Should exploration be more privatized?

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The pre-salt discovery has generated a lot of conversation over the various aspects of production. All of the relevant stakeholders have voiced their opinion on how the resource should be exploited. In this section, I display a few of the differing opinions on the subject.

An Americas Society article laments the growing difficulty of the ethanol industry to stay afloat in light of the growth of the oil sector. Author Rachel Glickhouse first describes how ethanol has changed the face of Brazil, citing how Brazil has become the world’s second largest ethanol producer, a pioneer in alternative biofuel, and a poster-child of flex-fuel cars that take any proportion of gasoline and ethanol. She admits that this era is bittersweet for the nation, since recent oil discoveries have relieved the nation of much energy-related stress. Despite the widespread enthusiasm over oil, Glickhouse’s angle is a pessimistic view that the oil sector’s gain is the ethanol sector’s loss. The article emits an “its not fair” undertone as she explains how on top of oil boons, sugar harvests were lost to frost, aging infrastructure and lack of investment by the government decreased productivity,  and too-little-too-late American tariff reliefs all contribute to what may be ethanol’s inevitable downfall.

O Globo, one of Brazil’s leading newspapers, paints a beautifully rosy picture of Petrobras, the state-owned oil company, in a recent article. At the time of publication, the company was going through a moment of transition, as someone new, Maria das Graças Silva Foster, was inheriting the all-powerful position of director. The article begins showing the warm friendship among President Dilma, former director Gabrielli, and new director Foster. They exchange various kind words to one another, praising Gabrielli for his job well done and Foster for their glowing expectations of her leadership. They take advantage of this publicity opportunity to announce Petrobras’ lofty goals: conquer deep-sea challenges, build new refineries, expand the petrochemical sector, and strengthen relations with Latin American and Asian comrades. All the while, Petrobras will promote gender equality by being the first oil company with a woman at its head. Foster is a homegrown leader, entering Petrobras as just an intern in 1978, a testament to how the company encourages upward mobility. It is very common to exalt Petrobras in this way because it is seen as the nation’s crown jewel. Not surprisingly, most criticism is made by foreigners.

As I mentioned in the previous paragraph, most of Petrobras’ criticism is generated by foreign entities. An article from The Economist offers its reasoning for why it believes the government’s new laws governing pre-salt development is a bad idea. First, it acknowledges that a record-setting stock worth of $70 billion had been taken up, then drops the truth bomb that $43 billion of that total was purchased by the government, and despite that revenue, Petrobras will still face high debt. The law that 65% of all future inputs (contracts, machinery, rigs, drills, etc) must be purchased by Brazilian companies, the article argues, is an unsettling stipulation because the oil-services sector may not yet be prepared to rise to the occasion. Secondly, these laws are worrisome because they suggest a “revival of wholesale government meddling in industry.” This concern, however, is only shared by hyper-capitalistic Americans; Brazil’s center-left mindset ignores such communism-inspired warning cries.

Another Economist article continues on the criticism train. Latin America in general, it says, is too dependent on exports and is over-exposed to the volatile commodities market, which puts those countries at risk of Dutch Disease where exports increase the value of the currency and consequently decrease the competitiveness of other industries. This notion is contested by some: namely, Patrick Duddy, the Department of State’s most senior Latin American specialist, asserts that Brazil is too big for Dutch Disease. In fact, Brazil is the world’s leading exporter of a laundry list of commodities–including coffee, orange juice, tobacco, beef, chicken, and soy products–that insulate it from being overpowered by big oil. Referring specifically to the federal presence in oil production, the article concedes that legislation demanding 65% Brazilian oil-service input is a good thing, but then puts on the brakes by saying only for the short term or else prices will increase.

Another source of disapproval comes from an article written for LatinPetroleum Magazine. I selected this particular article because it is dated at August 2009, around the time Brazil began considering changing the laws governing deep-water exploration and development that exist today to favor state-controlled Petrobras over foreign companies. I wanted to capture the industry’s reaction to the news. Not surprisingly, the author was skeptical of the law changes, suggesting that politics was the main motivator in Lula’s campaign for more state control since his party, the Workers Party, wanted to ensure the upcoming election. The article mentions on a side note that the director of Petrobras is also part of the Workers Party, which sounds like he’s insinuating collusion. Furthermore, he tells the reader the Brazilian logic behind these changes–exploration in deep-water areas is essentially a “no-risk” proposition–and then subsequently invalidates it by citing Exxon Mobil’s statement that Brazil underestimates the difficulties of discovering oil because they failed to find any commercial quantities of oil or gas in its Guarani well. He wraps up his article by explicitly saying that if the suggest laws do change (which they have), then it won’t sit well with big oil companies who will be “hesitant to give up control over investment schedules and technical details.”

A Brazil-based website in portuguese called the Pre-salt Diary includes a 2010 article by a counselor from the Brazilian Federation of Engineer Associations. He writes an editorial scathingly critical of international oil companies and the United States, specifically. He says the U.S. embassy has been lobbying congress to try and secure their interests in Brazil’s oil fields. Apparently, the embassy was active in advocating against Lula’s proposition to give the state more control in deep-sea development. He includes a photo (displayed on the right) of a giant brazilian drop of oil being carried away by a scowling, red-white-and-blue-hatted American eagle while a crowd of everyday Brazilians cling to it, shouting “it’s ours!” The message is an obvious reference to the widely-held view among Latin Americans that the U.S. is imperialistic and exploits its “backyard” countries. But the author won’t have that anymore. He candidly puts all the cards on the table, saying that despite the decrease in power foreign oil companies will face with the new law changes, they’ll stick around because, frankly, there aren’t many other places in the world they can go. He doesn’t hold himself back from calling capitalists “life-long looters” who have “usurped” Brazil’s riches, leaving a scorched trail in their wake. For the first time, Brazilians have the upper hand and would be doing themselves an injustice if they handed this opportunity over the capitalistic hawks.

The debate over Petrobras’ monopoly in oil production has been discussed in academia as well. A 2010 research article titled “Threatening to Increase Productivity” details Petrobras’ history and specifically how a 1997 law that decreased institutionalized barriers to market competition led to a dramatic increase in productivity. The article states that over 40 foreign companies now operate in Brazil’s off-shore areas, which it argues is the source of Petrobras’ incentive to reduce costs and work efficiently. Although this is probably true to a large extent, Petrobras is still the largest oil company in the region, in control of about 95% of production. In other worlds, Petrobras still retains near-monopoly status and is still incredibly productive. The article doesn’t talk specifically about the pre-salt debate, but to use their findings to suggest Brazil scale back its role in deep-sea oil production would not necessarily be appropriate because private companies will still partner with Brazil, and there will still be some degree of competition in terms of technology supply.

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