Brazil's New Oil Wealth Raises Debate on Redistribution

With a string of huge new oil discoveries, pundits are wondering whether Brazil will become the next Venezuela—a poverty-stricken country that uses windfall oil profits to improve social welfare. Multinational companies are already jockeying for sweetheart deals, while social movements are busy forming strategies that will push the government—whether through higher royalty rates or outright nationalization—to make sure the potential profits do more than line the pockets of a few board room fat cats in the oil industry.

December 4, 2008

When Brazilian seismic exploration hinted at the presence of massive off-shore oil reserves, President Luiz Inácio Lula da Silva quipped that the finding proved that “God is Brazilian.” Although the oil may convert the South American nation into a hydrocarbon colossus, approaching producers like Canada and Venezuela, it is already inciting controversy over how to use the potential petroleum wealth.

The oil fields are off the country’s southeast Atlantic coast beneath kilometers of ocean, bedrock, and hot salt-beds. Estimates vary, but Haroldo Lima, managing director of the National Petroleum Agency (ANP), claims the new reserves could surpass 100 billion barrels (Bb) of high-quality recoverable oil. (By comparison, Venezuela has 142 Bb, although this number is said to be rapidly increasing.) At current market prices gross receipts from the sale of Brazil's oil would exceed 3 trillion dollars—150 percent of Brazil’s annual GDP.

In recent years, exploratory drilling put recoverable reserves at five to eight Bb in the Tupi field—one of the offshore reserves. The new discoveries suggest that the Tupi cluster, composed of the Tupi, Guara, Iara, Jupiter and Carioca fields, could, according to Lima, contain a “minimum of 50Bb and a maximum of 80Bb,” in fields that have already been put out to tender. The magnitude of the find may be problematic. The government had already auctioned drilling rights to a large percentage of the blocks in the Tupi cluster before it had apprehended the fields’ size. Multinational energy companies are already jockeying for deals on the remainder of the sub-salt beds.

The government has yet to clarify the guidelines for the exploration and development of the balance of the sub-salt fields. Lula has delayed the announcement of a formal policy for the fields until at least late November. He is waiting to hear back from a specially appointed inter-ministerial committee, but the group has repeatedly postponed its presentation of proposals. Meanwhile, unions, left-wing factions within the Workers’ Party (PT), and social movements—including the massive Landless Workers' Movement (MST)—have mobilized, leaning on Lula to use the proceeds to provide for Brazil’s poor.

While it is true that the dizzying revenues from the sale of the oil could be the ingredient that completes the alchemy of Brazilian “development,” the country must first overcome numerous political, budgetary, and macroeconomic obstacles. And the population is demanding a role in determining the fields’ fate.

New Oil, New Contracts?

One particularly contentious issue is the reevaluation of existing contracts. Pedro Eugênio, a PT congressmen and president of the lower chamber’s Commission of Finances and Taxation, argues that the existing concession regime, in which companies purchase the right to explore parcels of territory, is inadequate for exploiting the new sub-salt reserves.

Eugênio explains that the old regime was based on a model in which the companies “encounter high risks with the compensation of high returns if all goes well.” The sub-salt fields involve “little risk,” he added. Every well sunk into the sub-salt fields has struck oil. Analysts consider a 100 percent hit rate astronomical.

The subtext to the potential contract controversy is Brazil's partial privatization of state oil company Petrobras under the administration of President Fernando Henrique Cardoso (1995-2003). The government began selling Petrobras shares on international stock exchanges and invited partner firms to help develop fields, or to openly bid against Petrobras. While Brazil's petrol production has since doubled, state-ownership of the company has been severely diluted. Although the government still maintains a controlling ownership stake, the rest of the shares are divided between foreign investors and Brazilian citizens.

Cardoso also introduced a presidential decree that capped the government’s royalty rate at 40 percent of the market price. Every major oil-producer in South America has recently secured a larger share in profits through adjusted royalty rates with multinational energy companies. Bolivia’s 2006 “nationalization” of its natural gas fields raised royalties to 82 percent, while other significant oil producers siphon over 80 percent of revenues in the form of royalties.

Despite Brazil’s markedly lower royalty rates, analyst Adriano Pires of the Brazilian Infrastructure Center contends that Brazil needs “to maintain the current legal regime with respect to the concessions, in order to give regulatory assurance to the market.” The government estimates developing the sub-salt fields could cost between 400 and 600 billion dollars. Considering the sum’s size, the government's ability to garner credit at tolerable interest rates is a reasonable concern.

But pre-eminent Brazilian geologist Marcio Mello said that funding development would be a non-issue. Mello told me that bringing the fields online is feasible while oil prices stay above $35 a barrel.

Social Movements Push Back

Some forces within Brazilian society have taken a radical, long-term standpoint, focusing on the long-run inevitability of the development of the subsalt beds. For them, the issue is who will develop the fields, and who will reap the benefits.

The focal point of resistance is the Committee in Defense of Petroleum for National Sovereignty, which has brought together social movements, trade unions, students, and intellectuals to discuss—and, they hope, determine—how the fields will be developed.

