1. General Considerations

The Energy Internal Offer - EIO of the country reached 248 million tons oil equivalent (toe) in 1998, a growth of 2.2 % relative to 1997. Of this amount, approximately 57% are clean and renewable energy, namely 38% hydroelectricity and 19% biomass. With large territorial extension and large energy potential, the country opted for the establishment of policies that favor renewable energies; the examples are the development of hydroelectricity from 1950 on and the alcohol program in the seventies. Of the 43% of IEO referring to non-renewable energy, 35% correspond to petroleum and its products and the remaining 8%, to natural gas, mineral coal and uranium.

In the petroleum area, PETROBRAS - Petróleo Brasileiro SA has been successful in the exploration and production of petroleum since the beginning of the eighties, guaranteeing the regular and reliable supply of petroleum products and reducing significantly the external dependence on these energy products, presently around 43%. At the time of the second petroleum shock in 1979, this dependence was around 85%. In global terms, considering the offer of all forms of energy, the external dependence of the country is about 24%.

In 1998, the Government proceeded with its program for stimulating the increase of natural gas in the energy market and promoting a larger use of non-conventional and/or decentralized energy sources (solar, wind, agricultural and forest residues, vegetal oils and small hydraulic potentials). The use of solar energy was encouraged, mainly for supplying to isolated and unassisted communities and for the development of the rural area. The incentive programs for increasing the energy efficiency level of the country, comprising the production and efficient use of energy and cogeneration of electrical and thermal energy were also strongly stimulated and will influence the national energy matrix in the long term.

In the institutional area, the Ministry of Mines and Energy continued the actions for reformulating the energy sector, opening opportunities for the participation of the private sector in the necessary investments and the responsibility for guaranteeing the national supply. In this transition phase and in spite of the elevated growth rate of energy demand, the country succeeded in overcoming localized difficulties and avoiding supply limitations and service deterioration. The actions of the new regulation agencies - ANEEL - National Agency of Electrical Energy and ANP - Petroleum National Agency is fundamental for continuing the guarantee of supply and the increase of energy service quality in the whole country.

The National Council of Energy Policies - CNPE, established in 1997, chaired by the Ministry of Mines and Energy, will promote studies and will examine policy propositions in the supply and use of energy before taking them for presidential approval.

      2. Economic Growth and Energy Consumption

In the period between 1970 and 1980, the Brazilian Gross National Product increased at an average rate of 8,7% annually (aa) and the energy consumption increased as well, with significant annual rates, electicity 12.4% aa and petroleum products 8.3% aa. The determining factors for these results were: the continental dimensions of the country, the predominance of road transport and also the development of basic industry and infrastructure to meet the unprovided needs of many regions of the country. In spite of the elevated rates of electricity and petroleum products consumption, the Internal Energy Offer-IEO grew 6.6% aa - elasticity of 0.75 relative to the GNP - mainly due to the small growth of biomass (0.4% aa), constantly substituted by petroleum products (LPG and fuel oil).

From 1980 on, under the pressure of the recessive environment of the country's economy, these rates declined and varied considerably. In the period between 1980 and 1992, the country's economy grew at an average rate of only .3% aa, with rates varying between (-) 4.3% in 1980 and (+) 7.8% in 1985. The growth rates of energy demand declined too but not in the same proportion as those of the GNP. The IEO grew 2.8% aa, with elasticity of 2.1 relative to the GNP. The electricity consumption grew 5.4% aa, due mainly to the expansion of the electricity-intensive industries (aluminum, pig iron, etc.). As to the petroleum products consumption, on account for the substitution policy, it grew only 0.9% aa and the biomass consumption, 1.1%, this last one higher than that verified in the period 70/80, mainly because of the alcohol program.

In the last years, with the stabilization of the economy, a new development cycle was established and this increased the expansion rate of the economy and of energy consumption. In the period between 1992 and 1997, the GNP grew 4.1% aa and the IEO grew 4.3% aa. In the same period, the petroleum products showed average growth rate of 5.8%, electricity 5.0% and biomass 0.6%, corresponding, respectively, to elasticity of 1.40, 1.21 and 0.14 relative to the GNP. The residential and commercial electricity, the automotive gasoline and aviation kerosene were the large inductors of the high energy consumption rates owing to the better income distribution caused by the Real plan.

