Brazil: A new royalties scheme

On 2nd December, the Brazilian Congress approved the fourth and last bill of the normative framework for pre-salt. The bill defines the production-sharing scheme and allocates royalties to all the states and municipalities, even those that are not producers of oil and gas from pre-salt.

The latter was the more controversial aspect of the legislation, and, by political agreement with the interested governors, it was acknowledged that President Lula would exercise his presidential prerogative of a partial veto of the legislation and proposes a new system of allocation of royalties, by gradually reducing the portion reserved for hydrocarbon-producing states over a period of ten years.

This reduction in royalties would be compensated, over time, by the increase in the volume of oil and gas produced, and hence by an enhancement of royalties accruing to producing states. The principal of these so far is Rio de Janeiro. The new scheme will be defined by Dilma Rousseff in 2011.

A recent article in the Wall Street Journal drew attention to the fact that eight out of twelve of the world's largest deep-sea petroleum deposits discovered over the last 30 years are in Brazil. All of them are being explored by Petrobras, and they are equivalent to 15 billion barrels of oil, more than Brazil's current conventional reserves and nearly two-thirds of those of the US.

There is no doubt that the new frontier of pre-salt is the key to the economic redemption of Brazil. It could spell an end to the country's staggering social iniquities.

For more news and expert analysis about Brazil, please see Brazil Focus.

© 2010 Menas Associates

What effect will the election have on Brazil's energy sector?

Before becoming Lula's Chief of the Civil Cabinet and his right hand, Dilma Rousseff had been his Minister for Mines & Energy and chair of Petrobrás. Throughout Lula's eight-year mandate, she remained in control of the energy sector, under the political dominance of PT and PMDB parties.

The results were not encouraging. The sector today reflects the government's general proclivity towards nationalism and state interventionism. Petrobras' capitalisation has been an unmitigated mess, as has been the entire pre-salt institutional framework. These tendencies are likely to persevere under Dilma's tenure as president. Moreover, she is prone to greater influence than Lula by the radical wing of the PT party, which translates into a statist, xenophobic and anti-capitalist bias.

There might be more overtures to South American energy integration, but in practice this means yielding to the demands of Brazil's 'Bolivarian' neighbours led by Venezuela's President Hugo Chávez, plus Paraguay, thus continuing Lula's failed scheme of a "diplomacy of generosity" at the expense of the Brazilian taxpayer.

If the former São Paulo governor and main opposition candidate, José Serra, wins the presidency, there will be none of the latter, and indeed the model for the energy sector will most likely consist predominantly of public-private partnerships (PPP), for which laws are now in effect, but, under Lula, not enough political will to implement them.

Dilma can be expected to pursue Lula's national-developmentalist strategy, in the energy sector, as well as Brazilian infrastructure in general.

For more news and expert analysis about Brazil, please see Brazil Focus.

© 2010 Menas Associates

Brazil: Election campaign momentum

José Serra's campaign is not doing well. He is trying to do in 40 days what PSDB failed to do in eight years of Lula's tenure. Serra's original assumption was that, given Lula's tremendous and unshakeable popularity, he should not criticise the president's performancebut focus on Dilma Rousseff.

Since Lula has adroitly managed to convince most of the electorate that Rousseff's tenure as president would be a mere formality, and a continuation of his own – and indeed that he would remain as president in all but name – it follows that Serra should attack Lula himself.

However, in the states the parties in Serra's coalition (PSDB-DEM-PPS) are blithely ignoring him. Tradition and ethics demand that the candidates for governor, senator, federal, and state deputy positions advertise the presidential contender in addition to themselves, but this is not happening. By contrast, Rousseff's campaign is blessed by Lula's appearance every time.

As the campaign unfolds, Rousseff has acquired self-assurance in live TV interviews, where she tries to underline both continuity with Lula's government and her own capacity for governing Brazil. Serra had been using the argument of his record of experience, but Rousseff is asserting her own experience.

For more news and expert analysis about Brazil, please see Brazil Focus.

© 2010 Menas Associates