Last week, Brazil and Bolivia reached an agreement that settled a contentious dispute over two oil refineries that could have far-reaching implications for the future of the energy sector in South America’s largest country.

On Friday, May 11, Bolivia agreed to pay $112 million for the refineries owned by Petrobras, the Brazilian government-controlled oil group – a price that was significantly higher than the initial offer of $40 million but far short of the $200million asking price.

“Petrobras will have to think very carefully about any future investments in Bolivia,” Adriano Pires, an oil industry consultant in Rio de Janeiro, told the Financial Times.

“Unfortunately it has no way of leaving the natural gas industry because Brazil is a hostage to Bolivian gas.”

The move comes just a week after President Luiz Inacio Lula da Silva made public comments re-affirming his administration’s intent to move forward on major hydroelectric projects as well as seeking out other energy producing alternatives.

"We can’t continue depending on gas we don’t have. We need to think about the type of energy in our matrix," Lula said during the inauguration of a hydroelectric plant in central state of Minas Gerais. "We either build the hydroelectric plants we need or we’ll enter the nuclear age.”

The two refineries were purchased by Petrobas in 1999 when Bolivia privatized the hydrocarbon sector. The election of leftist, Evo Morales in December of 2005 caused a 180-degree change in the political climate and nationalization became the watchword again.

On May 1, 2006, Morales ordered the nationalization of the country’s hydrocarbon sectors and set dramatic new conditions on the existing contracts. The move struck Petrobras hard due to the company’s 14 percent stake in Bolivia’s gas reserves. The fate of the two refineries was unknown until earlier this month when Bolivia's state-owned YPFB was granted a monopoly of sales from Petrobras's two Bolivian refineries.

Denied the ability to reap any financial gain from the properties, Petrobras threatened to take the issue to international arbitration if Bolivia did not purchase the plants at a fair price. According to The Financial Times, Petrobas purchased the plants for $104 million and has spent $20 million in modernization. The sale also includes $40 million in stocks of refined products.

The expected cooling of Brazilian investment into natural gas is expected to sharpen the South American country’s interest into other energy sources to handle skyrocketing demand.

Brazil’s energy consumption is growing at about 5 percent a year – a rate that threatens to outstrip current power resources as early as next year. That could spur a rapid rise in energy prices which would curtail the country’s economic growth.

The Brazilian Electric Energy Agency estimates the country needs to increase generating capacity by 3.096 MW annually to help sustain current economic growth. Brazil’s electricity generation capacity now stands at 98.14 terawatts.

Moreover, if projects to increase baseline generation are not started soon, there are concerns Brazil will face another energy crisis on par with the 2001 situation, which crippled the economy.

Lula has already taken steps to accelerate hydroelectric projects recently as the breaking up of Ibama, the country’s environmental protection agency, citing it as an obstacle for the licensing of infrastructure projects. A move expected to accelerate the progress on pending projects such as two hydro dams on the Amazon basin’s Madeira River.

"We're making an effort to do it (the dam licensing) as fast as possible," Bazileu Alves Margarido Neto told Forbes magazine. He was appointed acting-chief of the Ibama national environmental protection agency after the shakeup in early May.

Andrew G. Wright/ENR Brazilian engineer with model of Angra 2 nuclear plant.

Moreover, the nuclear option is very real with Brazil having possession of an partially-built facility near Rio de Janiero. Work on the Angra 3 reactor stalled in the mid-1980s due to lack of funding. The growing energy needs of the country could make it a viable investment again although it is estimated that completion of the 1,350 megawatt power plant would cost over $1.5 billion.

In addition, Brazil has commissioned a new centrifuge enrichment plant at Resende that will produce low-enriched uranium for reactor use.