In 1998, due to the crisis in the Asian countries, the Brazilian Government was constrained to take measures that led to a strong retraction of the economical growth and it is being expected a growth of around 0.1515% of the GNP. Nevertheless, the energy sources above mentioned, associated with the population's well being, kept their high consumption levels, as is the case of residential and commercial electricity with growth superior to 7%, of automotive gasoline (5.2%), aviation kerosene (6.9%), Diesel (6.6%) and consequently the IEO's elasticity relative to the GNP will rest above 7.

Therefore, it should be emphasized that in spite of the high rate of consumption growth verified in the last years, the measures adopted by the Ministry of Mines and Energy have permitted to maintain the supply at compatible levels as no short supply crisis has occurred.

      3. Electrical Sector

From the fifties on, the Brazilian states established their own electrical utilities. They progressively substituted the privates companies existing at that time. Later on, the Federal Government created ELETROBRAS, in 1963. Since then, the installed capacity of electricity generation grew dramatically reaching about 61.4 GW in December 1998, including the auto-producers with about 3.9 GW and 6.3GW from the Paraguayan part of Itaipu, almost completely intended for the Brazilian market.

In 1998 2.31GW were added to the installed capacity of electrical generation of which 2.16GW for public use and 0.15 GW from auto-producers. It should be emphasized the start of operation of 1,290 MW from Serra da Mesa - Go, 390 MW from Miranda - MG and 162 MW from Três Irmãos - SP, all of them hydraulic power plants.

At the end of 1998, the electrical internal generation for public use was divided between State (92.7%, of which 14.5% referring to the Brazilian part of Itaipu) and Private Sector (7.3%). Hydroelectricity represented 95% of the total national electricity generation

In the effort to ensure energy supply in the next years, the Ministry of Mines and Energy made in 1998 a bidding contest for 7 new hydroelectric undertakings that totals 2,446 MW, representing private investments of about US$ 1.9 billion in the next years. New authorization were granted as well, that totals approximately 1,700 MW aiming at constructing thermoelectric power plants, most of them located in the southeast region, between the states of Rio de Janeiro and São Paulo.

The internal public generation in 1998 was 301.2 TWh, to which should be added the Paraguayan part of Itaipu (39.4 TWh) and that of auto-producers (1.2 TWh), permitting to satisfy a total consumption of 287.4 TWh (4.1% higher than that of 1997). In December 31, 1998 about 60% of the electrical energy distribution was under private control as compared to 31% in December 1997, which demonstrates a significant transfer of responsibilities of service provision to the private sector.

The transmission of the generated energy to the consuming market has basically been made through two linked systems. One integrating the north and northeast, with 500kV lines, connecting the hydroelectric Tucurui power plant to the Rio São Francisco's power plants and the other one integrating the south, southeast and center-west regions, with lines from 345/440/500 to up to 750 kV, besides the direct current links with 600 kV.

In 1998 3,805 new transmission lines - TL were added to the Electrical System. It should be mentioned the implementation of the north-south TL composed of the alternating current of 500 kV with about 1,280 km between Imperatriz in Maranhão and Samambaia in Brasilia, which connected the north/northeast and south/southeast systems rendering them into a single linked system.

Most of the Brazilian municipalities have today a regular and reliable electricity service. Nevertheless, in spite of the fact that more than 90% of the total residences have electricity, part of the extended Brazilian territory is not covered by the transmission net. The north region presents the largest provision problems of the country, where localities are supplied by isolated systems of thermal generation from inefficient diesel oil power plants. This opens a large market for private investors interested in the segment of small or medium size plants, specially projects that use decentralized sources (for example, photovoltaic, wind, biomass and small hydraulic developments). It should be added that natural gas from Urucu will permit expanding the electricity offer in the north region in a more economical and competitive way, increasing the participation possibilities for private investors.

