Can Brazil live up to the hype?

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Good morning and welcome back to Energy Source, coming to you from London and São Paulo.

In London we have woken to news of the latest international exit from the restive, oil rich swamps of Niger Delta.

Shell, which picked up its first onshore exploration licence in Nigeria in 1938, has agreed terms to sell the 68-year old Shell Petroleum Development Company of Nigeria (SPDC) to a consortium of five predominantly Nigerian producers. Shell has been trying to get out of Nigeria’s onshore market for three years but had to pause the sales process due to a local court case. It says that hurdle is resolved but let’s see how they fair.

Energy Source readers may remember that ExxonMobil announced a similar exit in 2022, only for the deal to lose the support of the Nigerian presidency. Eighteen months later it is still incomplete. The FT’s Nigeria correspondent Aanu Adeoyo looked at the exodus for Energy Source in December and we will keep a close eye on the Shell deal going forward.

In today’s newsletter though we are approximately 6,000km west of Nigeria in Brazil, where our correspondent Michael Pooler has been investigating the prospects for green hydrogen.

Thanks for reading. (Tom)

What it will take for Brazil to become a green hydrogen hub

It is perhaps little-known outside Brazil that the country boasts one of the greenest electricity systems of scale in the world. Almost 90 per cent of its power comes from renewable sources — mostly through hydroelectric dams, but there has also been strong growth in wind and solar in recent years.

This fact underpins excitement among energy industry figures, investors and policymakers that Latin America’s largest economy can become a major producer of so-called “green” hydrogen (H2).

Hailed as a fuel of the future, green H2 is a version of the gas made from water through the process of electrolysis, using electricity from renewable sources. As it only emits water vapour when burnt, proponents say it has the potential to accelerate decarbonisation, with possible applications in everything from steelmaking and vehicles to heating homes.

A study by McKinsey published in late-2021 concluded Brazil was “one of the most competitive places in the world” to produce green H2. The authors found that levelised cost of the gas in Brazil would be about $1.50/kg in 2030.

Local boosters even reckon that the country’s north-east region, home to some of the most favourable wind conditions on the planet for generating electricity, will be the globe’s biggest hydrogen producer.

The promise has attracted heavyweights such as Shell, which is jointly developing a pilot plant expected to be ready by 2025. Low-carbon hydrogen projects worth some $30bn (and in different stages of implementation) have been announced, according to the environment ministry.

Alongside the domestic market, where inexpensive green H2 could help develop a local fertiliser industry to supply Brazil’s booming agricultural sector, there is also the prospect of exports.

A first wave of shipments is likely to be focused on H2 derivatives to Europe, according to a study by Boston Consulting Group last year, which reckons Brazil could capture 10 per cent to 15 per cent of global exports by 2030. The EU in June even pledged €2bn for green H2 production in the country.

But for all the hype, a number of obstacles need to be overcome for green H2 to take off in the South American country. A regulatory framework will be key to providing legal certainty for investments, say experts.

“The government needs to create subsidies for this market,” Gustavo Silva, a local executive at French renewable energy developer Qair, told me for an FT Big Read published today. It is planning a R$21bn (US$4.3bn) green H2 investment at the Suape port in Pernambuco state. “We will be competing with other countries that offer highly competitive scenarios.”

Alexandre Silveira, Brazil’s energy and mines minister, however, told the FT last year that Brasília would find it difficult to fund large government subsidies, as some wealthy nations are doing, because of budget constraints.

Other support mechanisms could be deployed instead, said Marina Domingues of consultancy Rystad Energy, such as the government guaranteeing to purchase part of the low-carbon hydrogen output.

“Hydrogen projects in Brazil have important risks, especially on the offtake and on the supply chain — how to get and secure electrolysers and other components,” Domingues added. “We’re still waiting for clarity whether the policy and political scenario will give enough structure for the market to develop locally.”

With draft legislation before Congress for both H2 and offshore wind (Brazil does not yet have any turbines installed in the sea), the coming months could provide crucial regulatory developments. The planned creation of a regulated carbon market in the country could help too, as it forces polluters to reduce their greenhouse gas emissions.

“South America in general is a great location for H2 producers because it has that renewable energy potential,” Domingues said. “However in terms of policy guidance it is behind other regions such as Europe and the US.” (Michael Pooler)

Power Points

Energy Source is written and edited by Tom Wilson, Jamie Smyth, Myles McCormick and Amanda Chu, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.