Oil and Gas Companies--Are They Shifting to Renewables? A Study of Policy Mixes for Energy Transition in Brazil.
| Autor | Noguchi, Alexandre |
INTRODUCTION
There is continuing interest in how policy mixes can favor energy transition (Haddad et al., 2022; Kern et al., 2019). Facing opportunities and threats in a global energy transition movement, oil and gas (O&G) companies started to diversify their business models to comprise new portfolios driven by renewables (Hartmann et al., 2021). O&G companies such as Shell, Total, bp, and Equrnor have all created divisions for renewable energies. Former O&G company 0rsted completely divested its O&G segment in 2017 and it is now a renewable energy organization and one of the most sustainable firms in the world (Corporate Knights, 2022; Pickl, 2019; Stevens, 2016; Timperley, 2021). Public policies involve strategic instruments for an energy transition, as they directly affect firms' investment decisions (Markard, 2018; Rogge & Reichardt, 2016; Sovacool & Geels, 2016). In a statement about the 2021 IPCC report, UN Secretary-General Antonio Guterres said, "... Countries should also end all new fossil fuel exploration and production, and shift fossil fuel subsidies into renewable energy" (United Nations, 2021). While most publications on this subject are from developed countries (Ghosh et al., 2021; Kern et al., 2019) and especially from European nations (Rogge et al., 2017), we found very few publications about the energy transition of O&G companies and policy mixes from major emerging economies--subsumed by the BRICS--that have idiosyncratic institutions and complex socioeconomic challenges compared to developed nations. We argue that there is a need to advance further research that strengthens the analysis of policy mixes for energy transitions in major emerging economies. This article aims to understand the features of Brazils energy policy mix that favor or hinder a transition from O&G businesses toward renewables, moving away from fossil fuels. While the world renewables usage was merely 14% in 2021, Brazils renewable energy sources shared 46% of its national energy matrix, backed by a large production of sugar cane derivatives (e.g., ethanol) and electricity from hydropower--which accounted for 19.1% and 12.6%, respectively, of the total energy supply. In addition, Brazilian renewables also comprise a fast-growing solar and wind energy systems market, which accounted for 1.7% and 8.8% in 2021, respectively (Empresa de Pesquisa Energetica [EPE], 2022; International Energy Agency [IEA], 2021). However, the country still faces grand societal challenges regarding poverty and inequality issues, in which context the royalties from O&G can be a valuable resource to tackle them. By discussing policies for the O&G exploration and production (E&P), we inevitably study subsidies for fossil fuel production, which are less researched than subsidies for consumption (Rentschler & Bazilian, 2017). The central research question (RQ) in this article is: How do Brazils policies favor or hinder an energy transition of oil and gas companies to renewables (7)
To answer this inquiry we organized qualitative research around two processes. First, we relied on the policy mix framework proposed by Rogge and Reichardt (2016) to analyze Brazils energy policy mix regarding its elements' consistency (1) with the transition goals toward renewables. Among the three building blocks of the framework, we analyzed elements (i.e., policy strategy and instrument mix) and characteristics (i.e., the consistency of the elements). Our analysis does not include political processes (i.e., the policymaking and implementation) because they are not relevant to our research question. Therefore, we studied the consistency of the elements to understand how aligned the policy strategy and instruments are toward the transition of O&G companies to renewables. This first stage contributes to enlightening how the policy mix impacts the O&G companies in Brazil Second, we conducted archival research and interviews to gain reliability in our findings by drawing data from multiple sources. We performed archival research about seven major O&G companies in Brazil to find evidence of renewables and O&G activities. We conducted the interviews with O&G industry experts to capture their perceptions of Brazil's policy mix for energy transition and O&G companies' activities. We focused our research on public policies and O&G activities relevant to the exploration and production (E&P) segment. We leave other O&G value chain segments for future research (e.g., refining and distribution).
We discuss the mam barriers in the Brazilian public policies that can hinder a transition toward renewables, including the fossil fuel subsidies that undermine the global efforts to shift resources to a cleaner and sustainable energy matrix. Brazil heavily subsidizes its O&G production because it stimulates shortterm economic growth and creates tax revenue to address social issues. We further discuss if these subsidies have effectively accomplished these two (economic and social) objectives and if the country should still need them. However, at least in the short run, we found that Brazil keeps going in an opposite direction of a needed transition to renewables since it still relies on a fossil fuel exploration regime with plenty of subsidies. Finally, we propose directions for the Brazilian policy mix to favor the transition of the O&G companies toward renewables and to reform their fossil fuel subsidies.
