Brazil's government aims to make more energy projects eligible for key tax benefits, however the main ministries involved disagree about whether to favor a "green" agenda or include oil projects and refineries, according to a senior official and a document seen by Reuters.

President Luiz Inacio Lula da Silva's government has vowed to lead a transition to next-generation renewable energy sources, but is still committed to developing a state-led petroleum industry.

The latest sticking point is a proposed decree expanding the REIDI tax regime, which now favors select infrastructure projects including electricity generation, power grids and natural gas facilities. Last year, more than 500 qualified energy projects received some 9 billion reais ($1.85 billion) in tax exemptions.

The Finance Ministry has proposed that a wider array of investments in Brazil's energy transition - from biofuels and green hydrogen to carbon capture and storage - should qualify for both REIDI tax benefits and tax perks in the private bond market.

The proposed tax incentives are part a broader agenda for a "green transformation" of Brazil's economy, which would include creation of a regulated carbon market and issuance of the country's first 'sustainable' sovereign bonds.

However, senior officials at the Mines and Energy Ministry are pushing to broaden the incentives to include oil refineries and fuel storage facilities. At a meeting with Finance Ministry officials last week, shown in their public agendas, they framed the matter as a strategic priority in light of higher oil prices during the war in Ukraine, the source said.

Last year, Brazil imported 28% of its diesel, a key fuel for a country heavily reliant on road transport for distribution.

Energy Ministry officials have argued that targeting tax benefits too narrowly would curtail oil and gas investments, calling in a technical note to expand incentives to oil and natural gas exploration, production and transportation.

"Oil refining will continue to be fundamental for guaranteeing supply for a long time, so it is essential that projects aimed at decarbonizing refining be a priority, as they are adhering to energy transition and energy security," wrote Mines and Energy Ministry officials in the document. "Investments in refining can be used in the future to convert refineries into biorefineries," they added.

The Finance Ministry declined to comment. The Energy Ministry did not immediately respond to a request for comment.

Brazilian state-run oil firm Petrobras has forecast oil production for the next four decades, even as it ramps up investments in renewable energy. When Lula took office in January, his government signaled a return to refinery investments for Petrobras, after years of divestments.

Petrobras also set off the biggest environmental controversy in Lula's new government with a plan to drill for oil near the mouth of the Amazon river, sparking debate between 'green' allies and advocates of regional oil and gas development.

Environmental regulators rejected the drilling plan, citing discrepancies in environmental studies, but Petrobras is appealing the decision.

($1 = 4.8680 reais) (Reporting by Marcela Ayres Editing by Brad Haynes and David Gregorio)