In this sense, the Federal Constitution was amended in 1995, eliminating restrictions to foreign private investors' capital in the energy sector. The Laws 8987 and 9074/95 (new Concession Laws) introduced deep and important alterations, specially concerning: (i) bidding contest for new generation undertakings; (ii) creation of the Independent Energy Producer entity; (iii) free access to transmission and distribution systems; and (iv) freedom of choice for the large consumers to choose the energy suppliers. The Decree 1717 established the conditions for extending and regrouping the public service concessions and the approval of Conclusion Plans for suspended works. Decree 2003 of 09/10/96 regulated the conditions for independent and auto-producers. Also in 1996 the National Electric Energy Agency - ANEEL was established by the Law n^o 9427 of December 26. Other regulations were established in 1997, specially: (i) Law no 9433 of January 08 that established the National Policy for Hydraulic Resources and established the National System for the Management of Hydraulic Resources; (ii) Decree n^o 2335 that established ANEEL and approved its Regimental Structure; and (iii) Special Law DNAEE n^o 466 that consolidated the General Conditions for Supplying Electrical Energy, harmonizing it with the Consumer's Defense Law (Law n^o 8087 of 09/11/90).

In 1998 new regulations were established aiming at improving the legal structure of the electrical sector, among them: (i) Law no 9,648 that created the Energy Wholesale Market - MAE and the National System operator - NOS entity that will create a favorable environment for free trade of electrical energy. Additionally, this law altered legal provisions allowing among other things: (a) ANAEEL should be vigilant in what concerns the compliance with competition's defense legislation; (b) increasing to 30 MW the limit for the authorization of hydroelectric power plants; (c) defining for the first time the import, export and commercialization activities of electrical energy, depending on authorization to be granted by ANEEL; (d) definition of the splitting of the federal generation electrical utilities; (ii) ANEEL Resolution n^o 094 that defines the concentration limits in the electrical sector for the distribution and generation activities.

ANEEL, whose Board was installed at the end of 1997, started its activities with the necessary requirements concerning administrative and financial autonomy and skilful to carry out its task. It was an important and necessary institutional change aiming at assuring the harmonious development of the Brazilian electrical sector.

In 1998 ANEEL implemented a vigorous inspection program where all the concessionaires have been inspected in what concerns the economical/financial aspects, supply quality and generation technical standards. A process of decentralization of several activities of all created state agencies was also started. Actions concerning consumer's defense, strengthening of consumer's committees, conflict settlement and public hearings, had strategic importance during the year, due to the Agency's commitment to the Brazilian society.

In 1998 the privatization process of the electric energy concessionaires was carried on and about 60% of the Brazilian distribution market has already been cumulatively transferred to the private sector, totaling resources around US$ 27,7 billion dollars, in which the transfer of about US$ 6.0 billion dollars of debt is included.

PRIVATIZATION CARRIED OUT IN THE ELECTRICAL SECTOR
As of 02/28/99

4. Petroleum Sector

The petroleum and gas industry, after decades of state monopoly exercised by PETROBRAS, enters a new era. The Constitutional Amendment n^o 9 of 1995 extinguished the monopoly of the industry's basic activities and the Law n^o 9478/97 disciplined the opening to the direct participation of the private sector in all links of the production chain.

The complement of the new institutional framework was introduced by the installation of the National Petroleum Agency - ANP in 1998 with large regulation, contracting and inspection responsibilities in the petroleum and natural gas sector.

In less than one year the ANP has been strongly acting in the petroleum sector, inspecting the distribution segment, making the registration and inspection of installations, establishing collaborations with universities and other research institutions. It has also elaborated the petroleum import regulation as well as that of free access to natural gas transport installation and granted the inherent authorization; it materialized the concession contracts for PETROBRAS' areas and submitted to public evaluation the model of new concession contracts to be adopted and it has recently authorized the construction of a new refinery in the country and it is preparing bidding contest for new parts in areas that are not assigned to PETROBRAS.

The implementation by ANP of the policy of price liberation for the final consumer reached, in 1998, 98% of the gasoline and alcohol market, 85% of the aviation kerosene market and 80% of the LPG market. In what regards the competition in commercialization margins of the distribution companies, it has reached the whole market. In the period, most part of the fuel transfer freight costs has been incorporated in the price of products, reducing several subsides and price distortions.