Antonio Carlos Spis, a member of the National Executive of the Central Workers Union (CUT), spoke at a Committee-sponsored event of the need to “prepare for virtual war, since the transnationals manipulate the media, blackmail governments, buy legislators, use armies” in order to “maintain their control over our sources of energy.” Meanwhile, João Paulo Rodrigues of the MST leadership called for the “immediate suspension of all auctions,” as well as for change in the regulatory framework.

João Antonio de Moraes, the coordinator of the United Federation of Oilmen (FUP), has suggested that the next step would be to consolidate the “regional and state-level committees in a grand national committee,” citing the example of the "Petroleum is Ours" campaign of the late 1940s and early 1950s. That campaign led to the 1953 creation of Petrobras, which exercised a state monopoly over the petroleum sector. He called for collecting 1,300,000 signatures and “pushing grand national mobilizations,” thereby compelling Congress and Lula to pass a law orienting the oil profits toward national development.

The Committee is possibly taking heed of earlier proposals—for example, the broad, ambitious, call-to-action that João Pedro Stedile, perhaps the leading MST intellectual, sketched out in early October in a communiqué in the leftist monthly Caros Amigos. Stedile wrote that the Brazilian people “cannot leave it to the corporations and their media to influence the people and the government as to what may be ‘the best solution.’ ” He also called for bodies beyond Lula’s official commission to assist in the evaluation of proposals.

He added that “unions, churches, and social movements … should form committees in defense of petroleum for the people,” exhorting the committees to bring information to the Brazilian people, creating the “widest possible debate,” including the possibility of deprivatization. Debates, marches, and strategy sessions have been planned or already have occurred in Northern Fluminense, São Paulo, Rio de Janeiro, Rio Grande do Norte, and Paraná, bringing together workers, movement militants, and students.

Cardoso’s demi-privatization, which Fernando Siqueira, the communications director of the Association of Petrobras Engineers, lambasted as “illegal” in an interview with leftist newspaper Brasil de Fato, could certainly be reversed. Siqueira suggested the repurchase of Petrobras stocks from foreign stakeholders, and said that he had proposed precisely that to BNDES, the Brazilian state development bank.

Along similar lines, Antony de Valle, the head of the Union of Petroleum Industry Workers in Rio de Janeiro, advocates the re-nationalization and reassertion of state monopoly control over the oil sector. Lula, too, has said that “One of the hypotheses is to use a part of the subsalt petroleum to increase the Union’s stake in Petrobras.”

Indeed, some officials have claimed that keeping the entire production operation within the Brazilian economy could be a massive boon for the country’s industrial plant. Lima has spoken of transforming Brazil from an iron exporter to a steel producer, responding to the need to construct over 500 oil wells in Tupi alone.

In this sense economists have suggested that Brazil take Norway as a model. “Brazil needs to strengthen its naval industry and equipment for oil exploration, and at the same time increase its refining capacity,” commented Júlio Sérgio Gomes de Almeida, a consultant with the Institute of Studies for Industrial Development, to the Estado de São Paulo.

He added that the production of boats and drills could give a considerable push to the Brazilian capital goods industry, and emphasized the “need to reopen the discussion concerning industrial policy.”

Oil: Boon or Bust?

It is unclear whether the mobilizations have had any effect on the government's plans for the oil fields. Edison Lobão, the Minister of Mines and Energy, said that the government’s interministerial Committee would likely conclude its studies at its next meeting, and bring Lula the proposal. He said that the Committee’s understanding was that by the year’s end the framework would be firmly in place. Yet perhaps not the framework movements are fighting for. Lobão spoke of “seeking to maintain attractive proposals for the investment of private capital.”

Furthermore, even were the petroleum development to proceed apace, the earnings would not necessarily be the manna many have imagined them to be. Although Lula describes the oil discovery as a “gift from God,” former Venezuelan oil minister and OPEC co-founder Juan Pablo Pérez Alfonzo has described oil as the “devil’s excrement,” at least for the poorer countries of the world.

The economies of such countries often exhibit symptoms of the Dutch Disease—overvalued currencies and hollowed out industrial and agricultural bases due to an over-reliance on oil profits. Imports become cheaper and a country’s native products become more expensive. Some countries, such as Canada and Norway, seem immune, but their oil production came after the countries had already achieved a certain level of development—a level Brazil has yet to attain.

Still, Norway has been spoken of as a model with respect to oil rent. Bruno Cruz, an adjunct director of IPEA, has mentioned the Norwegian example as worthy of emulation—it centralizes the collection of oil rent in the central government and invests the proceeds in a pension and retirement fund. “It may be in education, or Social Security, we could or even create a National Fund for Regional Development,” he suggested.

Others suggest otherwise. Almeida declared, “Brazil is not Norway” and explained that Brazil would have a hard time making oil a “source of development.” Lula has promised that “[Brazil] will transform a perishable wealth, like oil and gas, into a source of permanent wealth for the Brazilian people.” But doing so may be harder than his easy rhetoric would suggest.

Max Ajl is a NACLA Research Associate.

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