 2000 and is subject to change.

Brazil is the ninth largest economy and fifth most populous country in the world. It is the largest country in Latin America, in terms of economy, population, and area.

Since Brazil's January 1999 currency devaluation, the country has made significant progress toward long term economic stability and market liberalization. President Fernando Henrique Cardoso has worked since 1995 to attract foreign investment, increase competition, increase productivity, and streamline public administration and finances in Brazil. Brazil had record levels of foreign investment in 1999. The year also showed more economic growth and fiscal health than had been expected. In early 2000, Cardoso's economic reforms showed new momentum when Congress agreed to fiscal reforms necessary to maintain funding from the International Monetary Fund (IMF). Meanwhile, the January 1999 currency devaluation has begun to have a positive impact on Brazilian exports, which could help to balance the country's large current account deficit.

The pace of privatization in 1999 did slow as a result of the currency crash. Privatization had been expected to generate $19 billion in government revenue in 1999, which ended up totaling only $3 billion. The year 2000 now is expected to see active privatization in the energy sector, especially in the electricity sector. The remaining federally-owned utilities that had been slated for sale in 1999 now are expected to be sold in the summer of 2000. More than 30% of the state oil company, Petroleo Brasileiro (Petrobras), is planned for sale in the summer of 2000, which will generate an estimated $4.5 billion in government revenue.

Strikes among public and private sector employees across a wide range of industries are common in Brazil (most notably among customs officers and truck drivers), despite recent reductions in interest rates and an increase in the minimum wage. These strikes delay cargo and raise the cost of importing and exporting in Brazil. However, the strikes do not appear to have deterred foreign company involvement in or trade with Brazil.

Brazil contains the second largest oil reserves in South America (after Venezuela), at 7.4 billion barrels. Although Brazil continues to strive for self-sufficiency in oil production, it is unlikely that the country will reach this goal within the next few years. Petrobras produced an estimated 1.4 million barrels per day (bbl/d) in 1999, up 0.2 million bbl/d from 1998 production. Brazil's oil imports come mostly from Venezuela and Argentina.

Industry Organization
In 1997, the National Petroleum Agency (ANP) was created when President Cardoso signed the Petroleum Investment Law. As outlined in the law, ANP is responsible for overseeing the process of opening up Brazil's petroleum industry to other domestic and foreign players. In addition to raising much needed capital for the government through concessions and the selling of certain parts of the sector, the opening of the industry also ultimately is hoped to bring about self sufficiency in oil production for Brazil.

Since its inception in 1953, Petrobras has had a monopoly over the rights to exploration, production, refining, distribution and the international sale and purchase of oil throughout Brazil. Prices for Petrobras oil were fixed. However, Petrobras's sole position came to an end in July 1998 when ANP announced that more than 92% of the nation's sedimentary basins were to be put up for bidding to other oil companies. Also in 1998, the Petrobras oil price became linked to world oil prices, and price controls are expected to end completely by 2001.

Brazil will offer 18 billion common shares of Petrobras for sale on August 1, 2000. The shares are worth an estimated 8.5 billion real ($4.7 billion). The government will keep a majority 51% stake in the company. According to press reports, interested buyers can subscribe to the sale between June 27 and July 28. The 31.7% stake in voting capital will be sold in blocks with the minimum application set at 300 real ($167) and the maximum set at 100,000 real ($556,000). Complete privatization of the company is unlikely before the conclusion of Cardoso's presidential term in 2003.

Exploration and Production
The first Brazilian licensing round occurred in June 1999, when ANP sold the exploration rights to 12 of the 27 blocks being tendered for a total of $183 million. These blocks, which are extremely large (the average size of each area is 1,800 square miles, equivalent to 225 blocks in the Gulf of Mexico), were sold to 10 foreign firms, as well as to Petrobras, which won 5 of the 12 blocs. Of the foreign firms, Italy's Agip won the most blocks, totaling four. Companies such as Unocal, Texaco, Amerada Hess, Repsol YPF, and ExxonMobil also made successful exploration bids, some acting in alliance with Petrobras. Most of the bids came for relatively unexplored but highly coveted areas in over 6,560 feet (2,000 meters) of water off Brazil's Atlantic coast. For example, BP Amoco had a winning bid of $7.4 million for a large offshore block located 186 miles (300 kilometers) from the mouth of the Amazon River.