For PETROBRAS, 1998 was a milestone in the evolution of its petroleum and natural gas exploration and production activities. As a consequence of the approval of the Law n^o 9478/97 that regulates the petroleum sector in Brazil, the company presented to the Minister of Mines and Energy in October 1997 the list of 206 areas containing 240 fields with effective production and requested for permission to carry on the exploration activities in 133 areas (blocks) and 52 areas comprising 60 fields of production development activities.

In July 3, 1998 ANP defined the areas that would remain with PETROBRAS and the concession contracts were signed in August 6, 1998. The company obtained 397 concessions in Brazilian territory, divided in exploration, production development and production field blocks, whose values and respective areas are presented in Table 1. The total area of 458,532 square kilometers represents 7.1% of the Brazilian sedimentary area.

Table 1

Blocks/ Concession Fields

Blocks/Fields

Area (km²)

EXPLORATION

DEVELOPMENT

PRODUCTION

TOTAL

The exploration success index for pioneering wells reached 31% on land and 25% offshore.

The oil and condensed products reserves in the country increased to 7.4 billion bbl and the total reserves to 14.4 billion bbl, corresponding to 4.2% and 1.4% respectively. It should be mentioned that PETROBRAS incorporated in its process of reserve evaluation procedures, criteria from the Society of Petroleum Engineers (SPE) and of the World Petroleum Congress (WPC).

The projects in operation permitted the petroleum domestic production (including schist oil) and natural gas liquids (NGL) to reach the average of 1,004 281 bbl daily, 15.5% higher than the average production in 1997. This increase is due to the start of production in the 26, 27 and 30 PETROBRAS platforms in the fields of Marlin, Voador and Albacora, respectively, as well as the improvement in the operational performance of the company. The offshore production corresponded to 77,4% of the total, originating from 72 platforms of fixed production and 20 floating ones while at the end of the year about 50% of the total production originated from systems located in deep waters above 400 meters.

In December 31, 1998 a new record was established in the petroleum domestic production when the mark of 1,222,228 bbl per day has been overpassed. This result was mainly a consequence of the start of operation of the 33 PETROBRAS platforms in the Marlin field.

In the commercialization segment, PETROBRAS imported 163 million bbl (447 thousand bpd) of petroleum and 150 million bbl (411 thousand bpd) of petroleum products in order to complement the internal market needs, with larger participation of LPG and light and medium distillates, spending a total of US$ 1.9 billion FOB - Free On Board -, with petroleum and US$ 2.1 billion FOB with petroleum products.. The exports were 42 million bbl, with takings of US$ 541 million FOB, with larger shares of maritime fuels, light distillates and heavy products.

National consumption of petroleum products in 1998 reached 100.9 million cubic meters (equivalent to 1.74 million bpd). This represents an increase of 3.7% relative to the previous year when there was a rise of almost 8% in the demand. This smaller increase rate in demand had the influence of the country's economical and financial difficulties during the second semester that limited the expansion of the economical activity.

In 1998 PETROBRAS' refineries reached 64.2% of national petroleum participation in the processed load. In this sense, two special moments have marked the year: in June the conclusion of the expansion project of the Getúlio Vargas Refinery in Paraná, made possible the installed nominal refining capacity of this unit to reach 1,834 thousand bpd; in October, the average monthly load had a record of 1,621 thousand bpd. Besides that, it is important to accentuate the production of petroleum products which reached the yearly average of 1,488 thousand bpd.

In the transport segment, the pipelines in operation were 12,074 kilometers at the end of 1998, of which 7,830 km of oil and other products and 4,244 km of gas pipelines. It should be stressed the start of operation of the URUCU/Coari oil pipeline and of the Solimões Terminal, built in the Amazon forest to drain the petroleum and LPG production from the Urucu petroliferous province.

The partnership process in transport activities proceeded with the studies concerning the construction and operation of new pipelines for petroleum products in the south, southeast and center-west regions of the countries.

