Brazil’s Energy Sector Needs Reform. Is Bolsonaro Up to the Task?

Tânia Rêgo / Agência Brasil / CC BY 2.0

Brazil’s president will need to work with Congress for the country to make good on its energy potential.

Revitalizing Brazil’s energy sector will be key to Jair Bolsonaro’s success as president – but so far, he’s had mixed results when it comes to getting reforms through Congress. Unless Bolsonaro learns to work with legislators and ease turbulence within his government, Brazil’s missing energy reforms will continue to threaten its economy, and its politics.

First, the good news. Oil production is on track to meet the administration’s target – with several large platforms beginning production this year, OPEC projects a supply growth in Brazil of 300,000 barrels per day in 2019, second only to the U.S. among non-OPEC nations.

However, beyond crude production, deep reforms in crucial areas of the energy sector are needed. Refining, natural gas transport and distribution and electricity generation remain stubbornly concentrated in the hands of state companies, stifling investment and weighing on economic growth.

Bolsonaro’s combative relations with Congress make reforms more difficult, but not impossible. Brazilian industry is plagued by some of the highest natural gas prices in the world, paying up to seven times as much for gas as companies in the United States, according to Carlos Langoni, former president of the Central Bank and architect of the proposed gas reform. In response, the administration hatched a plan to open the gas sector, which is currently dominated by Petrobras. The measures, presented to Congress this week by Mines and Energy Minister Bento Albuquerque, seek to reduce the price of natural gas by 40% in about two years. The designers of the plan estimate that these lower energy prices could increase industrial GDP by 8.4%.

The most crucial element of the plan is the liberalization of access to Brazil’s natural gas pipeline capacity, which is currently controlled almost entirely by state oil company Petrobras, even though it uses a mere 40%. Granting open access to pipelines would enable multiple players to market natural gas. It would also allow private companies that produce natural gas as a byproduct from offshore oil fields (set to nearly triple in the next four years) to the domestic market for power generation and industrial use.

But a broader power sector reform is also needed. Recent years have made it increasingly clear that Brazil must reduce its heavy reliance on hydroelectric dams (in May hydropower generated around three-quarters of the country’s electricity). In 2018, water levels at dams in the populous southeast and central west fell below historical averages for the fifth straight year. Wind and solar capacity are rapidly expanding, but starting from a small base, meaning power providers must turn to more expensive thermal generation when dams are low. In Rio de Janeiro, electricity bills have more than doubled in the past decade, well outpacing inflation. Around 40% of the electricity rate stems from taxes, largely determined and levied by state governments.

The Bolsonaro administration can take the lead in reforming the power sector to diversify Brazil’s energy matrix. Albuquerque has touted the potential of nuclear energy and supports the opening of Brazil’s uranium reserves to private companies, and he has argued in favor of new coal plants to maintain the fuel’s share of generation to 2027 as demand swells. Bolsonaro has also pushed for more small-scale hydroelectric plants.

But few new ideas have been offered to accelerate investment in renewable energy or implement an overarching reform (though the cheaper gas that the government is pursuing would help). A main focus of the administration in the power sector has been proceeding with plans, initiated under former President Michel Temer’s administration, to divest the government’s controlling stake in Eletrobras, Latin America’s largest electricity firm, which manages about a third of Brazil’s power generation and half of its transmission. Raising revenue is a principal reason for the sale of shares, but privatization could also modernize the firm, make it more efficient, and enhance transparency, in turn attracting more long-term investment. Over 15 years, Eletrobras lost 186 billion reais (about $48 billion at current exchange rates) due to politicization and inefficiency, according to 3G Radar, an asset-management firm that holds Eletrobras shares.

Brazil’s refining and fuel markets also need to be opened to more competition. Petrobras controls 98% of the country’s refining capacity and, thanks to its virtual monopoly, sets fuel prices for all of Brazil. Under previous governments, Petrobras was forced to sell fuel below market prices, creating losses for the company that contributed to unsustainable debt levels. Temer sought to end fuel price controls and raise prices at the pump, but backed away from the plan last year when hundreds of thousands of truck drivers paralyzed the country during a strike to protest high diesel prices.

Bolsonaro, for his part, promised not to interfere in fuel pricing. But on April 12, he rattled markets when news emerged that Petrobras CEO Roberto Castello Branco had suspended a planned diesel-price increase after receiving a call from the president. Bolsonaro vowed in a written statement days later that he could not and would not interfere in Petrobras. But his misstep signaled to investors that his instincts may not align with the views of his economic team of free-marketeers, and provoked concern that he would cave to popular pressure to subsidize diesel.

The action also damaged Petrobras’ plans to sell refining and fuel distribution assets, a move that would open space for private players. Petrobras intends to cut its refining capacity in half by selling eight refineries to shore up its finances and focus on the more profitable oil exploration and production business. On June 6, Brazil’s Supreme Court ruled that state-run firms do not need congressional approval to sell their subsidiaries, thus removing one potential barrier to Castello Branco’s privatization plans. However, the ongoing threat of a return to price controls is hampering interest in purchasing these assets and Petrobras has failed to find buyers. Furthermore, the oil workers union that brought the court case against Petrobras’ divestment plan may well continue opposing the refinery sales through strikes, and a sizable minority front in Congress will try to keep alive the debate over selling assets without the legislature’s consent.

Encouragingly, Bolsonaro’s relations with Congress have recently thawed somewhat. In early May, the president of the Chamber of Deputies, Rodrigo Maia, said as much and indicated that he expected a pension bill to pass the lower house in the first half of the year. Bolsonaro’s rearrangement of ministries was approved a week before the deadline. At the end of May, the president met with the heads of Congress and the Supreme Court, seeking a “pact of understanding and goals” to jointly back a number of vital issues. Bolsonaro’s political frailty may have dawned on him, and he may be ready to play by the rules. If he can navigate the political system and dodge popular pressure for subsidies in order to push through critical energy reforms, this would bode well for further reforms needed in other sectors to revive Brazil’s economy.

View this article in Americas Quarterly.