by C. J. Schexnayder


In September 2009, Moody’s Investors Service became last of the three main ratings agencies to promote Brazil’s sovereign debt ratings to investment grade. Like Standard & Poor’s and Fitch Ratings, Moody’s cited the country’s strong banking system, high level of foreign currency reserves and quick recovery from the global recession. “The chances that Brazil will stay on a multi-year path of improved creditworthiness are reasonably high” said Mauro Leos, Moody’s regional credit officer for Latin America.
And investors have noticed. In 2008, foreign direct investment reached a record $ 45.1 billion, up more than 30% over the year prior. This rosy outlook is a dramatic change. As recently as a decade ago, Brazil’s economy was pigeonholed as boom-andbust. The country was not immune to an economic downturn that swept across the region in the mid-1990s. Inflation ravaged the nation, averaging 764% for the first half of the ‘90s.
The government then changed its monetary policy; it abandoned a fixed exchange rate and began an aggressive campaign to privatize many sectors, particularly the energy sector. These efforts were substantially slowed by a subsequent series of crises, but not rolled back completely.
Over the second half of the decade, Brazil weathered a series of economic setbacks, most due to financial instability of its neighbors. These were capped by a debt default by Argentina in 2001 that followed on the heels of a domestic energy crisis. The public discontent over the situation cost Brazilian President Fernando Henrique Cardoso his job. But the head of state had implemented an array of reforms during his eight years in office and resisted efforts to change them for political necessity. In 2003, Brazilians elected the former head of a labor union, Luiz Inácio Lula da Silva (known commonly as “Lula”), to the presidency. Instead of overturning the reforms of his predecessor, Lula kept most of them and has focused on keeping the economy stable.


The first great test of that has been the global financial crisis. To counter the worldwide economic downturn the government cut back on taxes, eased bank reserve requirements and launched the largest investment boom in the country’s history. The government is planning to invest $ 300 billion into infrastructure - including a substantial portion designated for power generation and distribution networks - over a four-year span.
This emphasis on energy is understandable, given the scale of the country’s energy needs. Brazil is the world’s tenth-largest energy consumer and, by far, the largest on the continent. The country’s electricity market is almost double the rest of South America’s combined. Between 1998 and 2008, Brazil’s installed generating capacity more than doubled from 49.6 GW to 102.61 GW. But the country has seen demand increase as its economy has grown. Power consumption of 424 terawatt-hours in 2008 is expected to grow by almost 16% in the next four years.
Brazil possesses oil reserves estimated at 12.6 billion barrels but recent offshore discoveries could push that figure up more than 177%. While the country became self-sufficient with oil in 2006, it’s expected to become a net oil exporter in 2010. The nation’s naturalgas reserves are expected to get a similar boost from the new discoveries. Moreover, Brazil is a world leader in ethanol production and use. The fuel, derived from sugar cane, is used by all regular gasoline vehicles and mandatory blend is allowed to vary nationwide between 20% and 25%. As of 2008, more than half of the fuel demand for the gasoline market was met by ethanol.


In a newspaper column published late last year, President Lula declared Brazil’s economy was growing at Chinese pace and emphasized that the prospects to continue doing so are quite high. The government now projects a growth rate of 6% to 6.5% over the coming six years. Yet there are signs for caution as well. Those numbers are expected to be down somewhat in 2009 due to the lingering effects of the global economic slowdown and a 2% tax on short-term foreign inflows into fixed-income accounts and stocks adopted late in the year.
The benchmark interest rate has been set at a record low of 8.75%, but it still remains one of the highest such rates in the world and there are lingering concerns about growing unemployment and falling industrial production. Brazil’s ace in the hole has been consumer spending, which, in 2008, accounted for 85% of GDP. As the availability of consumer credit has grown, the growth of the country has remained stable despite external turmoil.
The most visible sign of the country’s prospects arrived in the form of two high-profile development coups. In 2009, Rio de Janeiro was awarded the 2016 Olympic Games, a prize that followed the country’s selection to host the 2014 World Cup. Organizers of the Olympic event plan to spend $ 14.4 billion on the effort and estimate as much as $ 50 billion in indirect investment will be required as well.


PETROLEUM SECTOR DRIVES ECONOMIC PROGRESS
The future of Brazil’s energy aspirations lies largely in the promise of its offshore oil fields. Brazil achieved self-sufficiency in oil in 2006, and many analysts expect the nation to become a net oil exporter in 2010. The state-owned energy giant, Petróleo Brasileiro S.A. (Petrobras), intends to invest more than $ 174 billion in oil and natural-gas exploration and production by 2013, a 55% increase over a similar five-year plan unveiled just a year earlier.
Those advances and, for the most part, Brazil’s importance as a global oil producer have long been overshadowed by the sheer size and accessibility of oil reserves available to its northern neighbor, Venezuela.
Venezuela’s proven oil reserves are estimated at approximately 100 billion barrels, nearly four times the total reserves all the other countries of Central and South America combined. Yet onshore fields such as Venezuela’s, which are relatively inexpensive to exploit, are maturing, as are other such fields worldwide. As a result, efforts to develop expensive-to-produce offshore fields like Brazil’s have increased in recent years.

