Development & Aid, Economy & Trade, Energy, Environment, Global Governance, Headlines, Latin America & the Caribbean, Natural Resources

BRAZIL: The Complications of Coming into Sudden (Oil) Wealth

Mario Osava

RIO DE JANEIRO, Aug 26 2008 (IPS) - Brazil’s social and economic future may depend, according to experts, on the way it ultimately handles the sudden oil wealth discovered deep under the Atlantic ocean off the country’s southeastern coast.

The dilemmas facing the government and other major players in this national debate are whether to create a new state company, as Norway did, or strengthen the existing Petrobras oil company; whether to modify or maintain the regulations in force in the oil sector; and whether or not to redistribute the royalties generated by oil.

Fernando Siqueira, head of communications at the Petrobras Engineers’ Association (AEPET), estimates that 20 trillion dollars are at stake, given that gigantic reserves of “more than 100 billion barrels of oil” are lying under sand, rock and salt layers about 250 kilometres offshore.

That estimate is based on a market price of 200 dollars a barrel of crude, a price that may rise even higher in the next few decades as the world faces the third global “oil shock,” or period when demand grows faster than supply, as it did in the 1970s, Siqueira told IPS.

Brazilian oil deposits in what is known as the “pre-salt” area, below a two-kilometre- thick salt layer under rock, sand and deep water, are equivalent to “a new Iraq” in Latin America, partly because of the volume of predicted crude reserves, and partly because of the U.S. “desperation” to get its hands on these resources, he said.

The U.S. has only 29 billion barrels of its own oil reserves, sufficient for no more than three years at the present rate of consumption, according to the engineer.

But arguing about whether a separate state oil company should be created is to “divert the discussion” from the key issue, which is to establish these reserves as the heritage of the Brazilian people and “modify the regulatory framework” to raise the state’s share of oil revenues to 84 percent, which is the norm in other countries, Siqueira said.

Such a change could be achieved very simply, by a decree, as the state’s share of oil earnings was capped at a maximum of 40 percent by a 1998 decree during the administration of President Fernando Henrique Cardoso (1995-2003), he said.

Increasing the government’s share would incur little resistance from the foreign oil companies already working as Petrobras partners in oilfields in Brazil. In fact, Siqueira said, “they have proposed the 80 percent figure themselves.”

Introducing new regulations would solve the dilemma, since if Brazil’s state oil company were the production operator, the state’s share would amount to 90 percent, he emphasised.

Thus, Petrobras’ private sector partners holding a minority stake would have a limited share in the profits, whether they were contracted for extraction work in newly discovered or in already explored oilfields.

However, there will be a great deal of pressure from the U.S. government, “which wants oil that is cheap, rather than paying the market price,” a condition which infringes “Brazilian sovereignty over its reserves” of non-renewable resources, according to Siqueira.

In Siqueira’s view, the July 2008 reactivation of the U.S. Fourth Fleet in the South Atlantic is connected with Brazilian “pre-salt” oil.

The government of leftwing President Luiz Inacio Lula da Silva wants the oil profits to be used directly to benefit the population. Its stated priorities are education, fighting poverty and social security, said the analyst.

A careful study is being made of the example of Norway, which created a second, wholly state-owned oil company to administer extraction of its oil reserves, profits from which are being invested in a “trust fund” for future generations.

This option, apparently favoured by a majority in the government, would allow the state to hold on to the bulk of the oil profits and avoid paying amounts considered excessive to Petrobras’ mostly foreign partners, who contribute 60 percent of the working capital.

Another government goal is to change the rules governing the royalties paid to municipalities and states in whose territory or territorial waters oil is extracted, and to other institutions like the navy, who take a combined 10 percent of oil revenues. The aim is for the huge profits from the newly discovered reserves to benefit the entire country.

Governors of states that currently receive the most in royalties, such as Rio de Janeiro and Espiritu Santo, are up in arms against the idea of modifications in the regulations.

So far, royalties have been seen as an indemnity paid to compensate a local area for the negative impact of oil drilling activities, but this makes no sense when oil wells are 250 kilometres offshore, and therefore affect no one municipality in particular, Siqueira argued.

The debate is about potential funds whose amount and reality is still in doubt. “They seem to want to get their hands on the profits” without thinking about the “enormous investment” and effort required to extract oil located 6,000 metres below sea level and under a thick layer of salt, hundreds of kilometres from the mainland, said Giuseppe Bacóccoli, a researcher at the Federal University of Rio de Janeiro’s Postgraduate Engineering Centre.

The present regulatory framework has worked well, especially in terms of attracting investment and technology, and current contracts on oil production signed with private companies must be honoured, in order to avoid animosity when negotiating conditions for extracting the “pre-salt” crude, Bacóccoli told IPS.

The newly discovered reserves have awakened greedy expectations of great national wealth, but they “present high risks and require advanced technology,” said Bacóccoli, a geologist with years of experience at Petrobras. State benefits could come from taxation, he said, adding that some proposals said to be “protecting the interests of the people” were “demagoguery.”