The second licensing round was concluded in June 2000. This round offered 23 blocks in nine sedimentary basins, including Campos (the Campos Basin is responsible for roughly 70% of the country's current total crude oil output), Amazonas, Camamu-Almada, Parana, Para-Maranhao, Potiguar, Reconcavo, Sergipe-Alagoas, and Santos. Some of the blocks were offered (but not awarded) in the first licensing round, and some were on offer for the first time. In contrast to the first round, the second round included smaller blocks intended to appeal more to smaller oil companies. Contract changes also were designed to encourage smaller bidders, reducing capital requirements. There were a wide variety of blocks available, including onshore, shallow offshore, deep offshore, mature, and unexplored blocks.

The second round has been hailed as more successful than anticipated, with Petrobras winning many bids in partnerships with foreign companies. While there was little participation from the world's major private oil companies, small and independent U.S., Canadian, European, and Brazilian companies' bids earned $261 million for ANP, up more than 40% from the $183 million in the first round. The Campos and Santos Basin blocks generated the most interest, receiving as many as four bids. Only two blocks received no bids. (To view the complete results, click here.)

According to ANP's executive director, ANP plans to continue to hold annual licensing rounds. Brazil's large sedimentary basins afford a plethora of opportunity for further exploration and production activity.

To help meet Brazil's high oil sector investment demand, Petrobras has signed about a dozen oil development partnerships with private firms. In October 1998, Petrobras signed its first upstream participation agreement with a U.S. firm when it agreed with Coastal Corporation and two other partners to begin operations in the offshore Camamu Basin. So far in 2000, joint ventures have been signed between Petrobras and Coastal, Chevron, Texaco, Shell, ExxonMobil, and Repsol YPF.

Brazil still produces ethanol from sugarcane, which is used predominantly for transportation. This program has relied heavily on government subsidies, which were reduced drastically in 1997. On November 1, 1999, all price subsidies paid to ethanol were eliminated. Ethanol producers' prices increased 216% from May through November 1999, according to the Brazilian Finance Ministry. Ethanol consumer prices rose 73% during the same period.

In addition to liberalization of Brazil's upstream oil sector, changes are underway to allow foreign and other domestic firms to compete with Petrobras in the downstream sector of the industry. Petrobras currently imports some petroleum products for its domestic market. In May 1999, ANP allowed companies to import higher-quality fuel oil at market prices. According to law, ANP must free imports of gasoline, diesel, jet fuel and other petroleum products by August 2000. Further downstream deregulation should allow other firms to enter into the growing import market or to develop manufacturing capacities of their own.

There are 13 crude oil refineries in Brazil, 11 of which belong to Petrobras and comprise 97% of total refining. The end of Petrobras's monopoly has brought about fewer changes in the refining sector than in other parts of the industry. This is attributed to the relatively lower profit margins offered and the worldwide surplus in refining capacity.

Brazil's natural gas production and consumption rose steadily throughout the 1990s, with each figure reaching about 202 billion cubic feet (Bcf) in 1998. Natural gas reserves as of January 2000 stood at 8.0 trillion cubic feet (Tcf), the fourth-largest in South America behind Venezuela, Argentina, and Peru. The offshore Campos and Santos basins hold the largest Brazilian gas fields. Offshore southeast Brazil is hydrocarbon rich yet underexplored, leaving potential for significant increases in reserves and production. Past exploration activities have focussed on oil rather than gas.

Brazilian natural gas consumption is expected to rise from 3% of total energy consumption to 10% by 2010 as the country works to become self-supporting in the oil sector and to lessen its dependence on hydropower. The Brazilian government plans to construct 49 natural gas-fired power plants by 2010. Some estimates predict that gas consumption in the more heavily populated southeast will rise 2.5 times from 1999 levels by 2007. Much of this increase is expected to be fueled by imports, although Brazilian discoveries could mitigate the need for dramatic increases in natural gas imports.

Industry Organization
Natural gas exploration and production historically have been carried out by Petrobras. Distribution, however, was handled at the state level. In accordance with Brazil's national privatization agenda, plans are underway to privatize parts of the country's natural gas sector. Because Brazil maintains a highly federalized government system, many state governments are now shouldering heavy fiscal responsibilities. In an effort to raise necessary working capital, state governments have begun to sell their state natural gas distribution companies.

