Brazil’s oil boom constrained by nationalist, political agenda

AEIBy Roger F. Noriega and Felipe Trigos

The Washington Post this morning exposes the disappointing performance of Brazil’s petroleum industry, citing the inherent problems with state-owned oil companies that were explained last July in AEI’s Latin America Outlook, “Latin American energy monopolies: Boom or bust?

The Post reports, “Petrobras is saddled with mandates and heavy government interference that analysts say have overburdened the company. To revive the shipbuilding industry, for example, Petrobras and its partners must use oil platforms and other heavy equipment built in Brazil — which has led to huge cost overruns and equipment shortages.”

Furthermore, the Post explains, “Petrobras is required to be the lead operator and is required to have a minimum 30 percent stake in any new pre-salt fields, which has encumbered the company with huge financial responsibilities while driving potential foreign partners away.” As a result of these burdens (as well as test wells coming up dry), premier international companies – Exxon Mobil, Chevron, and BP – opted not to participate in an auction of a Brazilian field “thought to hold up to 12 billion barrels of crude.”

The Post cites a single Brazilian analyst to explain the extraordinary constraints of trying to run an oil sector that must answer to politicians with short-term economic and electoral agendas. That resource nationalism is a huge constraint to the development of a healthy petroleum sector, as my colleague Felipe Trigos and I wrote last July:

[Nationalistic and populist] political arguments have fallen flat as state-run oil companies have failed to deliver bonanzas for their people despite historically high oil prices and the discovery of staggering oil deposits. It is clearer than ever that government interference and barriers to foreign capital and technology have inhibited the growth of a strategic industry. In short, government policies based on nationalism rather than on free market principles are a recipe for failure.

Ideally, governments would get out of the oil business altogether. But at the very least, as argued in our AEI paper on this subject, “Professional management, transparency, free competition with private companies, and openness to foreign capital and technology can help state-owned energy companies maximize their potential and deliver optimal long-term dividends for their nations.”

We wrote in The American last December that Mexico has adopted an energy sector reform that – on paper at least – contemplates surprisingly ambitious steps in the right direction. Of course, as we cautioned, the implementation of such reforms depends on the political will of politicians. Therein lies the problem.

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