Brazil’s Oil Rush

Ever since the Brazilian state energy company Petrobras struck oil in giant fields deep below the floor of the Atlantic, the mood in the normally sedate Brasília has been practically euphoric. In 2007, this chronically energy-deficient nation confirmed it had hit the energy jackpot. President Luiz Inácio Lula da Silva donned overalls and a hard hat and helicoptered out to an offshore drilling platform to dip his hand in oil, like a Hollywood idol leaving a footprint in the sidewalk. A seminar last week in the capital kicked off with the national anthem. "We still do not know exactly how much oil is in the pre-salt layers," intoned keynote speaker Dilma Rousseff, Lula's chief of staff. "We have strong evidence that God is Brazilian."

After years of trial and error—probing 7,000 meters below the ocean's surface, past the rock and sand seabed, and on through the thick crust of salt on the South American coastal shelf—Brazilian oil engineers found staggering quantities of crude oil. Just the proven reserves in three different areas of the so-called pre-salt cache total some 9 billion to 15 billion barrels, the largest find in the Western Hemisphere in more than three decades. But that may be just the beginning. After drilling scores of test wells, the experts now reckon the pre-salt reserves sprawl over 149,000 square kilometers, an area half the size of Italy, and could contain up to 80 billion barrels of oil. Not the heavy, low-grade crude stuff Brazil currently fetches from the sandy layers in its existing offshore wells, but light, sweet crude, the prize of hydrocarbons. "Brazil drew a winning lottery ticket," said Lula.

And the potential for self-destruction that goes with it. As many nations have discovered, drilling oil generates money but not necessarily development. Economists call it Dutch disease, after the affliction that hit the Netherlands in the 1960s, when a natural-gas bonanza in the North Sea overwhelmed the small economy with dollars and foreign investment, inflating the value of the guilder, which gutted Dutch exports and crippled national industry. Mostly, though, this is a poor nation's problem. Three decades after oil started flowing in Nigeria, a study by the International Monetary Fund revealed, per capita income had fallen slightly, but the number of people living on $1 a day or less practically doubled, from 36 million to 70 million, between 1970 and 2000. Venezuela pumped nearly 3 million barrels of oil when Hugo Chávez came to office in 1999. A little more than a decade later, Venezuela pumps 800,000 fewer barrels a day, the once stellar oil company PDVSA is a government cash box, poverty is little changed, and Chávez is entrenched in power as never before. It's no different in the Andes, Central Asia, or the Middle East, where oil fuels tyrants and leaves a deep stain of poverty and backwardness.

Can Brazil avoid the curse? Until just a few years ago, the question would have seemed ridiculous. Brazil, after all, has won a reputation as an exemplary steward of its energy bounty. The country is already the world leader in renewable energy, with 80 percent of its electricity grid generated by hydropower plants. Half the national fleet of passenger cars runs on clean-burning ethanol distilled from sugar cane, a world benchmark. Before "pre-salt" was even part of the working vocabulary, topnotch geologists, experienced engineers, and pioneering investment plans had already turned Petrobras into one of the world's most profitable oil companies and the leader in deep-water prospecting. Last year Brazil gained energy independence, producing 2 million barrels per day from 14 billion barrels in proven reserves, enough to cover domestic demand for the first time. Now, with the new Atlantic discoveries more than doubling proven reserves in just three fields, and due to start producing by 2013, experts expect Brazil to become a net exporter of oil, natural gas, and byproducts. Mines and Energy Minister Edison Lobão reckons the oil will make Brazil the seventh or eighth-largest producer in the world.

If any developing nation could handle this windfall, Brazil would be it. The reasons Brazil is rising so fast as an oil power are in large part the same set of reasons it has surged to the front lines of the emerging markets: economic stability, a resilient democracy with respect for the rules of the free market, and leaders with a penchant for looking beyond the day after tomorrow. All this has drawn capital and foreign businesses and lifted Lula to the status of global superstar. No international gathering is complete without this hirsute former union man, a "responsible leftist," who champions the poor and scolds the elite but also combats inflation, breaks bread with executives, and scrupulously pays the country's debts.

Lately, though, the rich world's favorite emerging-market leader—"There's my man," Barack Obama exclaimed at the G20 summit in London in April—has become a little less predictable. At least since last year, when Petrobras confirmed the size and potential of its deep-sea oil reserves, the Lula government has taken on a marked swagger. Long before a single drop of this deepest oil was recovered, the government was already warring with states and towns over their share of the take. Bureaucrats declared how pre-salt largesse would be the salvation of the poor, while others waxed ebullient about paving the country with highways and bridges, and over the coming petrochemical-industrial complex. Now it seems that energy politics in Brazil are about to take a hard turn to the left. In August the Brazilian government announced its new regulatory model for the oil system. The proposed law, which must still pass Congress, where it may undergo an overhaul, is an abrupt departure from a system that many in the global energy business have come to know and respect. More troubling, what's fueling the shift appears to be something only too familiar: the official appetite for command and control.