Policy Recommendation

The terms for deep-sea development in Brazil have been a highly contentious issue for all parties involved. As it stands, the state will have much greater control over production in the pre-salt areas than in other areas, restricting access of private foreign firms. The major question is whether this increased role of the state is a good thing. Naturally, the response depends on whom you’re asking, but generally, Brazil is the only interest group happy about this deal. As someone who straddles both sides of the debate, being both Brazilian and American, I found it difficult to take a position on the matter. Eventually I came to the conclusion that Brazil should retain its sovereignty over the pre-salt oil fields. First I will detail why I support the law changes, then I will offer recommendations that I think would make the most of the pre-salt more.

Why Brazil should retain sovereignty over Pre-salt

The perception many Latin American countries have of the United States and capitalism is one of neo-imperialism. They often look to the U.S. as the neighborhood bully who aims to exploit them for its own gain. America’s policies resurface a painful memory in Brazil’s history of the Portuguese who pillaged Brazil of all its natural treasures in the colonial period. Lula called the pre-salt fields “Brazil’s second independence,” (News Wires) because  of what it means for the country to replenish what was taken from them. To give that up for the sake of efficiency would be to sacrifice the country’s dignity and chance at becoming a global powerhouse.

The country’s projectile in the global power scale is a national concern. Brazilians understands, too, that for it to reach that level of influence, it must improve its most underdeveloped regions. Despite promoting 30 million people to the middle class in the last decade (Arai), Brazil remains one of the most unequal countries in the world. The disparity between north and south, and interior versus littoral states is startling. Former President Lula and now President Dilma both vow to direct the revenue from the ultra-deep wells towards social programs meant to strengthen education, culture, science, technology, environmental sustainability, healthcare, and—most importantly—poverty eradication. There is no other source of revenue so substantial that doesn’t require taxing citizens that the country can use to lift its poor underclass from abject poverty.

One strong argument against the government’s role in production is the prediction that its presence will decrease competition and productivity (Bridgman). The situation, however, is not as dire as capitalists imagine. Even though Petrobras is government-controlled, its stocks are still traded in New York and Sao Paulo. It is still held accountable to its shareholders and is sensitive to the market. Furthermore, the pre-salt area will not be monopolized by Petrobras. Foreign firms will still be present in development, albeit with a smaller role, working in consortium with the state company.

The other conditions are also accused to limiting competition, and although that may be true, there is still room for competition in the pre-salt model. Although 65% of supply in puts are guaranteed to Brazilian companies, 35% can still be provided by any firm. Furthermore, many Brazilian oil-service companies have appeared on the scene hoping to take advantage of the 65% law, which in turn will increase quality, as they still have to compete with one another to supply Petrobras and partners with their products. A study by IPEA, a government-funded think-tank, found that Petrobras’s domestic suppliers were more technologically advanced and productive than the average Brazilian firm, and paid higher wages and more taxes. The same idea applies to the equity rule: although 30% is guaranteed to Petrobras, the other 70% can belong to any firm. Either way, many multinationals–FMC Energy, Cameron, Marine/Oceaneering, National Oilwell Varco, Weatherford, GE Vetco Grey, the Swedish/Swiss ABB, the Norwegian Aker Kvaerner, and the British Rolls Royce–all are key suppliers and have hold a significant market share in their respective sub-sectors (U.S. Foreign Service Office in Brazil).

Another argument is the possibility for Dutch Disease. This fear has been unsubstantiated as there is no evidence that Brazil has suffered from Dutch Disease (It’s only Natural). Ambassador Patrick Duddy also claims that Brazil is too big for Dutch Disease. In fact, Brazil is the leading exporter of coffee, tobacco, soyabean products, sugar, and orange juice. These sectors are too well developed to suffer at the hands of oil.

Another concern in that Petrobras is not yet mature enough to handle the enormity of the project. Though Petrobras has not been put to the true test yet, it is the single largest company in Latin America and the third largest in the world (U.S. Foreign Service Office in Brazil). According to experts, it is also an industry leader in ultra-deep exploration. Petrobras is poised to take on the pre-salt challenge gracefully. Either way, it will be partnering with other large international companies that will be obligated to share their technology with Petrobras which will only make the company more productive over time.