The first pipeline to connect Brazil to foreign gas sources was the Bolivia-to-Brazil pipeline[writer's bolding], tapping Bolivia's Rio Grande sources. Partners in the pipeline project include BTB (BG, BHP, and El Paso) at 21%, Transredes at 20%, Shell and Enron with 7% each, and Gaspart with 3%. The project began in 1996 and cost $2.1 billion. It came onstream in July 1999, with service to Sao Paulo, to be followed by an extension southward to Porto Alegre. The completed pipeline covers 1,432 miles. The pipeline is not operating at its 1,060 thousand cubic feet per day (Mcf/d) capacity, and capacity is not expected to be reached until between 2004 and 2010. Brazil's economic slowdown in the wake of the January 1999 currency devaluation suppressed demand growth, causing plans for new gas-fired power plants to be shelved. The power plants had been expected to be the major customers of the Bolivian gas. One power plant is currently under construction by Enron at Cuiaba, and it will be fueled through a spur off the main Bolivia-to-Brazil line.

Despite the current oversupply, demand is expected to increase sufficiently in the coming years to warrant further pipeline construction. There is a 273-mile, $250-million, 88-Mcf/d pipeline under construction, from Paraná, Argentina, to Uruguaiana, Brazil, which will provide gas to a $350-million, 500-megawatt (MW) AES power plant in Uruguaiana. Service is expected to begin in June 2000. Additional Argentina-Brazil pipelines are in various stages of planning, although recent natural gas discoveries in Bolivia and potential Brazilian discoveries could prevent development of the pipeline projects. These potential Argentina-Brazil pipelines include the Cruz del Sur, Trans-Iguacu, and Mercosur pipelines. The Cruz del Sur would extend to Brazil the Argentine-Uruguayan pipeline that currently is under construction. The Trans-Iguacu pipeline would cross from northern Argentina's Noroeste Basin into southern Brazil. The Mercosur pipeline would tap northwestern Argentina's Neuquen Basin to Curitiba, Brazil, and could extend to Sao Paulo. It also is possible that a second Bolivia-Brazil pipeline will be built.

Northern Brazil has an energy infrastructure separate from the more densely populated southern part of the country. Rising natural gas demand in the northern parts of the country probably will not be met with gas from Bolivian or Argentine sources, but rather with imports from Venezuela and/or Trinidad and Tobago. These imports could be in the form of liquefied natural gas (LNG).

Brazil's recoverable coal reserves are estimated at approximately 13.2 billion short tons of lignite and sub-bituminous coal, the largest coal reserves in Latin America. Due to the high ash and sulfur content and low caloric value of its domestic coal, Brazil imports a significant amount of coal. Production in 1998 was approximately 5.2 million short tons (Mmst), while consumption was an estimated 28.8 Mmst.

Coal is used predominantly for Brazil's domestic steel industry, with a small portion burned to generate electricity. A 1996 study by the International Energy Agency (IEA) concluded that Brazil will continue to be one of the world's major coal importers during the next 10 to 15 years, with imports possibly doubling by 2010. The country's steel industry is expected to remain the largest domestic coal consumer for the foreseeable future. Brazil plans to increase its use of steam coal (both domestic and imported) for electric power generation.

Brazil has installed electric capacity of 62.4 million kilowatts, 87% of which is hydropower (as of January 1, 1998). Of the 316.9 billion kilowatthours (bkwh) generated in Brazil in 1998, 91% was from hydropower. Together with Paraguay, Brazil maintains the world's largest operational hydroelectric complex, the Itaipu facility on the Paraná River, with a capacity of 12,600 megawatts (MW). Brazil's remaining electricity generation capacity comes from coal and an ever-increasing amount from natural gas. Brazil's small northern and larger southern electrical grids were joined in January 1999 into one grid that serves 98% of the country.

Electricity demand growth has exceeded GDP growth in recent years, and many analysts are concerned that construction of new generation facilities will not keep pace with demand, resulting in shortages. New generation capacity has not been constructed as quickly as government officials had hoped. Hydro sources in the southern part of the country are considered to be mostly exploited, and heavy reliance on hydropower has left the country's electricity supply vulnerable to drought and water shortages. In another attempt to meet growing power demand, Brazil has begun importing electricity from neighboring Argentina. Plans to import electricity from Venezuela moved ahead in April 2000, when Venezuela announced that it had reached agreements with indigenous peoples living along the border area allowing construction of 500 kilometers (310 miles) of electric transmission lines to join the two countries.

