Source: Reuters
The perceived tension between environmental sustainability and economic development lies at the heart of many domestic and international climate disputes. Brazil, the world’s sixth most populous country and the twelfth largest economy, is no exception. However, one of its “national champions,” the state-owned oil company Petrobras, can forge a path forward reconciling the two interests.
Today, Petrobras might be a confusing choice to spearhead the transition to a low-carbon economy. The company has recently been under increasing environmental scrutiny and embodies physical and transition climate risk dilemmas. Last month, the Brazilian Institute for the Environment and Renewable Natural Resources (IBAMA), the country’s environmental agency, denied Petrobras’ petition to drill at the mouth of the Amazon River. Facing only 12 years left of known oil reserves, the Brazilian oil company has appealed the decision.
The governmental back and forth generated a political crisis between the country’s political branches. The uncertainty has also cast doubt on President Luiz Inácio Lula da Silva’s promises to strengthen Brazil’s environmental record, even as he promised at a Paris climate meeting in June to reach zero deforestation in the Brazilian Amazon by 2030. In the 2015 Paris Accords, through its Nationally Determined Contributions (NDCs), Brazil committed to reducing greenhouse gas emissions by 43 percent below 2005 levels by 2030. Reports suggest Lula could increase the country’s NDC to 50 percent.
Lula has a justified sense of urgency given Brazil’s exposure to physical and transition climate risk. Adverse impacts such as droughts and water level changes could devastate the country, which relies on climate-sensitive sectors. Agribusiness represents 27.5 percent of its GDP and hydropower powers 55 percent of Brazil’s energy. However, Brazil has excellent renewable potential. The Brazilian Northeast has installed 21.03GW of energy in more than 750 wind farms. The region has more than quadrupled solar capacity in 10 years with projections doubling again by 2030.
If Lula intends to meet this more ambitious commitment while reconciling the environmental and labor-focused parts of his base, Petrobras will need to pivot from new drilling exploration to deepening its evolving initiatives to a green transition, such as evaluating possible joint ventures with Norway’s Equinor and China Energy International. Petrobras needs to move faster.
Mauricio Tolmasquim, Petrobras’ energy transition director, mentioned publicly that the company is already late for the energy transition. Petrobras moving to renewables would greatly aid the transition. According to Europar, the sector emissions went from 6.7 percent to 8.9 percent from 2005 to 2019. When assessing carbon emissions by economic sectors, energy, and heat increased the most. The second highest increase came from transport. Both are core parts of Petrobras’ activities.
Petrobras would transition at a time when international investors are increasingly bullish on renewable energy in Brazil. Solving this problem, Brazil and its energy sector stand to lead the region forward in this evolution. Such a transition, however, comes with serious risks. The company must rethink its capital investments while maintaining its social commitments, which rely on oil reserves projected to decrease quickly.
Petrobras’ 2023-2027 strategic plan aligns with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and seeks to increase investment in renewable energy sources such as wind and solar. However, in said plan, the company allocates just six percent (USD 4.4 billion) to low-carbon energy and 83 percent (USD 65 billion) to its oil and gas exploration endeavors. In 2012, Brazil’s Congress implemented a Royalties Law mandating Petrobras to contribute Pre-Salt exploration royalties to health and education, firmly establishing that the company has a defined role within Brazilian society.
In addition to engaging in an energy transition, Petrobras also has economic incentives to abandon business as usual. Brazil currently retains just 12 years of known oil and gas reserves, and according to data from S&P Capital IQ, Petrobras’ profitability is expected to drop 33 percent between 2022 and 2025. The price of Brent crude oil is predicted to decline by 18 percent from August 2023 to July 2028. Brazil’s oil and gas consumption growth rate is anticipated to decrease from 4.9 percent to 1.1 percent between 2023 and 2032. Therefore, Petrobras’ current and upcoming strategic plans should focus more on renewable energy, which has an upside growth potential and helps Brazil meet its Paris Agreement commitments.
Meanwhile, reports by Fitch indicate a surge of agreements with Chinese, French, and Spanish renewable energy corporations and Brazilian state-owned and private companies in the Brazilian states of Minas Gerais and Ceará. Non-hydroelectric renewable energy generation is projected to grow by 5.9 percent, beating the projection of the larger energy market, which sits at 2.5 percent.
Experts acknowledge that Petrobras has a “fundamental role” in supporting a green transition by focusing on biodiesel fuels, sharing energy infrastructure with renewables, carbon capture, and research investments in low-carbon energy. These expectations are in line with the company’s history. In the 1970s, Petrobras helped lead projects in Brazil that laid the groundwork for biofuels, such as ethanol and biodiesel. The company must take center stage in this latest transformation or risk alienating its environmentally conscious domestic and international investors that range from Brazil’s National Development Bank (BNDES) to Black Rock and Norges Bank.
Petrobras has taken significant steps. Between 2015 and 2022, the company reduced its CO2 emissions by 39 percent and issued a USD 1.25 billion green bond in 2022. This was followed by a statement from Petrobras President Jean-Paul Prates this year that renewables and wind power are company priorities—as seen in the recent creation of a new director position for energy transition and sustainability.
Yet, most of its emissions decline came from reducing power generation, while emissions from exploration and production fell only 19 percent. Petrobras would need to overhaul its strategy to cut its emissions sustainably, but leaning into the energy transition will put the company in a position to command this emerging field. In May, it proposed a revision to the strategic plan that would allocate as much as 15 percent of its capital expenditures to low-carbon projects. Petrobras should increase by raising that amount annually and incrementally to at least 40 percent by 2030. This new plan and allotment will be voted on in November.
Brazil’s government also has a role to play. Brazil’s Congress revised the Royalties Law in 2013 to provide socially oriented royalty money to non-petroleum-producing states. Combining the spirit of that revision with the need to incentivize social buy-in for the transition, Congress should again revise the law to create a new royalty category for the social distribution of royalties from green energy production.
Given Petrobras’ high profile in the energy sector with proven expertise in low-carbon emission technologies, such as hydropower and biofuel, taking the discussed steps could secure Brazil as a hemispheric leader in green energy and the decarbonization transitions. These activities will establish Petrobras as a vital energy and environmental agent and will maintain the company’s role as a contributor to social good while assisting the country in achieving its NDC commitments.
Fernanda Barbosa is a strategic consultant for SMEs and was formerly an asset manager in private equity real estate. She earned her MBA at the Bayes Business School in London, finished a specialization in Sustainable Finance at the University of Cambridge, and has her civil engineering degree from Unicamp. Fernanda is based in São Paulo, Brazil.
Steven Hyland Jr. teaches Latin American history and sustainable finance courses at Wingate University and researches capital markets and sustainability. He is also a Senior Consultant at Responsible Alpha.
Travis Knoll teaches religion, social movements, and Latin America at the University of North Carolina at Charlotte and Wingate University. He is also a Senior Consultant at Responsible Alpha.
