REGULATORY: Evolving Energy Relations between the United States and Brazil: Actions and Expectations from the Presidential Visits

by King & Spalding
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[author: Kendall W. Carter]

Brazil is currently the eighth-largest economy in the world, and is poised to become the fifth-largest economy in the next few years, surpassing both Great Britain and France.[1] This is remarkable for a country that, in 2002, had to obtain a loan from the International Monetary Fund to avoid default on its debts. Though Brazil’s rise as an economic power appears swift, it is the result of years of careful planning on every level, particularly as regards energy policy.

Recent meetings between President Obama and Brazil’s former and current presidents (Lula da Silva and Dilma Rousseff, respectively) invariably touched on Brazil’s burgeoning energy sector. In March of 2011, President Obama traveled to Brazil. The heads of state again held discussions with regard to four principal areas of energy policy–ethanol, oil and gas, nuclear, and efficiency standards and clean energy.[2][3] Below is a brief summary and analysis of the progress made in these areas since those meetings, but first a summary of Brazil’s energy experience over the last decade.

A Brief Summary of Brazil’s Energy Experience

Over the last decade, Brazil has undergone two significant developments in the energy sector. First, it has reduced its reliance on foreign oil in large part due to its early emphasis on ethanol. Since the oil crises of the 1970’s, Brazilian fuel standards had an ethanol/gasoline blend requirement between 18 and 25 percent. Incentives in the Brazilian automobile industry led to production of ethanol-only vehicles in the late 1970’s, and to the advent of mass-produced flex-fuel vehicles in 2003. True flex-fuel vehicles allow for the use of any mixture of gasoline and ethanol. Giving drivers the ability to use whichever fuel is most available or cost-effective from tank to tank. In 2009, flex-fuel vehicles accounted for 93 percent of all new car sales in Brazil.[4] The high blend requirement and the large proportion of flex-fuel vehicles ensure a fairly steady demand for ethanol producers, and a relatively secure source of energy for transportation.

Second, the Brazilian petroleum sector has experienced a significant surge. In 2007, Brazil became a net exporter of petroleum for the first time in its history. Moreover, since 2006, various strikes in the pré-sal (“pre-salt”) layers of fields located in the Santos and Campos Basins, approximately 160 miles south of Rio de Janeiro, have led to reserve estimates between 50 and 123 billion barrels of oil.[5] Brazil’s net exporter status is expected to continue as more pré-sal offshore wells south of Rio de Janeiro come online in the next few years. Worth noting, in September 2010, Petrobrás conducted the largest IPO in the history of the Bovespa and the New York Stock Exchange.[6] It sold approximately $67 billion worth of common and preferred shares and raised nearly $25 billion in capital, which it intends to invest in exploiting the reserves mentioned above.[7] Over the next four years, Petrobrás plans to spend $224 billion boosting production from these reserves.[8]

The Energy Summits in Washington & Brasilia

Soon after taking office, President Obama made it a foreign policy goal to increase ties with Brazil. In March 2009, President Lula da Silva was the third head of state received by the Administration, behind the leaders of Japan and Great Britain. The President continued his efforts with Lula’s successor, President Dilma Rousseff. His trip to Brazil in March 2011 marked the first time a U.S. President was introduced to a Brazilian President on Brazilian soil. There were substantial measures taken in each area of energy discussion as set forth below, and generally as regards the broader relationship between the United States and Brazil.

Ethanol

The two largest producers of ethanol agreed on a Partnership on the Development of Biofuels for Aviation, by which they will foster innovation together with the private sector and engage in a free exchange of ideas and personnel involved in the effort.[9] Presumably, this agreement will allow for each government to follow on and support the joint corporate efforts of General Electric, Embraer, and Amyris in creating a production model ethanol jet airliner and reliably sourcing fuel for that airliner.[10]

The partners also agreed to foster jointly fledgling ethanol industries in smaller countries by direct investment and legal framework assistance in the Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Jamaica, and Senegal.

The most significant development after these discussions on ethanol is a compromise reached July 7, 2011 among U.S. Senators to end ethanol subsidies and tariffs.[11] While this move was trumpeted in the Brazilian press, it is worthwhile to note that the Administration is wary of removing all support for technological development of every source of ethanol, particularly cellulosic ethanol. The measure still requires the approval of the House of Representatives to become law, but it is significant nonetheless. It marks the first time that the United States government has indicated a willingness to examine and restructure ethanol subsidies. On a broader level, it also marks the first time a U.S. political body proactively moved to reduce agricultural subsidies for product markets in which Brazil competes. Of course, the principal motivation of many Senators for eliminating the subsidy is cost reduction, but any move in this direction is notable where it is not prompted by a negative ruling from the World Trade Organization.

Oil & Gas

In light of Brazil’s huge strikes in the pré-sal fields, in 2010 the Obama administration pledged more than $2 billion in financed U.S. goods and services to Petrobrás from the Export-Import Bank of the United States.[12] Following on that pledge, Presidents Obama and Rousseff expressed a continuing desire to share “best practices with respect to the safe and environmentally benign exploitation of offshore oil and gas resources.”[13]

The United States Secretary of the Interior, Ken Salazar, already engaged his Brazilian counterparts in regard to the development of best practices for environmental safety in offshore oil and gas extraction, sharing some of the lessons learned in the BP Deepwater Horizon disaster. [14] There was an initial workshop on deepwater technologies and environmental management held in October 2011.[15]

Nuclear

President Rousseff served as the Minister of Energy under former President Lula da Silva. While there, it appears she became convinced of the long term benefits of nuclear energy as Brazil’s energy demands continue to outgrow its mainly hydroelectric power supply. At the time, her appointment was seen as a nod to the private sector, given her commitment in working with business leaders in a similar capacity in the government of the State of Rio Grande do Sul. It is her willingness to partner with private entities in development of nuclear energy resources where it benefits the government to do so that characterizes her approach in this sector. The Brazilian Constitution prohibits ownership of nuclear facilities by private entities, but Dilma appears willing to open the sector to foreign investment through contracts for services, materials, and technology.[16]

To that end, the U.S. Department of Energy, the Brazilian Ministry of Mines & Energy, and the Brazilian government-controlled utility Eletronuclear will continue to cooperate on safety, technology, reactor-life sustainability, human capital development, and risk analysis. Furthermore, discussions continue with regard to collaboration on the Megaports Initiative for the detection of nuclear materials.

Efficiency Standards & Clean Energy

The U.S. and Brazil issued a statement of joint support for efficiency measures, particularly focusing on the Brazilian effort to develop a consumer product energy rating system. A workshop on energy efficiency audits and financing retrofits of industrial facilities will be held in conjunction with the Brazilian Ministry of Mines & Energy. Additionally, government and private sector development of solar and other clean energy sources will be discussed at a Clean Energy Roundtable.[17]

Conclusion

While it appears that both governments realize the importance of working together, whether the relationship becomes truly cooperative in the energy sector depends upon each leader’s ability to reconcile hard policy and hard realities with their good intentions. President Rousseff’s approach to relations with the United States is well reflected by her comments at the joint press conference in March. While welcoming President Obama to Brazil, she noted that any true alliance between the two countries would have to be “among equals.” In the same press conference she said, “if we wish to build a relationship in depth, it’s necessary, frankly, to deal with our contradictions.”[18] To date, President Rousseff has fulfilled pledges she made during President Obama’s visit.

_______________


Kendall W. Carter
Atlanta
+1 404 572 2495

kcarter@kslaw.com
     

The content of this publication and any attachments are not intended to be and should not be relied upon as legal advice.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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