When Luiz Inacio Lula da Silva was elected in 2002, his leftist credentials troubled many investors, who worried about a turn against the markets by Latin America’s most populous nation. Yet a little under five years later, the Brazilian president has emerged as a voice of moderation in a region brimming with populist leaders such as Venezuela’s Hugo Chavez, Ecuador’s Rafael Correa, Bolivia’s Evo Morales, and even Argentina’s Nestor Kirchner. Lula’s pragmatism contrasts with his Latin peers in many respects but especially on the strategic energy front: the Brazilian president and his diplomats have been at pains to contain the revolutionary enthusiasm engendered by other energy producers in the region; political radicalization and nationalization programmes that have recently been implemented in several Andean countries have left many investors in the lurch.
Lula has remained a steadfast advocate of regional energy integration, and his efforts have intensified in recent years – several large-scale infrastructure projects are set to be financed, which may become excellent business opportunities. Brazil is both a large producer and a large consumer of energy. Its state-controlled energy company Petrobras is therefore a key partner in integration schemes. “Regional integration is a necessity, and Petrobras intends to be a leader in this market,” the president, Sergio Gabrielli tells Emerging Markets. “There are two other large players in the region. [Mexico’s] Pemex is currently facing a serious problem because its reserves are declining. [Venezuela’s] PDVSA has huge reserves, but it needs to expand production,” he says. Meanwhile, Petrobras has reserves of 11.77 billion barrels of oil equivalent – more than half of which is still unexplored.
Brazil’s strong relations with neighbouring Bolivia were challenged by president Evo Morales’ nationalization of hydrocarbons almost a year ago. Brazil relies on Bolivia for half its gas, and Petrobras owns two refineries there. Relations between the two neighbours have soured since the Morales government insisted on increasing the price of its gas to its main customer. Both parties finally reached an agreement last February after lengthy negotiations. “Petrobras has acknowledged that the gas it has been purchasing from Bolivia is much richer than what we were actually paying for,” explains Gabrielli, referring to the energetic value of Bolivian gas (propane, butane, methane, etc.). This may cost less than $100 million per year for Petrobras and Brazil, but some analysts say this is sending a wrong signal. “The [Brazilian] government overlooked Petrobras’ interests as it bowed to Bolivia’s pressure,” says Fabiana d’Atri at the Sao Paulo-based consultancy Tendencias.
Gabrielli notes that hydrocarbon-related matters must often take the geopolitical dimension into account. Petrobras gas and energy director Ildo Sauer is even more straightforward: “The role of the state must be that of a protagonist to deliver the broad guidelines. This is the reverse of what used to happen in the 1990s or at the beginning of the decade, when ultraliberal policies were predominant, and market forces were believed to be able to solve everything. “The Latin American experience shows that it is possible to have a hybrid model, where the state is in control and there is also private investment,” he adds. The Brazilian approach in favour of state-led development is a soft one compared to the strong-arm tactics employed by several other governments in the region.
Venezuela and Bolivia have nationalized hydrocarbons, and Kirchner has poor relations with private foreign investors in Argentina, following the debt moratorium and the breach of several contracts. Inflation pressures have resurfaced in Argentina and Venezuela, and Chavez has already initiated a monetary reform to knock three zeros off the bolivar at the beginning of next year, a method that has seldom worked in the past. If oil prices drop, Venezuelan public finances will face a crisis. Meanwhile, Bolivia has threatened to take over installations owned by foreign energy companies, including Petrobras. But the developing country still lacks technicians and a skilled workforce to manage refinery operations.
Common interests
Lula’s pragmatist tone is much closer to his Chilean counterpart Michelle Bachelet than to Chavez or Morales. At the same time, he has pursued, in spite of widespread criticisms at home and abroad, a key objective to integrate the so-called South American community and to include leaders who are ostracized by several western governments. The picture may still look very obscure to outsiders, but energy has clearly emerged as the key to regional integration. The main project, a huge 8,000km gas pipeline from Venezuela to Argentina, could lead to as much as $25 billion in investment. Nevertheless, it is also the most controversial, as it would have to cut through the Amazonian forest and the rest of Brazil. Despite widespread environmental concerns, Brasilia has shown that it is ready to support the project.
During the latest Mercosur summit (of which Venezuela is now a full member), an agreement was signed to launch a feasibility study for the first stretch of the pipeline between the south of Venezuela and the north-east of Brazil. In turn, Brazil’s Petrobras is interested in Venezuelan state oil company PDVSA’s cooperation to build a much needed oil refinery on Brazilian soil, which will help it reach self-sufficiency, and jointly explore oil in Venezuela’s Orinoco belt. The Brazilian state-owned development bank (BNDES) also has a vast portfolio of energy integration projects to finance, including a series of small gas pipelines in the region and an electricity transmission line in Uruguay. So many common interests explain why a feeling of entente cordiale predominates between regional heads of state when they meet to discuss controversial issues. “The political trend leads to convergence,” says Petrobras’ Sauer.
This is exactly what happened when Lula met Morales on February 15 and accepted a small increase in the price of imported Bolivian gas (up to $100 million per year), after Bolivia complained that it received less from Brazil for its natural gas than it would if it supplied Argentina. “The main contract to supply Brazil via the Bolivian pipeline will continue to be implemented, with a capacity of 30 million cubic metres per day (which is the equivalent of 200,000 oil barrels per day). There is a separate contract to supply a thermo-electric plant in Cuiaba that represents only two million cubic metres per day ... which was signed at the time when the plant was owned by Enron and Shell,” says Sauer. In the case of the Cuiaba plant, the price of natural gas was readjusted from $1 per million British Thermal Units (BTU) to $4.2 per million BTU.
Partners
Morales once said he wanted partners instead of bosses, and Brazilians seem ready for partnership, as they have adopted a conciliatory tone towards their impoverished neighbour. “Petrobras has kept on producing in Bolivia. Its situation has deteriorated a little, but it is still OK,” says Sauer. “Morales does not want to breach contracts. He wants legitimate contracts. This has to be debated politically. The problem is that people sometimes see things their own way, and they just don’t see what can be achieved [through negotiations].”