THEORETICAL CONCEPTS AND FRAMEWORK
The transition of O&G companies
O&G companies have sustained their busrness-as-usual models by continuously searching for new reserves, executing enormous projects, and not worrying too much about their operations' externalities (like flaring). However, in a world of growing preoccupation with climate issues and commitment to reducing fossil fuels, their old businesses show signals of failure. One of the pillars of this business model is to maximize the company's proven reserves, which means constantly drilling and acquiring new oilfields to increase their expected future revenue. As the access to low-cost oilfields is getting scarce, companies have been exploring places like ultra-deep waters (e.g., the Brazilian pre-salt layer) or shale (typical in the USA). These oilfields increase the costs of adding new reserves and producing O&G, reduce profitability and make it more difficult for O&G companies to increase their value (Fattouh et al., 2018; Stevens, 2016). Like Brazil's Repetro tax exemption program for O&G, production subsidies are essential to commercially make feasible many of the costly pre-salt layer fields (Centro Brasileiro de Infraestrutura [CBIE], 2019). Nevertheless, the growing number of legislations worldwide that restrict or phase out fossil fuels can favor energy transition policy plans. France and Spain's long-term decisions to date the end of all O&G production in their territory (for 2040 and 2042, respectively), and Canada, which has imposed restrictions for new licenses for offshore O&G in the Arctic (London School of Economics [LSE], 2021), are examples of the plans favoring progress in the energy transition.
Aware of the increasing difficulties of operating their oil and gas-based business model, many O&G companies diversify their portfolios. One common strategy is mergers and acquisitions or joint ventures with renewable energy companies, like bp with Bunge and Shell with Raizen in Brazil for ethanol production. Shell created a 'New Energies' division in 2016 to work with hydrogen, renewable energies, and electrical vehicles (Pickl, 2019), and Total plans to spend 20% of its capital expenditure (CAPEX) on renewables and electric mobility during 2022-2025 (Total Energies, 2021a).
O&G companies are unlikely to transition to renewables as 0rsted did ultimately. It is perilous to move out of their core business, and petroleum products will still be needed for many more decades (Hartmann et al., 2021; Stevens, 2016). As a first step to decarbonizing O&G companies are likely to reduce their carbon intensity deaccelerate their O&G exploration and production (E&P), and diversify their business portfolio with cleaner technologies (Fattouh et al., 2018; Stevens, 2016).
Intnguingly national O&G companies (NOC), like Petrobras (the state-owned Brazilian O&G company, founded in 1953), seem to be behind the private companies, like Shell and Equmor (called international O&G companies, or IOCs), in the shift to renewables. According to one of the interviewees in this study--a petroleum politics researcher from an O&G multinational in Brazil--, NOCs have different concerns than the IOCs, like ensuring the nation's oil supply and resolving social issues. Indeed, NOCs are not driven by stock prices, and they are not pressed for climate actions as the IOCs are. Thus, IOCs are generally pushed to decarbonize faster than NOCs. The interviewee said, "you don't see protests at CNOOC and Gazprom's doors like you see at Exxon's." Cheon et al. (2015) argue that NOCs are generally oriented by their 'national purpose,' and that their political and economic goals come before profit. Petrobras, for example, is a NOC, and it has a clear strategy to focus on O&G production for the following years, with very few activities in renewables (Petrobras, 2021). The state should serve as an example, but these contradictions suggest that private O&G companies are more interested in the energy transition than governments of oil-exporting countries.
The Brazilian energy matrix
According to the Brazilian Company of Energy Studies (EPE, 2022), Brazil's energy matrix comprises 46% of renewables. In contrast, the world average is merely 14% (EPE, 2022; IEA, 2021). Table 1 presents the breakdown of each energy source in the matrix.
When it comes to the electricity matrix, the share of renewables is 83% in Brazil, and the world average is 27%. This high share of renewables comes from hydropower (65.2%), biomass (9.1%), wind power (8.8%), and solar power (1.7%)...
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