Down in Brazil, it’s still ‘drill, baby, drill’

By Erasto Almeida and Willis Sparks As a constant gush of crude oil into the Gulf of Mexico illustrates the dangers of deepwater production, policymakers around the world must make tough choices on how and when to open other deepwater projects. You’d expect that America’s ongoing nightmare might generate serious debate in Brazil, where policymakers ...

By , the president of Eurasia Group and GZERO Media.

By Erasto Almeida and Willis Sparks

By Erasto Almeida and Willis Sparks

As a constant gush of crude oil into the Gulf of Mexico illustrates the dangers of deepwater production, policymakers around the world must make tough choices on how and when to open other deepwater projects. You’d expect that America’s ongoing nightmare might generate serious debate in Brazil, where policymakers and petroleum engineers are moving forward with plans to develop one of the world’s largest oil discoveries in a generation. Political factors ensure that that’s not so.

Brazil’s plans are plenty ambitious. British Petroleum’s Deepwater Horizon project drilled at ocean depths of 4,920 feet. Brazil’s reserves, discovered in 2006, are located beneath a layer of salt more than 7,200 feet down. Petrobras, Brazil’s national oil company, will assume ultimate responsibility for bringing the oil safely to the surface if current legislation makes its way through the country’s congress.

The technical challenges are considerable. Petrobras will have to reinforce pipes to withstand enormous deep-water pressure. Special alloys must be used to limit the corrosive effects of high levels of carbon dioxide. The unstable ocean floor above the salt will make rigs difficult to anchor. No oil company in the world has ever faced such complex challenges. Yet, Brazil is advancing full speed ahead, and its plans have broad public and political support. Why?

First, there’s an element of national pride involved. Brazilian officials remind doubters that Petrobras is the world’s leading producer of deep-sea oil reserves. The state-owned company produces more than two million barrels per day, more than three quarters of which is drawn from deepwater wells. Nearly one fifth of the total comes from depths equal to BP’s Deepwater Horizon rig. Officials add that, as with the financial crisis, America’s current problem flows from a catastrophic failure to regulate. Brazil will adopt tougher safety standards. The country’s National Petroleum Agency, responsible for oversight of rig and well safety, is already preparing a detailed study of the state of equipment — and of contingency plans should disaster strike. Whether the subject is big banks or big oil, Brazilian officials insist there is little risk in their country of American-style regulatory complacency. That said, they’re also likely to limit the cost of new regulatory burdens to ensure that plans move forward without unnecessary delays.

Second, Brazil’s legislative debate over oil reform has centered in recent months on how the huge expected deepwater profits will be divided among federal, state, and local governments. That gives political powerbrokers at every level a substantial share of the spoils — and a reason to support the project. 

In addition, the current government sees state-owned Petrobras as a useful tool of economic policy. During the slowdown in Brazil that followed the U.S. financial crisis, Petrobras helped protect local jobs by expanding local investment and buying larger percentages of its equipment from Brazilian suppliers. Petrobras can be even more useful if it meets its public target of doubling production over ten years, and most of the added output will come from the deepwater pre-salt reserves. President Luiz Inacio Lula da Silva has called the deepwater discovery a "second independence for Brazil." In part, that’s because it can reduce the country’s dependence for growth on economic conditions elsewhere. That’s a powerful political incentive for a fast-developing country.

Ironically, the spill in the Gulf could actually accelerate Brazil’s plans. If oil-stained U.S. beaches lead to a longer-than-expected U.S. deepwater drilling moratorium, additional supplies of capital and equipment could become available. Some of those supplies will likely make their way south.

Only a major spill that finds its way onto Brazil’s beaches could slow the momentum toward developing the pre-salt reserves. That’s not impossible. The most promising deposits are located offshore between Rio de Janeiro and Sao Paulo, Brazil’s most densely populated cities by far.

But even a large spill might not make a difference. The largest wells are 150 to 250 miles offshore. More to the point, Brazilian officials say that ocean currents would carry leaking oil further out to sea — not onto Brazil’s beaches.

Are they right? We won’t know for sure unless and until it happens. But we do know that, for better or for worse, Brazil is about to drill deeper than ever before.

Erasto Almeida is a Latin America analyst at Eurasia Group. Willis Sparks is an analyst in the firm’s Global Macro practice. 

Ian Bremmer is the president of Eurasia Group and GZERO Media. He is also the host of the television show GZERO World With Ian Bremmer. Twitter: @ianbremmer

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