Currently, Brazil boasts oil reserves estimated at 12.6 billion barrels, of which some 92.5% are located offshore. Recent discoveries of huge deep-water fields could increase Brazil’s proven oil reserves to as much as 35 billion barrels by 2012, according to the government. That news comes as the South American nation struggles to meet skyrocketing domestic demand. Brazil’s oil consumption is, by far, the greatest on the continent and has tracked the country’s recent, rapid growth. The almost 2.4 million barrels per day consumed in 2008 represented almost half the consumption for all of Central and South America and puts Brazil’s thirst for oil on par with Germany’s and Saudi Arabia’s.
Brazil’s daily production of 1.9 million barrels covers about 80% of total consumption. Yet almost all this production is from deep-water fields located off the southeast coast near Rio de Janeiro. The 100,000-square-kilometer Campos Basin includes oil fields in water depths that reach almost 2,600 meters. The basin boasts confirmed reserves of 7.21 billion barrels and the largest single field, Marlim, produces more than 500,000 barrels each day, roughly a quarter of the country’s production.
Of the 55 fields that currently exist in the Campos Basin, 36 have already capped their production. Brazilian officials say the Campos Basin has sufficient reserves to sustain existing production levels into the 2030s, but the cost to do so is expected to rise dramatically as the fields become depleted. In late 2007, Brazil announced the discovery of the largest deep-water oil-field in history, the Tupi Field in the Santos Basin. The total of recoverable oil and natural-gas reserves in the field is estimated between 5 billion and 8 billion barrels of oil, and some estimates almost double that projection. The Tupi oil is sweet with an intermediate or medium gravity similar in type and quality to most of the country’s deep-water fields.

The abundance of the new fields is partially offset by the formidable obstacles that must be overcome to exploit them. For most of the fields, it is between 5,000 and 7,000 meters from water line to the reservoir. The fields are located in water between 2,000 and 3,000 meters in depth. After that lies a rock layer of 2,000 meters and then a salt layer of 2,000 meters. The great depth is complicated substantially by the salt layer, which often behaves more like a fluid than a rock. The technical complications of drilling through the salt are expected to dramatically increase the cost of production. Because the oil deposits are in earlier strata than the salt, the resource is called “pre-salt” oil.
The size of the new fields and their vast financial promise has required the Brazilian government to create a legal framework for exploring and exploiting them. Brazilian President Luiz Inácio Lula da Silva has proposed a plan that dramatically emphasizes governmental control over the oil extracted from the new fields as well as taking half the production for the state. In late 2009, the Brazilian legislature was still considering the proposal.
If approved, Lula’s plan would create a new state oil company, Petrosal, to handle the country’s interests in the new fields. It is likely Brazil’s existing state-owned oil company, Petrobras, will have a great deal of say in how the development of the fields proceeds as well.


ETHANOL
The country’s domestic oil consumption is heavily affected by the importance of alcohol-based fuels, which have met a significant portion of Brazil’s vehicle fuel needs since the global oil crisis during the 1970s. At that time, Brazil sought to meet its ballooning transportation needs while reducing its dependence on imported oil and stimulating the nation’s agricultural sector, particularly sugar cane.
By 1985, more than 90% of the nation’s vehicles were using ethanol alone but the government was struggling under the weight of subsidies required to keep the retail price of the fuel below the production costs. Shortly after, Brazil loosened restrictions on fuel requirements but laws that require vehicles to be compatible with the fuel have kept the industry alive. For example, diesel fuel sold in Brazil must include a 3% biofuel component.
Today, Brazil is the world’s second largest producer of ethanol, after the United States. More than half of the country’s sugarcane crop is devoted to the production of the fuel, and in 2007, the country produced more than 390,000 barrels per day. The country is also the world’s largest exporter of ethanol, sending 5.16 billion liters of sugar-based ethanol abroad in 2008, a 46% increase over the year prior.
A quarter of Brazil’s exports are to the United States, despite trade restrictions. The U.S. has imposed the restrictions for a number of reasons, including protecting the U.S. ethanol industry from Brazil’s lower production costs and higher quality of fuel derived from sugar cane rather than corn. About half of the country’s sugar cane is grown in the southern state of São Paulo and approximately 60% of the country’s ethanol production is centered there.