10:55am

Wed September 7, 2011
Latin America

Brazil Hopes To Add Oil Wealth To A Booming Economy

When people say Brazil won't be the next Saudi Arabia, they mean it in a good way.

Brazil has discovered enormous oil reserves far off its coast, but the country's robust and varied economy means it shouldn't become dependent on oil.

"Brazil is not just going to be an oil exporting country," says Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson Center for International Scholars. "That's not all it's going to do."

Brazil now has the ninth-largest economy in the world and has enjoyed enormous growth in recent years, thanks in part to the export of a wide array of commodities to China, its largest trading partner.

Oil, of course, is an especially valuable commodity to sell, and Brazil now has lots of it. The discovery in 2007 of an oil field the size of Florida in the Atlantic Ocean signaled Brazil's emergence as a major energy player.

Oil's For Fighting Over

Estimates of the amount of oil resting under a layer of salt have ranged as high as 123 billion barrels. Even much more conservative estimates of 15 billion barrels would double the country's proven reserves.

Given the difficulties of extracting oil 200 miles out to sea, Brazil will never be able to recover all the oil that's out there. But whatever the amount, it seems it's worth fighting over.

Brazil's national government may release a compromise plan as early as this week to try to settle a political fight over how to split the proceeds among its states.

"This is a big, nasty battle that's coming to a head now," says Christopher Garmin, director of the Latin America practice at Eurasia Group, a research and consulting firm.

Great Discovery

Brazil barely had any oil industry to speak of for most of its history, says Riordan Rouett, Latin American studies director at the Johns Hopkins School of Advanced International Studies (SAIS).

But oil exploration has paid off in a big way in recent years. Petrobras, the state-run oil company, produced more than 2 million barrels a day last year – a number it hopes to double by 2020.

Under a law passed last year, Petrobras has been given exclusive rights as lead operator for exploration and development of the big offshore fields. Other companies can play only a strictly limited role as junior partners.

Some think the job is more than Petrobras can handle on its own. The company is experienced at deep-sea exploration. But this is an unusually tough job, drilling down through four miles of ocean and rocks and a thick layer of salt. Putting the burden on a single company will inevitably slow things down, Garmin says.

"People who have worked for years for Petrobras will tell you we're asking them to do too much," says Sotero, the Woodrow Wilson Center scholar.

Dividing The Spoils

For now, delays are mostly related to arguments about money. Traditionally, the states that have oil off their coasts have also gotten the revenue.

But the enormous recent finds have led to demands for greater equality. The so-called non-producing states have been making the argument in Congress that mineral rights belong to Brazilians as a whole and the proceeds should be divided accordingly.

"Congress is now yelling that it's a national treasure and the oil revenues should be distributed widely," says Rouett, the SAIS scholar and author of The New Brazil.

The non-producing states want a share not only of the as yet-untapped offshore fields, but the smaller ones already in production.

Garmin, the Eurasia Group analyst, predicts that the national government will fashion a compromise in the coming days or weeks. The idea would be for the national government to give up some of its share and raise taxes on oil production, with the money going to the states.

Slowing Things Down

But increasing taxes on oil companies is "going to raise a lot of noise," Garmin says. It's also going to take some time.

The deal may be outlined this week, but the resulting fight over it in Congress will likely take months to sort out. That means the process of getting the final bids in order for the big, offshore oil fields is going to be pushed back until the second half of next year – two years later than the government had originally predicted.

"The politics around oil revenues are starting to slow the whole framework down," Garmin says.

Still, A Lot Of Upside

But despite the delays, there's still a widespread belief that national oil production and revenues are certain to increase through the remainder of the decade.

Oil is already one of Brazil's top exports, along with soybeans and iron ore. The country has also emerged as a major producer of renewable fuels, thanks to its conversion of sugar cane into ethanol.

"Now largely self-sufficient, its overall energy portfolio is one of the cleanest in the world," Shannon K. O'Neil, a fellow for Latin American studies at the Council on Foreign Relations, wrote recently. "While the (offshore) finds will test this last achievement, Brazil's energy management shows that it can conduct a successful long-term energy policy."

O'Neil suggests that Brazil's "messy" but vibrant politics will also help prevent the "oil curse" that has corrupted some other countries' economies, by providing a system of checks and balances that bring many economic players and interests into the process.

"We don't think Brazil is going to face the problems other countries face," Sotero says. "We're not going to be one of these countries completely dependent and defined by the export of oil."

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