     5. Natural Gas Sector

In 1998 intensive work was carried on in order to guarantee the increase of natural gas internal offer and to continue and conclude the new transport pipelines, namely the Bolivia-Brazil pipeline - the largest undertaking of this kind in Latin America -, the Urucu -Coari pipelines in the Amazon and the Guamaré-Pecem and Pilar-Cabo gas pipeline in the northeast region.

Still in 1998, the construction of the north segment of the Bolivia-Brazil pipeline between Santa Cruz de la Sierra in Bolivia and Campinas, in São Paulo, 1,970 km long, was concluded. From 1999 on, when this segment will be operating, there will be initially available an average volume of 4.1 million cubic meters per day of natural gas for the sates of Mato Grosso do Sul and São Paulo.

The conclusion of the south segment between Campinas, in São Paulo and Porto Alegre, in Rio Grande do Sul, with 1,180 km of extension, is foreseen for the end of 1999, when Bolivian gas will reach the states of Paraná, Santa Catarina and Rio Grande do Sul, supplying the country with an initial volume of 9.1 million cubic meters/day.

The pipeline will be operated by the Transportadora Brasileira Gasoduto Bolívia-Brasil (TBG), controlled by Gaspetro (99,98% of the shares).

 Another large project administered by Gaspetro is the natural gas from Urucu for thermoelectric generation that will generate 930 MW in the Amazon region, using five million cubic meters /day of natural gas, coming from the Urucu and Juruá fields in the Solimões Basin, in the High Amazon. In 1998 the construction of the 280-km-long gas pipeline connecting Urucu to Coari, at the banks of the Solimões River, was concluded. Besides that, it is foreseen the construction of a gas pipeline connecting Coari to Manaus with 420 km of extension and a 500 km-long gas pipeline from Urucu to Porto Velho in order to supply fuel to the already existing thermoelectric power plants and those to be installed, which will supply to the Manaus' system and those of the neighboring localities as well as the linked system of Rondônia e Acre.

In partnership with the private initiative, as part of the project of importing natural gas from Argentina, it will be built the Uruguaiana-Porto Cheers gas pipeline with 615 kilometers of extension and capacity to transport up to 12 million cubic meters /day of natural gas. The pipeline will enter in operation at the end of the year 2000 and it will be linked to the Bolívia-Brasil gas pipeline in the vicinities of Porto Alegre.

In 31/12/1998, the total reserves of natural gas reached 409,8 billion cubic meters, while the proved reserves reached 225,9 billion cubic meters, equivalent to 21 years of average annual production. The production of natural gas was of 29,7 million cubic meters a day, superior in 9,8% to the average of production of 1997. The offshore production of gas corresponded to 65% of the total production, representing a similar percentage as that of the previous year.

     6. Mineral Coal Sector

The mineral coal industry in the country began its activities about 140 years ago. The characteristics of the Brazilian coal, with low calorific power, much ash and high sulfur content, demand processing that raises its cost and makes it not very competitive vis-à-vis other energy sources. These limitations lose their importance when new technologies are introduced, more appropriate for direct burning, eliminating the processing used in the past when the coal used in the thermal generation was subsidiary of metallurgical coal production.

Until 1975, the mineral coal participated with 3,2% in the national energy matrix, mainly for metallurgical use (about 80% of the total). From 1975 on, its use in the industry grew as a function of the advantageous prices compared with those of fuel oil as well as of the subsidies to its transport, decreasing afterwards from 1986 on, when petroleum prices decreased.

Now, the participation of the mineral coal in the Brazilian energy matrix is 5,0%, of which, 0,8% national coal and 4,2% of imported metallurgical coal and coke. In 1998, of the 5,6 million tons produced in the country, 86% was consumed in thermal power plants and 14% in the industry.

In 1998, with an installed capacity of 1.415 MW of electric generation (public) using mineral coal, 4630 GWh were generated (12% below that of 1997) and 3890 thousand tons of coal were consumed. In the indicative planning of the electric sector, to the current installed capacity of thermal power plants using mineral coal it should be added 1.200 MW (two power plants of 350 and two of 250), until the year 2006.