Privatization is underway in the electricity sector, although it stalled slightly in the wake of the January 1999 currency devaluation. Generation is in the process of changing over to private control, distribution is mostly in private hands, and transmission is expected to remain under government control in the near term. Eletrobras, the federal utility company, currently controls 50% of the country's installed capacity and most of the large transmission lines. The generation assets are expected to be sold in the next two to five years, while there are no plans to sell the transmission assets. Eletrobras coordinates and supervises the expansion and operation of the generation, transmission and distribution systems. Eletrobras also assists in financing the expansion of the power sector, making it one of the largest agencies for long-term financing in the country.

Successful bids for Brazilian generation facilities include U.S.-based Duke Energy's July 1999 purchase of Paranapanema, part of the former Sao Paulo Energy Company, with installed capacity of 2,300 MW. As of January 2000, Duke held about 95% of Paranapanema. U.S.-based CMS Energy announced in September 1999 intentions to buy a controlling stake in Grupo Companhia Paulista de Energia Electrica (CPEE), a group of electric distribution companies. In September 1999, U.S.-based El Paso Energy opened the 158-MW Rio Negro power plant, which supplies Eletronorte, a subsidiary of Eletrobras. In January 2000, Alliant Energy agreed to become a significant stakeholder in four utilities serving the northeast. El Paso is in the process of completing the 409-MW Termonorte project, supplying western Brazil with natural gas sources from the Urucu basin. The completed Termonorte project will make El Paso Brazil's largest independent power producer (IPP).

To better accommodate the purchase of electricity both domestically and from its neighbors, Brazil currently is in the process of creating a wholesale energy market. Under such a system, generation, consumption and prices would follow free market conditions, allowing for quicker responses to the fluctuations of supply and demand. The Brazilian Wholesale Electric Energy Market Administrator (ASMAE) announced in April 2000 intentions to create an Internet-based electric trading system. The system is expected to be in place by late autumn or early winter 2000.

Nuclear Power
Nuclear power generation is on the rise in Brazil, which has the world's sixth-largest uranium deposits. There are two operational nuclear plants, Angra-1 and Angra-2, and one under construction, Angra-3. Angra-1 was bought from the U.S. company White Westinghouse in 1969. The Angra-2 plant came online in 2000, 23 years and $10 billion after construction began. Angra-3 will be larger and cheaper than its predecessors. The nuclear program historically came under the Ministry of Defense rather than the Ministry of Mines and Energy, and decreased funding for the military translated to delays in nuclear power plant construction. The Angra plants had been associated with the state utility Furnas Centrias Eletricas (Furnas), now slated for privatization in the next month or two. The Angra plants no longer are associated with the utility, and a new government company, Eletronuclear, has been created to assume responsibility for the plants. When all three plants are operational, nuclear power will comprise an expected 4% of the nation's total power generation.

Brazil is a major player in discussions regarding the environment. Brazil's Amazon rainforest comprises 30% of the world's remaining tropical forests, and in addition to providing shelter to at least one tenth of the world's plant and animal species, the Amazon rainforest acts as a mechanism for absorbing carbon dioxide from the atmosphere.

Brazil is the largest energyconsumer in South America, consuming 8.1 quads of commercial energy in 1998, and the third largest in the Western Hemisphere behind the United States and Canada. While total energy consumption statistics place the country as prominent in the region, Brazil's per capita energy consumption of 50.0 million Btu is comparable to the average per capita energy consumption for all of Central and South America. Brazil also is the largest emitter of carbon dioxide in the region, releasing 84.5 million metric tons of carbon into the atmosphere in 1998. Although Brazil's carbon emissions are fairly significant in the region, carbon intensity, the amount of carbon emitted per dollar of GDP, is comparatively low. In 1998, carbon intensity measured 0.15 metric tons of carbon.

One reason for the comparatively lower carbon intensity in Brazil is the significant use of hydropower in the energy mix, as well as the use of biofuels and other forms of renewable energy. One prominent biofuel in the Brazilian economy is ethanol. The ethanol program was initiated partially in response to the oil shock of 1973, and partly as an alternative to oil to promote self-sufficiency. The ethanol program also has been one of Brazil's strategies to mitigate the environmental effects of rapid urbanization.

As the 21st Century approaches, Brazil's government is facing the challenges that environmental conditions are posing. In January 1999, Brazil's Congress implemented an environmental pollution law that fines polluters for environmental standards violations. Industrial polluters have five years to come into compliance with the new law, after which they can be fined from $50 to $50 million dollars for violations.