| RIO DE JANEIRO
RIO DE JANEIRO Brazilian President Dilma Rousseff has put her government's oil policies front and center in her re-election campaign.
TV ads show dramatic views of giant, floating oil platforms and new refineries under construction. The message: her leftist government is turning an offshore oil bonanza into schools, hospitals and jobs, propelling Brazil into the ranks of developed nations.
But there's a problem. Brazil's oil industry may be large and growing, but little of what Rousseff promised when elected in 2010 - or before then as energy minister or chairwoman of state-run energy giant Petrobras - has come to pass.
Instead, industry experts and Rousseff's election rivals say her policies have led to stagnant oil output, increased dependence on imports and waning investor confidence despite Brazil's huge potential.
"When Dilma talks of oil she talks of success, of patriotic destiny, but she's failed to deliver," said John Foreman, a former director of the ANP, Brazil's oil industry regulator. "She's delivered very little considering all the money spent."
Oil nationalism runs deep in Brazil and Petrobras is a source of pride so Rousseff's campaign has sought to tap into that, focusing on Brazil's potential as an oil giant.
Realizing that potential, however, has proven difficult. Despite more than $200 billion in investment since 2009, output at Petrobras, responsible for nearly 80 percent of Brazil's oil production, has fallen in the last two years and was stagnant in the previous three.
Rousseff, who faces a tough re-election battle as economic growth has slowed to a halt, correctly points out that many major oil companies, including Exxon Mobil Corp. and Royal Dutch Shell Plc, have also failed to increase output in recent years.
But few are spending as much as Petrobras, which has invested more than any company on earth in the last five years.
The government and Petrobras say they are working to cut costs and delays, and that the spending will pay off, making Brazil one of the world's top-five oil producers.
Petrobras' 2009 five-year plan, drafted while Rousseff was chairwoman and as she prepared her run for president, promised average output of 3.9 million barrels of oil and equivalent natural gas a day (boepd) in 2014.
Actual production in 2014 has been 2.6 million boepd, a third below target and barely above 2009 levels. The missing 1.3 million boepd from the target translates into a huge loss to Brazil's treasury in royalties from Petrobras alone.
Considering a base royalty of 10 percent of the value of each barrel produced and an average price for Petrobras oil of about 20 percent below benchmark Brent crude, Brazil is losing at least $13 million a day, or nearly $5 billion a year, according to Reuters' calculations.
Petrobras oil sells at a discount because most of it is heavier and harder to refine than Brent, a high-value light crude.
That estimate of lost revenue is almost certainly very low. Thanks to windfall profit taxes, royalties per barrel can be as much as three times higher. Nor does the estimate include other taxes or economic activity related to the missing output.
Petrobras did not respond to requests for comment.
Rousseff's biggest oil legacy will likely be her role in re-writing Brazil's petroleum law to give the state greater control over and more revenue from giant offshore oil deposits known as the "subsalt."
These high-quality but technically challenging crude resources get their name from a layer of mineral salts that trap oil thousands of meters beneath the seabed off Brazil's coast.
Announced in 2007, the discoveries are some of the largest in decades. Estimates range from 30 billion to 100 billion barrels of oil and gas, enough to supply all the world's needs for one to three years.
Rousseff argued that the subsalt is so large and the risk of tapping its riches so low that Brazil's concession system - where companies bid for rights in exchange for fixed investment promises and royalty payments on output - needed an overhaul.
Her new law makes Brazil a partner in all subsalt areas not already leased. Rights go to the company or group that gives the government the biggest cut of oil production to sell on its own.
This, she said, would raise the state's take of oil profits to levels well above those under the old system.
Not necessarily, according to a study by Paulo Cesar Ribeiro Lima of the independent research office of Brazil's Congress. The "government take" or share of profit from the giant Libra area sold in November will give Brazil 70 percent of profits, according to Ribeiro Lima.
That's less than the 72 percent the government is getting from Lula, the first subsalt field that is being managed under the old concession rules, the report says.
"The big loser in the Libra auction are health and education in addition to Brazilian society at large," Ribeiro Lima wrote.
Rousseff's office declined to comment, directing queries to the energy ministry, which did not respond.
Rousseff has used higher subsalt output to deflect attention from the fact that overall production fell in both 2012 and 2013. Subsalt output has jumped to 520,000 barrels a day in 2014, or about a fifth of total output, from 41,000 in 2010.
"The subsalt is so expensive that it's made Petrobras neglect the areas where it actually produces most of its oil," said Cleveland Jones, a geologist with the Brazilian petroleum institute at the State University of Rio de Janeiro. "There is a lot of smoke and mirrors being used to confuse the public about what's really going on."
Even achievements such as the revival of Brazil's shipyards have inadvertently gotten in the way of producing more oil and state revenue. By delivering over-priced and sometimes poorly constructed vessels late, production has been compromised and costs have risen sharply.
All this has dimmed investor interest despite the giant new discoveries, prompting most of the world's leading oil companies to ignore the Libra auction.
A group including Petrobras, Royal Dutch Shell, France's Total SA and two Chinese state firms won rights to its estimated 8 billion to 12 billion barrels for the minimum price of about $7 billion and the bare-minimum government share of 41.65 percent of oil produced after development costs are repaid.
It was the only bid, but the government declared the auction a success anyway.
"Brazil could have got 10 times that for Libra in 2007," a former Brazil project manager for a major international oil company said. "When they pulled the subsalt from the table, I was authorized to spend up to $2 billion no questions asked on much smaller Brazilian subsalt prospects."
"We now know the subsalt is far more risky and expensive than we first thought," the source added. "Brazil won't see the oil it expected for another five to 10 years."
Over the past five years, the United States discovered and began to exploit large amounts of shale oil and gas, increasing output to its highest levels in four decades.
Brazil, which was a net exporter of petroleum products when the subsalt was discovered, is again dependent on imports, primarily of gasoline and diesel fuel. Rather than becoming a big importer of Brazilian crude, the United States is now a main supplier of fuel to Brazil.
In an attempt to curb inflation, Rousseff blocked Petrobras' efforts to raise gasoline and diesel prices in line with world prices. With Petrobras' refineries unable to keep up with demand, imports have risen and because of the pricing policy, each barrel imported gets sold at a loss.
This has devastated Petrobras' finances just as it spends billions on the subsalt. It is now the most-indebted and least-profitable of the world's 14 largest oil companies.
The bad news doesn't end there. A Petrobras refinery in Texas and others under construction in Brazil have become a focus of corruption allegations, and a former company executive has been arrested for alleged wrongdoing in refinery deals.
Petrobras' market value has risen nearly eight-fold to more than $134 billion since Rousseff's Workers' Party came to power in 2003 but all of those gains were registered before she became president.
Under Rousseff, the share price had fallen about 50 percent by March this year and its rebound since then - including a rise of 25 percent in the last month - has been driven largely by opinion polls showing that Rousseff could lose the election.
(Editing by Todd Benson and Kieran Murray)