By Juan Carlos Quiroz and Mari Joseph
A Parliamentary investigation of corruption at Petrobrás should receive greater consideration during the debate on the new legal framework for hydrocarbon management in Brazil. On July 14, 2009, Brazil installed a Parliamentary Investigation Committee (PIC) to clarify a number of accusations of corruption involving the National Petroleum Agency (NPA) and Petrobrás. The allegations came a year ahead of Brazil's general elections (scheduled for October 3, 2010) and in the midst of a major debate about the country's new energy policy proposed by the Executive after the discovery of significant hydrocarbon deposits in the so-called pre-sal oil fields.
As the Brazilian government and Congress discuss reforms in the legal framework for hydrocarbons, they should provide conditions for the PIC to conduct a credible investigation and take this opportunity to strengthen transparency and accountability in the sector, as the country faces the possibility of becoming a major petroleum power.
The Parliamentary Investigation Committee on Petrobrás
In May 2009 Brazil's opposition parties, led by the Brazilian Social Democratic Party (PSDB), collected 32 signatures from senators (five more than necessary) in support of creating a PIC to investigate cases of corruption involving Petrobrás and the National Petroleum Agency. The agenda of the PIC includes alleged fraud in procurement of exploration platforms; irregularities in contracts for platform construction; over-invoicing in the construction of the Abreu Lima Refinery in Pernambuco; accusations of misappropriation of oil royalties; alleged fraud in diverse payments to sugar mill owners; accounting irregularities to reduce taxes paid for up to 4.3 billion reais; and irregularities in the use of Petrobras sponsorships.1 According to the agenda of the PIC, some of these accusations are based on Federal Police and the Federal Auditing Tribunal investigations.
In the absence of a comprehensive investigation or independent analysis, Petrobrás has publicly denied these allegations2 and it has started a blog to address accusations and provide information on the activities of the PIC.3 The Brazilian public appears to be hungry for results from this investigation. A poll released by the Senate on July 1—taken among 1,277 adults from 81 regions of the country—shows that the PIC was supported by 84 percent of respondents; 67 percent believed that the PIC can help address the alleged violations committed by the state owned company. This evidence that the public is concerned about corruption in the oil industry should compel the Brazilian government to take these allegations of malfeasance seriously and to contribute to a credible investigation.
The timing of the PIC's creation, however, has stirred a powerful political confrontation, in particular because of the next general election. The Petrobrás PIC was appointed on July 14, with Labor Party (PT) Senator Joao Pedro as chairman and the Brazilian Democratic Movement Party (PMDB) Senator Romero Juca as reporter. The PIC has 180 days to do its work (starting on July 14), with a possible 180-day extension, which means it will overlap with the build up to Brazil's general elections scheduled for October 3, 2010. The Committee's activities are likely to touch sensitive issues that may seize the public's attention during the electoral debate and end up having an impact on the electoral outcome next year.
The politicization of the debate around the PIC risks diverting the debate from the main policy issues raised by this affair and the need to strengthen checks and balances, as well as accountability to prevent corruption in the long term in both the National Petroleum Agency and Petrobras. For instance the government and its supporters have attempted to disqualify the PIC as a strategy of the opposition to privatize Petrobrás, benefit foreign interests and enact a "neoliberal" agenda.4
As mentioned above, the ongoing debate about the installation of the PIC has also coincided with the discovery of huge potential deep water oil reserves and the subsequent initiative to revise the petroleum legal regime. The discoveries at the Tupi and Sugar Loaf oil deposits in late 2007, together with the Júpiter deposit discovery in 2008, have opened the possibility of turning Brazil into an oil giant. All these deposits are located offshore, between the states of Espíritu Santo and Santa Catalina in southern Brazil, in a stratum under the salt layer seven thousand meters below sea level. These discoveries, which have come to be known as pre-sal, have been compared to the vast oil reserves of the North Sea, and they are estimated to hold 30 to 50 billion barrels of oil. Such a find gives Brazil the opportunity to position itself as one of the most important oil and gas-producing and exporting countries in the world.
This potentially damaging corruption investigation comes at a time when the Government and Petrobras would like to celebrate this success rather than fight accusations of corruption. However, instead of brushing the PIC off, the government should take the opportunity to strengthen checks and balances to reduce opportunities for corruption in the future. By addressing this issue in a constructive way, the government and the opposition parties in the Congress would strengthen confidence in the legislative procedures, and would help Brazil to prepare for the potential oil windfall with increased transparency and accountability mechanisms.
Why the PIC matters in the discussion of a New Petroleum Legal Framework
The recent oil discoveries have also sparked a vigorous debate about the current regime for hydrocarbon production in Brazil. For President Lula's government, this is an opportunity to redefine the rules of the sector, with the objective of increasing the government's share of the profits and the pledge to use future windfalls to fight poverty. For this reason, in 2008 the Brazilian government created an inter-ministerial committee, including the Ministries of Energy and Mines, Civil Administration, Planning and Finance, as well as the Director General of the NPA, the President of Petrobrás, and the President of Brazil's Development Bank (BNDES), to work on a new regulatory framework for oil production in the pre-sal.
There were two main alternatives discussed before the government submitted its proposal.5 The first option suggested managing the pre-sal fields via concession agreements with private companies that would have been similar to those employed elsewhere in Brazil, but with a higher return for the government (through a hike on royalties and taxes). In the second, the concessionary system would have been replaced by a production sharing contract regime. In this option, the risks of exploration are still borne by the private companies, but the government owns the output, and the company is compensated and recovers costs by being granted a share of the oil produced.