The final, and perhaps most considerable, concern is whether these new regulations will scare away investors. According to Ambassador Patrick Duddy, though the private sector is still evaluating these policies, as of yet, they have not discouraged patrons from investing. Brazil, when compared to their Andean counterparts, has been moderate in how it dealt with foreign firms after the discovery. Whereas Venezuela basically kicked out large private companies after they invested billions into production, Brazil has honored their contracts and only changed the regulations for future ultra-deep fields. Argentina is another country who has raised the risk of business too high for private companies by reneging on a deal to sell their state-owned oil company to Repsol, the Spanish state company. Because Brazil has not committed any similar infidelities, and because the pre-salt is the largest and most attractive find in the past decade, private companies are certainly still looking to invest. In fact, foreign oil companies including Shell, Statoil, Anadarko, Repsol/Sinopec, and OGX are expected to invest an additional $43 billion in Brazil from 2011 to 2015 (U.S. Foreign Commercial Service Office in Brazil). Furthermore, Petrobras has a running list of critical equipment that must be provided by foreign suppliers including pipelines, rigs, platforms, and vessels, among many others (do Rego).

A few recommendations:

The potential revenue to be generated is immense. It is vital that Brazil manage this income wisely or else they risk falling victim to political temptation, especially since Brazil ranks 73rd on corruption (Corruption Perceptions Index). To avoid corruption schemes, a separate private entity should handle the earnings, rather than the government itself. The government must clearly express what the intended goals are that the income is meant to achieve so that there is no ambiguity in how it should be invested.

Established a “rainy days” savings account that the country can draw upon in the event of a recession. Chile was able to emerge from the 2008 economic crisis mostly unscathed because it had a large savings accumulated from exporting it’s oil equivalent—copper. The opportunity of collecting such large sums of revenue should not be wasted entirely on the present, but set aside for future security.

Both Lula and Dilma have expressed their priority of directing the funds to develop underdeveloped areas of the country. However, besides doing that and setting up a saving account, Dilma should also direct some of the revenues towards alternative energy research and development. Though the pre-salt reserves now are a powerful economic propeller, it will eventually run out. Brazil shouldn’t lose its hegemony in biofuel production because it grows too dependent on oil while it is abundant. Brazil should set an example for other developing countries by pursuing its environmentally sustainable agenda. Sixty percent of all of Brazil’s industrial investment is currently in the oil and gas industry, according to the National Petroleum Industry Organization. Though this proportion is inevitable now because much investment is necessary to get pre-salt production off the ground, it must decrease over time to allow for other sectors to develop. Petrobras is already headed in the right direction in terms of eco-consciousness as it plans to invest $4.2 billion dollars in health, safety, energy efficiency, and environmental concerns where new corporate goals are to minimize the potential environmental impacts of the company’s activities, focusing particularly on carbon emissions. As revenues increase due to increased productivity, this investment should also increase to scale.

On a similar vein to increasing R&D for eco-friendly energy methods, Brazil should also scale back other energy activities that are harmful to the environment, namely, deforestation of the Amazon. Brazil could even use the pre-salt euphoria as a window of opportunity to give the Amazon greater legal protection from exploitation.

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References

Arai, Adriana. “Brazil Will Use Pre-Salt Oil to Eradicate Poverty, Lula Says.”Bloomberg. 7 Sept. 2008. Web. 30 Apr. 2012. <http://www.bloomberg.com/apps/news?pid=newsarchive>.

Bridgman, Benjamin, Victor Gomes, and Arilton Teixeira. “Threatening to Increase Productivity.” World Development 39.8 (2011): 1372-385. Print.

Corruption Perceptions Index: Transparency International. Transparency International. Web. 30 Apr. 2012. <http://cpi.transparency.org/cpi2011/results/>.

do Rego, Claudio R. Procurement Policy and Critical Equipment Supply. Rep. Rio De Janeiro: Petrobras, 2011. Print.     <https://www.focusbrazil.org.br/SiteUSA/PPT/Louisiana%20Trade%20Mission%202011/Petrobras%20presentation%20for%20the%20LA%20delegation%20sept%202011.pdf>

“It’s Only Natural.” The Economist. The Economist Newspaper, 09 Sept. 2010. Web. 30 Apr. 2012. <http://www.economist.com/node/16964094>.

News Wires. “Tupi Oil Is ‘second Independence for Brazil’” UpSTREAM. 4 May 2009. Web. 15 Apr. 2012. <(http://www.upstreamonline.com/live/article177455.ece>.

US Foreign Commercial Service Office in Brazil. Oil and Gas Industry. Print. Not yet available to the public.