To enlarge the current  competition  capacity of the national carboniferous sector, efforts for capacitation and modernization of the industry were continued aiming at the implantation of new technologies, such as clean coal technologies. In that sense, cooperation agreements between the Ministry of Mines and Energy and the Department of Energy of the United States are being established in order to build a new stage for the industry, through: (i) reduction of the coal production and processing cost by using modern technology, (ii) mitigation of the environmental impacts provoked by the industry, (iii) amplification of the revenue in the generation with the introduction of the combined cycle techniques and, (iv) development of specific programs for facilitating partnerships among national and foreign companies.

     7. Energy for Isolated Communities and for Rural Areas

The MME's Program for Energy Development of States and Municipal districts - PRODEEM - gave continuity to the actions aiming at supporting the supply of basic social demands of dispersed communities in localities not served by the electric system, and to promote income increase and creation of jobs in the rural areas, by installing local small energy systems of production and use, using renewable and decentralized energy sources, especially solar energy. In partnerships with other entities, the Program also promotes the development of the education, health, water supply and communication services.

The surveys carried out by the states and concessionaires of energy electric point out the existence of about 100 thousand unassisted communities and more than 3 million rural properties without energy, representing about 20 million people unable to participate in the process of social development and economic growth of the country.

Thus, as results of the Program, in the period 96-98 more than 2.000 communities have been supplied with illumination of schools and community centers, water pumping, food production, information, emergency communication and other collective benefits, contemplating about 400 thousand people.

Still, in the period 1996/1998, PRODEEM consolidated the partnerships with several institutions interested in the program and it devoted efforts to show the extraordinary potential of the Brazilian market for the development of renewable energy and to raise the interest of the private sector on the programs, especially on the production areas (residences and rural units) and isolated systems.

As a consequence of PRODEEM's actions, the BIRD proposed to finance one project for energizing 78.000 rural residences, in the value of US$ 110 million, and BID prepared, together with DNDE, PRODEEM's Plan of Action, involving the contribution of up to US$ 9 million, for infrastructure investment, with the following objectives: (i) to increase the supply capacity to 10/15 thousand communities a year; (ii) to promote the training and the operational and managerial capacitation, in all the activity levels and in the whole country; (iii) to stimulate the formation of market of energy supply services in the rural way from renewable decentralized sources (iv) to make possible the effective transfer of new technologies, using the scale of the Brazilian market as vector of its competitive application in the country; and (v) to implant a monitoring and evaluation system of the results (social and economic impacts of the program), of furnishing information and of dissemination of innovative and successful solutions.

Due to its national comprehensiveness and its structuring characteristic regarding social and economic development, PRODEEM was included in the Program Brazil in Action, starting from the administrative year of 1999 on.

       8. Investments in the Sector Energy

In the last years, with annual investments varying between 2.5 and 3.0 billion dollars, the Brazilian Petroleum Sector has been able to guarantee the supply of petroleum products and to increase significantly the oil and natural gas reserves.

In what regards the Electric Sector , the investments made in the last years, around 4.5 to 5.0 billion dollars a year, of which about half in the generation segment, has not been enough to guarantee annual increments around 3.500 MW to the generation installed capacity , the power necessary to supply the verified growth of demand. Thus, the average increments of 1.080 MW a year, between 1990 and 1994 and of 2.000 MW from 1994 on, have increased the risk of supply cut off.

In the future, some alterations should happen in the structure of energy investments. With the installation of natural gas thermal power plants, that demand smaller investments than the hydroelectric ones, it is expected a relative reduction in the generation investments, with consequent increase of investments in gas pipelines. On the other side, the electric connections with Argentina and that between the South and North of Brazil will demand larger investments in the transmission segment.

In summary, the potential of energy supply investments for the next years can be estimated as: 3,0 to 4,0 billion dollars in the petroleum area 1,0 in gas pipelines, 2,5 to 3,5 in electric generation and 2,5 to 3,0 in transmission and distribution sectors. Therefore, a total amounts between 10 and 11 billion dollars a year will be necessary.

      9. Main Business Opportunities