Finally, the government presented a reform proposal (composed of four separate bills) to Congress on August 31.6 The new legal framework would respect concession agreements already signed in the pre-sal region (equivalent to 12 percent of the estimated area of the region), but a new production sharing contract regime will be set in place for future exploration. A new state-owned company called "Petrosal" would be created to supervise exploration and receive some of the revenues from the pre-sal, but with no operational capacity. The new bill also guarantees Petrobrás operating control of every new project and gives it a minimum 30 percent share in all new ventures. Finally, the government will increase its stake in Petrobras, which would diminish the weight of minority investors and the independence of the company. These measures envision a stronger role for Petrobrás while reducing its autonomy and open the stage for a larger role for the state in the day-to-day operations of the oil sector. Complementing this package is the Executive's promise to use future oil revenues to attack Brazil's social problems through the creation of a social investment fund following the Norwegian model.7
While this reform proposal for the oil sector draws attention to the debate over how petroleum resources should be managed in Brazil,8 the PIC's appointment to investigate accusations of corruption in the industry should serve as a warning about the risks that arise when abundant petroleum windfall becomes suddenly available. Corruption scandals are not new in Brazil, but these recent allegations of wrongdoing touch several aspects that are related to the reform proposal, from the issue of a larger government role in the sector and the reduced autonomy of Petrobras to the use of oil profits for social welfare funds. For these reason, the Executive and Congress should make sure that future oil revenues are combined with limits to discretionary powers, transparency provisions and mechanisms to ensure accountability in the state own companies.
Recommendations
The debate over oil industry reform and the handling of the Petrobrás corruption investigations are critical issues in determining the future of Brazil’s hopes of creating a more equitable society. Developing the new pre-sal deposits is crucial to making potential oil windfall a reality. Consequently, the oil industry reform must determine which arrangement will best attract the investments of capital and technology needed to develop these fields, as well as to define the terms for dividing the risks and profits between the state and the investors, while maximizing the benefits that Brazil can reap from this new venture.
How to manage and realize the potential of the new discoveries is only part of the current debate. The proposal to use the potential revenues for social development projects is a sensible policy in a country with the social inequalities of Brazil. However, in pursuing this objective, the government should be aware that other countries in the region and elsewhere have also placed high hopes in their petroleum resources but that corruption, abuse of public funds, the creation of agencies closed to public scrutiny and monopolies with discretionary powers have defeated their best intentions.
Consequently, transparency and accountability in hydrocarbon management must be a key factor in ensuring that the potential windfalls from Brazil's new deposits are used to fight poverty and increase the standard of living. As a first step and a demonstration that both the government and the opposition parties take transparency and accountability seriously, they must both respect and cooperate with the Petrobrás PIC's investigations.
References
Central Intelligence Agency, (CIA). The World Factbook. July 30, 2009.
Departamento Intersindical de Estadística e Estudos Socioeconómicos – DIEESE (2008). As recentes descobertas de petróleo e gás natural e o marco regulatório da indústria do petróleo no Brasil. Nota Técnia. Número 71, August 2008.
Energy Information Administration (EIA). Venezuela Energy Data, Statistics and Analysis. July 30, 2009.
Kingstone, P. (2004). Critical Issues in Brazil’s Energy Sector: The Long (and Uncertain) March to Energy Privatization in Brazil. The James A. Baker III Institute for Public Policy of Rice University.
Mares, D. (2004). Natural Gas Pipelines in the Southern Cone. The James A. Baker III Institute for Public Policy of Rice University. Geopolitics of Gas Working Paper Series. Working Paper n. 29.
Metri, P (2008). Grupos económicos intensificam lobby contra a mudanca do marco regulatorio. O Presal e do Povo! Artículos y Análisis 162. December 22, 2008.
Petrobrás (2009a). Plano de Negócios 2009 -2013.
Petrobrás (2009b). Relatoria Anual 2008. (pdf)
Petrobrás (2009c). Formulario 20-F 2008. Relatório Annual a la Comissao de Valories Mobiliarios dos Estados Unidos Da America. (pdf)
Stevens, P (2004). National Oil Companies: Good or Bad? – A literature survey. The Centre for Energy, Petroleum and Mineral Law and Policy. Volume 14, Article 10.1For a version of the Agenda of the CPI, its objectives and activities, see here. (pdf)
2The clarification processes in these cases have been identified by the company as one of its risk factors, because they impose losses of time and money. See the "Risk Factors" section of the Petrobrás Financial Disclosure Statement to the U.S. Securities and Exchange Commission (SEC) for 2008 (Petrobrás, 2009c).
3See here.
4For more examples of the government's reaction see: "Em resolução, PT diz que eleição de Dilma não é suficiente para manter projecto iniciado por Lula" ("In a resolution, the PT says Dilma's election is not enough to maintain the bill submitted by Lula"), Folha Online. June 26, 2009.
5Barroso, H. y F. Bergonse, 2009. "New Rules of the Game." Energia Hoje. June 5, 2009.
6Originally, the bill regulating the oil industry's operations should have been ready last year, but it was decided to postpone the proposal's release until this year due to the economic crisis and the plunge in oil prices.
7"Lula anuncia criação de fundo social como dinheiro de petróleo" ("Lula announces the creation of a social fund as oil money"), Folha Online. March 28, 2009.
8Stevens (2004) reviews the literature on the relevance of the creation of national oil companies in the framework of the debate on government's role in the economy.
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