With energy resources that are the envy of much of the world, it seems strange to envisage towns and cities across Brazil facing power cuts. For months last year, drought has drained the country’s hydroelectric reservoirs, critical power-generating infrastructure, to record low levels. Brasília will increasingly turn to its southern cone neighbour Argentina, with whom it has signed agreements to import natural gas in the coming months. These are not cheap and economic ramifications are likely to persist for some time. 

The rains have returned but it will take between two to three years before the reservoirs return to previous levels. This is according to forecasts published by the ONS – Brazil’s national grid operator.     

There are domestic political considerations at play here too for both Brazil and Argentina. Buenos Aires is in chronic need of fiscal manoeuvrability and the prospect of revenue from increased exports to an energy-deficient Brazil is an attractive option. In addition, it will allow Argentina to pump funds into projects of its own including the Vaca Muerta gas pipeline and electrical infrastructure works.  

For Brazil, elections loom later this year – President Jair Bolsonaro is keen to keep energy bills to a minimum as he seeks to broaden his electoral appeal amidst record-low approval ratings. Reacting to the drought, the Government did authorise thermoelectric plants to begin operating – these however are expensive to run and it remains difficult to see how the Bolsonaro administration can avoid passing these costs onto consumers.    

Energy exports to Brazil are at an all-time high. In December, Brazil’s Ministry of the Economy revealed that exports from Argentina had exceeded USD 1.3 billion. Brazil is also pressing ahead with plans to construct a 570-kilometer gas pipeline between the Uruguayan power plant and Porto Alegre in the southern state of Rio Grande do Sul, at a cost of around USD 600 million. The intention is that the pipeline will then connect across the border to Argentina and ultimately to the vast shale gas reserves in Neuquén province.

"We will have to wait and see if Vaca Muerta goes ahead. It will depend on the value of bids generated by the tender ... Brazil may not be the most feasible option."

Energy investor, Argentina

An investor active in the gas, electricity and wind sectors based in Argentina, was a little sceptical that the pipeline would come to fruition, “Ultimately, we will have to wait and see if Vaca Muerta goes ahead. It will depend on the value of bids generated by the tender and if the price is not attractive, for which there is always a possibility, selling to Brazil may not be the most feasible option. One must also take into account that many countries in Asia and Europe are also very active in the LNG market – they may offer more competitive prices than Brazil can."

"Argentina and Chile have an established track record when it comes to natural gas exports and imports."

Entrepreneur, Energy Industry, Chile

In comparison to the neighbourhood, Brazil is a more challenging export market – contracts for energy imports are often interrupted by political and economic considerations. An entrepreneur in the energy industry in Chile highlighted the distinction with Brazil’s neighbours, “Argentina and Chile have an established track record when it comes to natural gas exports and imports. Both countries have recently seen an uptick in exports to foreign markets. These are exported under firm and non-negotiable conditions, which reassures importers and stands in contrast to Brazil where agreements and contracts can often be interrupted.” 

Both sides have much to gain, they also have much to lose if domestic concerns and market jitters give policy-makers and politicians cold feet.