Brazil moves aggressively toward resource nationalism

By Ian Bremmer

Brazil's emergence as an investor-friendly, free market democracy has been one of the world's most encouraging stories of the past several years. As Venezuela's Hugo Chavez perfects his Castro impersonation, Ecuador and Bolivia follow Chavez's example, and Argentina's economy flounders, Brazil's President Luiz Inacio Lula da Silva has maintained responsible macroeconomic policies -- while redistributing wealth to narrow the still-considerable gap between the country's rich and poor. But as he begins his final year in office, a huge off-shore oil find has emboldened his government to deepen state control of the energy sector, clouding the investment picture.

Lula now looks likely to win a legislative battle over the future of Brazil's oil sector. State-owned oil company Petrobras will then hold exclusive rights to operate all new exploration and production in off-shore fields that are believed to contain one of the world's largest deposits of crude oil discovered in recent years. Brazil's government will then control all activity in the new fields, making the big decisions on project operation and management. Over time, Petrobras will become a much larger but less profitable and less efficiently run enterprise.

No surprise then that multinational oil companies resolutely oppose this plan. Despite the tremendous potential in the offshore fields, many of them may simply opt not to work with Petrobras under the terms the Brazilian government has proposed. That's why there's a real risk that Brazil will have to turn to Chinese and other state-owned energy companies for the resources they'll need to bring this oil to market. That will be bad news for those who import oil because, though Petrobras has the technical expertise for the job, the company is already approaching overstretch on development of existing projects. The fact that Petrobras can do the job doesn't mean it should. Partnership with oil multinationals with much more experience managing projects to recover maximum quantities of deep sea oil deposits would bring more oil to consumers -- and do it more quickly and efficiently.

Brazil's opposition isn't happy with Lula's plan either, but his popularity (near 80 percent) has kept the opposition quiet. Even Sao Paolo Governor Jose Serra, the candidate most likely to defeat Lula's preferred successor (Chief of Staff Dilma Rousseff) next October is keeping most of his reservations to himself. Lawmakers who would normally oppose a government-managed plan are eager to remain in Lula's good graces as elections approach.

Multinational oil companies are moving cautiously, as well. They've aired their criticisms through Brazil's Petroleum Industry Association, but have avoided direct involvement in Brazil's election dynamic. 

Without determined opposition, the legislation will probably pass. If Serra wins next fall's presidential election, he will probably try to reverse the legislation. But that would be a long process. If Dilma wins, international oil companies can only hope for an eventual victory in court on the reform plan's constitutionality. Either way, Brazil's energy sector will be much less investor friendly for the next several years.  

Ian Bremmer is president of Eurasia Group.