Brazil still needs more electricity. And while there is hydro potential in the north, transmission costs make it impossible for electricity to reach the southern regions

Amerada Hess is a major investor in the oil and gas exploration area, operating four blocks. Amerada’s Kieft says things are looking promising for his firm after vital early negotiations.  “One initial problem was that Brazil used to be very protectionist and there were barriers in place that made it difficult for international companies to import required equipment without paying tax on it. Usually companies pay tax on revenue, not on the investment,” he says. After negotiations through a lobby group, during which it was made clear to the government that such taxes would scare investors away, Brazil allowed tax-free imports of equipment. Kieft considers this an important victory on the path to investing in Brazil.  Moreover, Kieft is very interested in the nascent exploration business, despite no real ground being made. “It’s early days,” he says. “Nobody has really found anything yet. Announcements have been made by a few companies, but nobody has made a major gas discovery so far. But I am confident that we will soon be able to deliver gas soon at a price that can compete with the gas imported from Bolivia.” Until gas is successfully drawn from Brazil’s offshore resources, the vast Bolivia-Brazil pipeline is the source of most of the country’s gas. The pipeline stretches from Bolivia, west of Brazil, to São Paulo and Rio de Janeiro, in the south-east. There is also another a large pipeline that comes in from Argentina. All this means Brazil is Latin America’s largest importer of energy.

What about the environment?

Brazil’s Amazon rainforest accounts for nearly a third of the world’s remaining tropical forest. In terms of energy expansion plans, this puts the country in a precarious position, which environmental groups are keen to monitor.  While these vast forests act as efficient carbon sinks – absorbing large amounts of carbon dioxide and converting it into oxygen – Brazil is the largest emitter of carbon dioxide in Latin America. According to the Washington, DC-based Energy Information Administration, Brazil pumped 84.5 million tonnes of carbon into the atmosphere in 1998, some 1.4% of the world’s output. Environmentalists find this figure horribly high.  But Brazil strongly argued at the 1997 United Nations-sponsored Kyoto Summit on Climate Change that it, like other developing nations such as China and India, should be exempt from cutting emissions, as the need for power generation is still growing.  Thus, even after the Kyoto agreement, emissions are still rising. However, it is hoped that the cuts made by developed countries will offset the emissions of developing nations. Another major environmental risk stems from the actual construction of energy facilities such as generation assets and pipelines. The huge Bolivia-Brazil pipeline runs for more than 2,500 kilometres in Brazil, has the capacity to carry 30 million cubic metres daily and has an off-shoot pipe to Enron’s gas-fired plant at Cuiabá in western Brazil.  One of the investors in the project, US government investment agency, the Overseas Private Investment Corporation, described the pipeline as a “world-class project”. But Atossa Soltani of environmental pressure group Amazon Watch has called it “a world-class disaster”. The pressure group claims Enron has not kept its promises to preserve parts of the Chiquitano forest, through which the pipe runs. Enron has refuted these claims, restating its commitment to the area.  Companies in Brazil clearly must be very careful when considering plans to build facilities in such environmentally protected areas, a fact which has the potential to scupper many development plans.  Tim Kieft at the New York-based independent energy company Amerada Hess says: “The Ministry of the Environment has very clear and publicised objectives and rules. However, the ANP [National Petroleum Agency] has eased the situation by making a commitment to get more staff at the Environment Agency to support the growing industry.

President Cardoso and Brazil’s changing fortunes

Brazil is on the road to recovery. Such is the widely held belief of the international community following the emerging markets slump seen in 1998.  Investor confidence in the emerging markets has been low since many south-east Asian markets crashed, but economies are gradually recovering. Crucial to the upturn in Brazil’s fortunes has been President Fernando Henrique Cardoso, a man with a firm belief in free markets and privatisation.  An increased sense of political stability has also helped Latin America gain a new attractiveness to investors, with relations between South American countries improving over recent years.  Political analysts have partly attributed this increased steadiness to Cardoso’s re-election in 1998 imparting a certain degree of consistency to the largest country in South America. This second term was only made possible by Cardoso’s 1997 changing of the constitution, a move undertaken to ensure his market reforms are completed. It has not been easy for Brazil, which saw its currency, the real, devalued in January 1999. One real is currently worth $0.53. The real, previously pegged to the US dollar, has achieved the independent stability required to make Brazil a more attractive opportunity for national and international investors alike.