Oil and Gas

Brazil's debate over new oil wealth heats up

SAO PAULO (Reuters) - Brazilians have long joked that Brazil is the country of the future, and always will be. But since massive oil reserves were found off its coast last year, many feel the future may have finally arrived.

A general view shows the P-51 oil rig of Brazilian oil giant Petrobras at Angra dos reis in Rio de Janeiro August 21, 2008. Brazilians have long joked that Brazil is the country of the future, and always will be. But since massive oil reserves were found off its coast last year, many feel the future may have finally arrived. Picture taken August 21, 2008. REUTERS/Bruno Domingos

From the halls of Congress in Brasilia to the bars of Sao Paulo, Brazilians are fiercely debating what to do with the newfound oil wealth. Newspapers are running cover stories and editorials on the issue almost daily, drawing parallels to a “The Oil is Ours” campaign that led to the creation of state petroleum company Petrobras in the 1950s.

President Luiz Inacio Lula da Silva is also talking up Brazil’s oil potential at every turn, calling the reserves a gift from God that should be used primarily to benefit the poor instead of Petrobras shareholders and foreign oil companies.

But critics worry the government may end up squandering a huge development opportunity by nationalizing the reserves, which could foment corruption and inefficiency.

“This is a debate that promises to heat up even more,” said Sergio Fausto, a political scientist at the Fernando Henrique Cardoso Institute in Sao Paulo.

“It’s all about natural resources, symbols of national wealth, the future, and that’s creating expectations that the country can leap to a new level.”

Brazil began imagining itself as an oil superpower when Petrobras PETR4.SAPBR.N announced last November it had found an offshore reserve in the Santos basin off Rio de Janeiro holding 5 billion to 8 billion barrels of light crude, the world's second-biggest oil find in the last 20 years.

Since then, more data has emerged suggesting that as much as 80 billion barrels worth of oil might lie deep below the seabed in a huge area off Brazil’s southern coast.

If true, that would vault Brazil -- which still occasionally has to import oil to meet domestic demand -- into the top 10 of the world’s oil producers.

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Although it will likely take years and hundreds of billions of dollars to extract the oil, which lies below a thick layer of salt, the Lula government is already making plans for the flood of revenue it will bring.

A former metalworker who grew up poor, Lula wants to use the money to tackle Brazil’s most glaring social blemishes: endemic poverty and a shabby education system. In a world where cheap oil seems a thing of the past, Lula sees a chance for Brazil to cash in and join the ranks of developed nations.

At first, the reserves also looked like a sure windfall for Petrobras, a pioneer in deep-sea drilling technology. But the government appears intent on rewriting the country’s oil law to gain more control over the reserves, raising doubts about Petrobras’ role in managing and developing the new fields.

On several occasions in recent weeks, Lula said the oil “belongs to Brazil, not to Petrobras.” In doing so, he helped push Petrobras’ share price sharply lower and irked many Brazilians who see the company as a source of national pride.


Drawing inspiration from oil-rich Norway for ideas on how to manage the reserves, some government officials advocate creating a new state company to oversee the subsalt fields. Brazilians have already nicknamed the proposed company “Petrosal,” or “Petrosalt.”

That would involve adopting a production-sharing model in which the new state firm would own the rights to the reserves but would leave production to Petrobras and foreign firms already operating in the area, such as ExxonMobil Corp XOM.N and Shell RDSa.L.

Currently, Brazil auctions off the rights to oil blocks to the highest bidder and charges royalties and taxes in return.

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In addition, the government may raise royalties and taxes on the subsalt blocks where Petrobras and its foreign partners already operate -- concessions that officials say will be honored. It is also studying raising its stake in Petrobras.

The idea of a new state oil company is proving controversial. Petrobras’ chief executive Jose Sergio Gabrielli has said there is no need for a new company to manage the reserves. And any attempt to change the rules governing the oil sector is likely to face opposition in Congress.

“Why change a model that has been hugely successful in Brazil, a model that was responsible for the discovery of the subsalt reserves in the first place?” said Adriano Pires, a former director at Brazil’s National Petroleum Agency.

Hoping to sway public opinion, Lula plans to dip his hands in the first oil from below the salt layer next week and talk up the significance of the finds on national television on September 7, Brazil’s independence day. The armed forces are also planning offshore maneuvers in the subsalt areas to show that Brazil is prepared to defend its oil wealth.

Experts warn that Brazil should step cautiously to avoid the mistakes that led other developing countries to squander huge oil resources through mismanagement and corruption.

“One of the biggest temptations, which always leads to problems, is to try to accelerate development and move fast into some kind of great leap forward,” said Terry Karl, a political scientist at Stanford University and the author of “The Paradox of Plenty: Oil Booms and Petro-States.”

“Brazil has all the ingredients to get it right. But they need to move slowly, be transparent, and have a broad national debate about what their priorities are,” she said. “If they do that, it’s possible that this could turn out different than it has in other parts of the world.”

Editing by Stuart Grudgings and Kieran Murray