Brazil Fights Recession with Investments AS/COA Online 01/27/09
Brazil began 2009 facing deteriorating economic conditions and rising unemployment. But, through recent actions, the Brazilian government seeks to steer the economy into safer waters by committing billions of dollars to create jobs and propel Petroleo Brasileiro (Petrobras) into the heavyweight category of oil production companies. Furthermore, U.S. President Barack Obama signaled his interest to work with Brazilian counterpart Luiz Inácio Lula da Silva to move forward on biofuels and the Doha round of global trade talks. Lula will visit Washington to meet with Obama in March.
With the goal of jumpstarting the ailing economy, Brazil’s Central Bank reduced its overnight lending rate by a full percentage point to 12.75 percent on January 21. The move intended to stimulate economic activity at a moment when financial markers signaled the danger of recession; private consumption has shrunk, December job losses hit their highest level since 1999, and analysts predict GDP growth may not reach the 2 percent mark in 2009. The Economist Intelligence Unit’s ViewsWire augurs that industrial growth could be close to zero and private consumption may drop to 0.9 percent in 2009—down from 6.2 percent last year. The analysis applauds the cash infusion of more than $42 billion into the Brazilian Development Bank (BNDES), designed to stimulate the creation of new employment. The fund helped create 2.8 million jobs in 2008 alone, according to BNDES data. “The businessmen who used to shop for funds on the international market and are not managing to obtain capital due to the financial crisis will be able to resort to the BNDES,” said Brazilian Finance Minister Guido Mantega last week.
In tune with the government’s actions, Petrobras unveiled a plan on January 23 that promises a 55 percent expenditure increase over the next five years. The package includes investments of more than $174.4 billion, with $28 billion alone to finance exploration of recently discovered pre-salt oil fields. The company also hopes to double its total oil and natural gas output by 2015, counting on the Tupi oil field and three other offshore camps to begin production. The day after the plan’s release, the first fully Brazilian-made natural gas platform, with capacity to generate electricity for 300,000 people, started operations. This also marks a step forward for Brazil’s naval industry, which will build another eight platforms to be deployed by 2013.
Washington’s new administration has signaled interest in working with South America’s largest economy this week in the fields of energy and trade. Following Monday’s phone conversation between the presidents of both countries, a spokesperson from Lula’s office announced that Obama “is interested in continuing discussions to advance the Doha round” of trade negotiations. In his January 26 edition of his radio show, “Café com o Presidente”urged Obama to push Doha forward.
A new report by AS/COA’s Trade Advisory Group entitled Building the Hemispheric Growth Agenda: A New Framework for Policy proposes creation of a hemispheric energy partnership that would include Brazil: “[A]s a starting point to greater regional integration, the United States and other willing partners across the hemisphere, perhaps as an E4 or E5, should join together to formulate a mutually beneficial hemispheric energy agenda roughly analogous to the original European Coal and Steel Community.” The report also suggests that the new U.S. administration should scrap the 54 cent-per-barrel tariff on Brazilian ethanol and consider a pact for a civil nuclear program similar to the one signed with India during the Bush administraion.
A December AS/COA panel analyzed the investment climate for energy in the region, with an emphasis on Brazilian energy and Latin American integration.
Deepwater Troubles AS/COA Online 02/21/08
Last week, Pemex declined an invitation to join Petrobras as a minority partner in a deepwater exploration in the U.S. side of the Gulf of Mexico. This despite Pemex’s twin problems of declining production and limited exploration capacity to tap large oil reserves in deeper waters. The conundrum rests now in how to get to those reserves without the technical ability and with constitutional hurdles barring privatization of the government’s energy monopoly.
Pemex’s production woes are not new and, according to the Energy Information Administration, Mexico’s proven oil reserves continue to fall. Cantarell, once the world’s biggest offshore oil field, reached its peak production capacity in 2004, but has seen production rates shrink by 500,000 barrels of oil a day.
In early February, Mexican Energy Secretary Georgina Kessel predicted that Mexican oil production would drop by another 200,000 barrels in 2008. She also stressed that Mexico holds roughly 100 billion barrels of equivalent crude oil, saying the country has “plenty of oil, but we need to find ways of turning these reserves into production and into resources for the Mexican people.” In a report setting out a five-year strategy, the energy ministry reports that total oil production could declice by 2.5 million barrels a day.
Mexico’s President Felipe Calderón—who served as energy minister in the Fox administration—echoes Kessel’s concerns. During his recent tour of the United States, he said, “The problem is that this treasure is buried beneath the ocean. To reach that oil we need to strengthen Pemex.” To meet that goal, Calderón has worked to push through reforms of constitutional law (PDF), which keeps Mexico’s hydrocarbons in the hands of the state. Mexico was the first developing country to nationalize its oil industry, expropriating U.S. and British holdings in 1938. As the Economist notes, Pemex’s failings are related to “two wasted decades in which governments have milked Pemex of cash which it might otherwise have invested.”
But Calderón’s efforts to open up Pemex to private investment have hit a roadblock in Mexico’s opposition-controlled Congress. As a Houston Chronicle analysis reports, opponents to the reform say the Calderón administration paints a dark future for Pemex to rally support for privatization. Among the critics stands Calderón’s political adversary Andrés Manuel López Obrador, who lost the presidential election by a hair in 2006. The former Mexico City mayor argues that rooting out corruption would serve to fix Pemex’s troubles. López Obrador may be able to strike a chord among Mexicans who remember a former privatization by President Salinas de Gortari’s, which gave Mexican billionaire Carlos Slim a monopoly over the telecommunications industry. As Newsweek’s “Why It Matters” blog reports, Calderón must ensure that reforms occur “under circumstances that primarily benefit the Mexican people.”
Enter energy giant Petrobras, which could serve as a role model—and potential partner—for Pemex. The Brazilian firm’s aggressive energy exploration policy led to two major offshore oil discoveries in 2007 plus more ventures in the U.S. Gulf Coast, West Africa, Turkey, Colombia, and, recently, Cuba. While Mexico began deepwater exploration in 2006, Petrobras drilled its first deepwater well in 1992, at a depth of more than 3,250 feet deep. The company has hit some hurdles along the way, such as a failed $135 million exploration venture with ExxonMobil and Colombian state-owned Ecopetrol in the Caribbean coast. Still, Petrobras, which the government maintains a 55 percent stake in and which began accepting private investment in the early 1970s, has been recognized as a model for other national oil companies to follow. For now, Pemex has turned down Petrobras’ partnership offer; energy reform could open the door to similar agreements in the future.
View a report by COA’s Energy Action Group on building lasting energy partnerships to improve security and prosperity in the Americas.