Blessed with the world's largest oil discovery in 30 years, Brazil has recently proposed a new development model designed to turn this unexpected windfall towards the public good rather than the curse it has become for other nations, which have found their discovery a short-lived path to prosperity because of the damage it can wreak on the overall economy. Brazil is determined to forge its own way to best manage the exploration and development of these vast oil reserves as well as their ultimate revenues.
To ward off the future oil curse, Brazil is taking bold steps today along a tightrope. On one side of our balancing pole is the commitment to remain a reliable development partner to foreign governments and energy companies. On the other is our country's desire to control its own resources and use their revenues to fuel our fight against poverty and improve social equality.
What's proposed is a New Social Fund that not only would keep these efforts on track for generations to come but also would help shield the economy from the potentially destructive impact of a resource windfall. Also helping to fend off the "curse" is the hard-earned fact that the oil bonanza arrives in a diverse economy and a land rich in many natural resources.
Brazil's booming economy, expected to grow about 4% next year, was attractive to foreign investors well before the discovery of the massive presalt oil reserves. The new legal and regulatory framework submitted to the National Congress aims to preserve this allure.
New system
In the newly outlined production-sharing system, foreigners will remain welcome to bid for contracts to explore and develop oil in association with Petrobras. Last year's global financial crisis–from which Brazil was one of the first countries to recover–has shown us that government involvement can be essential to protect public interest.
The new system would impose stringent oversight onto the contract process to fight corruption and ensure scrutiny. It would rest on a foundation of Brazil's already strict banking transparency regulations, which have helped turn Brazil from a debtor into a creditor nation and produced the clear, real-time metrics that enabled the central banks to take quick measures to counter the global financial crisis.
The existing development contracts already held by foreign companies for 26% of the presalt territory will be unaffected by the new regulations. These agreements will be honored and cover what Petrobras estimates as 5-8 billion bbl of oil and natural gas equivalent. In addition, the current concession model will remain in effect for Brazilian onshore sites.
In the 72% of unlicensed presalt reserves, Petrobras will operate all exploration contracts and partner with all parties while keeping a minimum of 30% of costs incurred and profits realized. That formula leaves plenty of profitability for investors, and Brazil still needs these foreign partners to bid on development rights. A competitive market is a stronger one, both financially and technologically. International investors viewing involvement alongside Petrobras face a tremendous opportunity, as Petrobras has established global benchmarks developing technologies for deep-sea oil exploration. Furthermore, presalt oil exploitation is high reward, low risk.
Social fund
With the creation of the New Social Fund, Brazil will create a public savings account that funnels presalt revenue into education, science, and technology as part of our fight against poverty. Countries that have successfully managed wealth from their newly found natural resources, such as Norway, earmarked those funds as investments in human capital and development.
The New Social Fund would draw income from different facets of presalt exploration and production revenues to fuel Brazil's commitment to socially inclusive development. Core to President Luiz Inacio Lula da Silva's priority of sustainable growth to reduce poverty and inequality, this would further brighten a social landscape, which during 2004-08 saw a 10-point rise in the proportion of Brazilians belonging to the middle class—currently 52%.
Brazil continues to take a long-term view of managing these natural resources, including a commitment to renewable and alternative energy. We are self-sufficient in oil, and the presalt discoveries will not impact our clean and renewable energy network. For example, last year, 160 hydroelectric plants produced 74% of all electricity generated, and only 27% of the country's hydroelectric potential has been explored. By 2017, the expanding Brazilian economy is projected to demand approximately 155,000 Mw of installed energy capacity. Despite the presalt bequest, 80% of that energy will continue to come from renewable sources. We also boast the world's largest flex-fuel fleet.
Given the magnitude of expected reserves, many issues surround the development of what international geologists estimate could be tens of billions of barrels of recoverable oil. But the country's fundamental objective is to exploit this resource in a way that bolsters Brazil's economy and its progress in fighting poverty while remaining a reliable international business partner, rewarding the investments of the countries and international oil developers that join Petrobras in exploiting the presalt layer.
Like Brazil's actions to shield its economy from the global financial crisis, the new plan is another step on our unique path as full participants of the world economy while remaining responsible for stewarding our own resources and destiny. For the oft-described country of the future, the future is now.
The author
More Oil & Gas Journal Current Issue Articles
More Oil & Gas Journal Archives Issue Articles