Greens call Brazil oil finds a tempting trap

SAO PAULO (Reuters) - Brazil's huge offshore oil find, though an economic treasure chest, threatens to undermine the renewable energy industry the country has worked so hard to build.

A possible oversupply of oil products in the local market once expensive exploration, production and refining initiatives are up and running could make ethanol, biodiesel and hydroelectricity less competitive.

This possibility is feeding a vigorous debate about the country's relatively "green" energy matrix falling into a fossil fuel trap.

The government says it won't make the same mistakes that some oil-rich countries have made -- such as selling gasoline cheaply at home and neglecting other industrial sectors as oil cash flows in -- but market fundamentals can undermine the best of intentions.

"I think Brazil has to be very careful to not let the subsalt exploration take its energy matrix down a dirtier path," said Adriano Pires, director of Brazilian Infrastructure Center, a think tank and consultancy.

"The country cannot succumb to the populist temptation of subsidizing oil products, as some oil-rich countries did in the past," Pires said, echoing many comments in the local press.

Brazil's energy supply in 2008 was 36 percent renewable and 64 percent nonrenewable, according to statistics from oil producer BP. By comparison, energy supply for the combined 30-member OECD group of advanced industrial economies was 5.2 percent renewable and 94.8 percent nonrenewable.

Brazil is still in the early stages of exploring massive oil fields in the so-called subsalt layer off its coast, but analysts estimate the deposits range from 30 billion to 100 billion barrels of recoverable oil.

A big rise in oil output is still at least a decade away since the ultra-deep exploration involves tough technological challenges. But the government is earmarking enormous investments for oil extraction and refining, worrying proponents of renewable energy sources such as hydro, biofuels and biomass.

BATTLE LINES DRAWN IN CONGRESS

Ethanol officially passed gasoline as the main fuel for light vehicles in Brazil last year. Hydroelectric plants such as Itaipu, once the world's largest dam, generate almost 80 percent of Brazil's electricity.

But the government is making a big effort to pass new oil legislation in Congress that includes a capitalization plan for Petrobras which would give it enough money to fund subsalt exploration.

"It would be wrong for the country to abandon its efforts in clean energy and concentrate resources in the new oil frontier," said Luiz Pinguelli Rosa, director of the Rio de Janeiro Federal University Center for Engineering Programs (Coppe-Rio), an influential group of energy analysts.

Despite the big push to fund the oil firm, government and Petrobras representatives deny a basic change in the country's energy strategy.

"Brazil will keep investing resources in alternative sources of energy despite the efforts in exploration of new oil frontiers," Almir Barbassa, chief financial officer of Petrobras, told energy analysts last month at a seminar. "There will not be any competition with ethanol."

Brazilian Chief of Staff Dilma Rousseff, who is President Luiz Inacio Lula da Silva's pick to succeed him in next year's presidential election, said the country would not abandon its "vanguard" position in areas such as biofuels.

"Our next goal is second and third generation biofuels. We will preserve our clean energy matrix," she said.

THE CLIMATE CHANGE FACTOR

Such comments have not quieted the critics.

Pinguelli and others say Brazil's role as a world leader in renewable energy is under threat from oil just as world scrutiny of Brazil and climate change is intensifying.

Environmentalists have already attacked Brazil for allowing more deforestation in the Amazon, which for ages has acted as a key "sink" to remove carbon dioxide from the atmosphere.

Pinguelli also said a massive shift in public investment to nonrenewables when Brazil still has huge untapped potential for hydro power and biomass is shortsighted.

Marcos Jank, president of the Brazilian Cane Industry Association (Unica), said it would be a setback to divert major funding to oil after decades of success with ethanol in Brazil, where the cane-based fuel took industrial root.

Jank also pointed to Brazil's nascent biomass energy industry, which uses leftover sugarcane as fuel for electric generation plants and is only starting to feed into the national power grid.

Brazil, the world's largest sugar producer, generates waste from almost 600 million tons of sugar cane grown every year.

"We have two Itaipus in the cane fields," he said.

(Editing by Reese Ewing and Jim Marshall)