Brazil’s Black Gold (But also its Black Stain)

The Brazilian authorities have portrayed a complex issue of huge significance as a simplistic contest between nationalists and sell-outs. On Wednesday, June 9th, the Brazilian Senate passed a bill that alters regulations governing the exploitation of the offshore “pre-salt” oil fields. Discovered in 2007, these are potentially extensive deposits of oil and gas, trapped several miles under the sea bed beneath a hard layer of salt. The regulations’ model will soon change from concessions to partilha, increasing the government’s control over production. One should hasten to underscore the dangers resulting from such a change.

In a partilha system, the role of Petrobras, Brazil’s state-owned oil company, will be overstretched. According to the new pre-salt legislation, the government can sign two types of agreements: either solely with Petrobras, or based on bidding procedures in which companies may participate freely, with an operator status assigned to Petrobras. This move will force Petrobras to invest more than it can comfortably afford to. Government-proposed funding plans are tortuous and likely to be inappropriate. Inevitably, Petrobras will be financed by the Brazilian treasury, and part of the funding will come from a transfer of 5 billion barrels of oil that presently belong to the federal government, and which are worth an estimated 40 billion Reais (about 22 billion USD). Applying public funds in this manner is an offense to the Brazilian population, which already suffers from dramatically inefficient social services. One enlightened aspect of the bill is the creation of a Social Fund to direct 50% of pre-salt oil revenues to the improvement of these services. However, experts believe the pre-salt reserves will not yield profits until 2015. In the meantime, while the government digs into public coffers to pay for Petrobras’ investment, Health Minister José Gomes Temporão calls for more funds for his Ministry, arguing that the contrast between public and private healthcare in Brazil may create a spirit of “social apartheid” in the Brazilian healthcare system.

The government’s inefficient spending plans make its commitment to financing Petrobras all the more uncalled for. The government argues that without the privileges conceded to Petrobras in a partilha system, the company will not be able to fulfill its mission of developing the equipment necessary to expand the Brazilian oil sector. The goal is to produce all of the required equipment in Brazil, essentially nationalizing such production to handle the extraction of oil from the pre-salt reserves. It is imperative that Brazil develop a service sector for its oil industry. In order for Brazil to truly benefit from the discovery of these reserves, the country should be a producer, as well as an exporter of oil. But nationalizing all production may prove to be too costly. According to an Estado de São Paulo newspaper editorial, for every dollar invested in the pre-salt, four dollars will be first needed to pay for equipment to service it. Sergio Gabrielli, Petrobras’ director, declared that Petrobras is looking to spend $111.4 billion in the pre-salt reserves. Investment in equipment therefore could cost an additional $400 billion. As a result, the government will be forced to channel most of its resources to the pre-salt program. This will have to come at the expense of other sectors, making the Brazilian economy dangerously dependent on oil.

Finally, there was no need to alter a system that was already handsomely profitable for the government. Under the concession system, Petrobras’ output increased significantly, with most of the economic surplus from oil consigned to government coffers. In 1993, when Petrobras still held a monopoly over the country’s oilfields, Brazil produced 693 thousand barrels of oil a day. By 2009, this number had risen to 2 million. In 2007 and 2008, more than 60% of the added value from oilfield operations went to the federal government, states, and individual municipalities in the form of taxes, contributions, royalties, and special fees. The state, then, was the big winner under the concessions system. As the result of partilha, the relative increase in revenue for the state will not be significant. The concessions system has already provided the government with sufficient funds to invest in what Brazil really needs: improved social services.

Public spending should be a matter of national priority. Pre-salt investments are not as urgent as the improvement of social services, particularly when the cost could be the diversity of the Brazilian economy. To change the system from concession to partilha could be counter-productive because the current model is already highly profitable, non-exploitative and ultimately less burdensome for Petrobras. The passing of the pre-salt bill presses the question: will black gold end up being a black stain on the current administration’s record?