Navigating Risk in Brazil’s Energy Sector

With presidential elections on the horizon, great uncertainty surrounds the future of Brazil’s energy policy. A new report from the Inter-American Dialogue finds that, in the face of many barriers to investment — from price controls and stringent local content stipulations to a lack of familiarity with local market dynamics — Chinese investors are moving at a measured pace into Brazil’s energy sector, with far more interest in some industries than others. As investment opportunities open up around the world, Chinese firms are also increasingly weighing the costs and risks of investing in Brazil with investment options elsewhere, according to the report, edited by the Dialogue’s Margaret Myers and Lisa Viscidi.

Highlights from the new report include:

• Regulatory risk and nationalist energy policies have deterred investment, not only from major international oil companies, but also from Chinese firms. Operational inefficiencies, production delays, and enormous upstream losses for Petrobras have created a specter of uncertainty among foreign oil companies – CNPC and CNOOC included – about their future investment in Brazil.

• China has made quick inroads into Brazil’s hydroelectricity industry, with Chinese firm State Grid on track to double investment to US$10 billion in 2013-2015 and move into the generation and distribution markets in the next five years.

• Chinese investment in Brazil’s nontraditional renewable energy sector, including wind and solar, has also been limited due to price controls, regulatory uncertainty, and strict local content rules. But investment in the long term is likely to grow as hydroelectric projects face growing public resistance, Brazilian firms lack the necessary technology to scale their operations, and Brazil becomes a more attractive market amid declining demand in Europe and the United States.

• In the longer term, there is a stronger possibility for energy policy reform, given the growing realization that the current framework is unsustainable. The next government should liberalize price caps and moderate local content restrictions. For their part, Chinese firms should continue improving engagement with local communities and dialogue and cooperation with Brazilian firms.