Brazil’s Libra Oil Field and the Peril of Government Complexity

If you’re a Brazilian citizen with a relatively low income, you may have been anticipating the launch of operations at the Libra oil field. After all, Libra was expected to be the first project to produce revenues for a new governmental “… special fund that is supposed to spend money on areas like education and health.

Regrettably, though, the plan to generate public funds through the government ownership of oil fields hasn’t proceeded as planned. Although Libra will soon start producing crude oil, the government of Brazil has no ability to sell it.

Huh? In a world that is hungry for energy, and at a time of rising oil prices, how can an oil producer have no means to sell its product? The answer to this question lies in the sheer complexity of the government’s contracting process.

You see, in an attempt to prevent the corruption that has plagued Brazil’s state-sponsored energy firm Petrobras, the rights to Libra’s profits reside in a newly created special fund called Pré-Sal Petróleo SA (PPSA).

But not all of Libra’s profits are placed there; only 42% of “profit oil” is controlled by PPSA. So what does “profit oil” mean?

This is where the legal process become very complicated. Instead of paying Petrobras or other private contractors a simple fee to operate the Libra field, the government permits the firms to keep large shares of crude oil revenues to cover their expenses.

Any revenues in excess of these expenses are shared by the firms and the federal government. And 42% of Lbra’s excess funds has been earmarked for PPSA to finance Brazilian social services.

In accordance with these complex terms, the private contractors cover their expenses before the government obtains its own share of profit oil. Thus, when production volume is low, private contractors may break even while the government receives no revenue at all.

But this is not the only example of complexity that is plaguing the Libra field. In addition, the government must grant a “commercial agent” contract to a private firm to sell its profit oil. And because of a lengthy and complicated contract bid-and-review process, it may take years for the agent to be selected, while the production process is likely to begin generating oil in a few months.

The outcome? The government will soon produce a product to generate funds for people in need. And buyers will be available to purchase the product. But the government has established a legal process that will hand much of its revenues to private operators, and that will belatedly introduce a sales and distribution process long after it is first needed.

Brazil is a prime example of what energy industry veterans call the “resource curse” or the “paradox of plenty.” Indeed, there is a reason why nations with immense energy fields are often unable to translate their natural resources into national wealth. Many of these countries are victims of their own tendencies to develop legal systems of immense complexity.