Friendly neighbors

Today's energy worries are a hemispheric, not a country-specific problem.

Sep 4th, 2001

Today's energy worries are a hemispheric, not a country-specific problem.

Brazil is a dramatic case in point. It is suffering from a full-blown energy crisis, a result of both natural forces and human error.

About 90% of Brazil's electricity is generated by hydropower, and the country has been plagued by low rainfall over the past few years. The fact that neither the state-owned electric company nor outside investors put enough money into generating plants compounded the problem.

As a result, the country's struggles to meet its demand load are now more severe than what has been seen the past year in California.

"The effects of the shortage are widespread: night-time soccer matches have been canceled, cash machines only function part of the day, and thermostats are set at unusually high temperatures," the US Energy Information Administration said in a recent analysis.

Oil for power

The government has been far more successful attracting capital in developing its oil sector, which began liberalizing the rules on foreign investment in the late 1990s. Some Brazilian officials sought without much success to place the same kind of conditions on foreign investment that Saudi Arabia was able to impose when faced with similar power problems.

The Saudis leveraged interest in its oil and gas deposits into restrictive deals expected to generate cash for infrastructure. Foreign oil companies may only help develop natural gas fields; the gas then may be used only for domestic projects such as desalination, power generation, or petrochemical production.

Saudi officials say that, for every $1 invested in the gas venture, another $5-8 will be spent on domestic projects. This translates to a total foreign investment of over $100 billion.

Brazil's bargaining position was more limited, given its smaller proven reserves and higher production costs.

Power from oil

Brazil may not have the same clout among the megamajors as does Saudi Arabia, but it still is an important energy player. It is the largest country in South America and has the second largest oil reserves on the continent (after Venezuela) at 8.1 billion bbl, according to EIA.

With consumption at 2.0 million b/d and production at a healthy 1.5 million b/d, the country is also on its way to a long-standing political goal of oil self-sufficiency.

It will likely continue to attract investment from foreign sources, although US companies are mildly wary of the political climate.

Brazil follows a foreign policy that does not necessarily dovetail with that of the US-a reputation also shared with key US oil supplier Venezuela. Leaders from both countries recently met with Cuban President Fidel Castro to celebrate the opening of a power transmission line connecting Venezuela with northern Brazil.

Brazil is also reaffirming ties with Saddam Hussein. It reopened its embassy in Baghdad last month, citing a desire to expand trade with Iraq once United Nations sanctions are revised.

Most of the oil Brazil imports comes from neighboring Venezuela and Argentina. But it also imports crude from Iraq under the UN oil-for-aid program. The US also imports oil from Iraq under the program, but only because the oil revenue is tightly controlled by the UN Security Council.

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