OPINION: The oil dilemma: why Brazil needs to channel its fossil wealth into the green transformation

Despite the resilience of the pre-salt layer, the country risks missing the opportunity to become a global leader in clean energy if there is no strategic management of revenue, writes Nicolas Lippolis

Nicolas Lippolis, founder and executive director of the CEFD (Centre for Energy, Finance and Development).

Today, Brazil ranks among the world’s major oil producers, driven primarily by ultra-deep pre-salt reserves. In 2024, crude oil became the country’s main export product, overtaking soya.

However, this expansion occurs at a time of global uncertainty regarding the future of the oil and gas industry, raising a crucial debate: is the country prepared for a decarbonising world?

The International Energy Agency (IEA) and most current forecasts indicate that global demand for oil and gas is expected to peak by 2030. From then on, substitution by competitive low-carbon technologies should accelerate the decline.

Despite this scenario, the Brazilian oil and gas sector, dominated by Petrobras, has characteristics that make it particularly resilient. With an average breakeven cost of around 28 dollars per barrel, most pre-salt production should remain competitive even with falling global prices.

Furthermore, Brazilian oil extraction features greenhouse gas emissions below the world average, allowing it to remain competitive even in a scenario where emission levels become a criterion in the global trade of this product.

Production is projected to peak at 5.4 million barrels per day (mbd) in 2030 and, in an energy transition scenario, Brazil could gain market share in the international oil market.

However, this resilience does not eliminate the risks. Petrobras estimates that 35% of its exploration and production projects would lose value in a Net Zero scenario, where global net greenhouse gas emissions reach zero and the global temperature rise is limited to 1.5°C above pre-industrial levels.

Moreover, production in new exploratory frontiers, such as the Equatorial Margin, which would only reach the market after 2030 and have a lifespan extending into the 2060s or 2070s, faces a higher risk of becoming stranded assets, losing value before the end of their useful life.

On the other hand, even in the most ambitious global energy transition scenario, where demand for fossil fuels drops drastically, most of Petrobras’s oil and gas projects would still be considered profitable due to their low production costs (pre-salt).

However, the risk of stranded assets is significantly higher in this scenario.

Unlike other producing countries, Brazil’s economic dependence on the oil sector is limited: it is estimated that the sector generates around 600,000 direct and indirect jobs, which equates to less than 1% of the workforce.

Similar considerations apply to fiscal dependence: despite the heavy reliance of some municipalities in the Southeast region and the state of Rio de Janeiro on pre-salt royalties, oil and gas extraction represents only 5% of federal government revenues—a level much lower than that of the ‘petro-states’ in the Middle East, Africa, or Central Asia.

Recent studies point out that oil revenue in Brazil is poorly managed for several reasons, such as its heavy concentration in a few states and municipalities adjacent to production sites, as well as the fragile regulation of the Social Fund, established to administer the royalties destined for the federal government.

There is also an absence of clear and stable policies linking the use of oil revenue to finance the energy transition, among other climate and environmental actions, despite the narratives that have been constructed by the sector.

Therefore, regarding the impacts of the decline in international oil and gas demand on Brazil, the greatest risk is not that the sector will become uncompetitive, but that the country will fail to seize the opportunities offered—both by the increase in oil revenue and by the decarbonisation of the global economy.