Venezuela's oil policy

A sticky proposition

Take a tiny bit of it, or leave it

IN A world in which oil is scarcer, the 272 billion barrels of heavy crude that Venezuela reckons are contained in the oil sands of its Orinoco basin ought to seem like a more attractive proposition to multinationals and state oil firms alike. Yet three times this year Petróleos de Venezuela (PDVSA), the state oil company, has postponed bidding for seven blocks in the Orinoco which officials think would yield 1m barrels per day of synthetic oil. The reason: the terms on offer are even stiffer than those being contemplated by Brazil’s government (see article), and the uncertainty is even greater.

The risk is not geological. Everyone knows where the oil is. The upgrading and refining facilities required to turn tar to oil cost billions of dollars, but the technology is tried and tested. Environmentalists, so vocal about Canada’s tar sands (see article), have so far been silent over Venezuela’s bitumen.

It does not help that PDVSA wants a 60% share and operational control in each block while not putting up any money. On top of that the government will take a 33% royalty and a windfall tax. Even so, state-owned oil firms from China, Russia and India have expressed interest in the blocks, along with Brazil’s Petrobras and multinationals such as BP, Chevron, Royal Dutch Shell and Total. Two things have prompted them to hesitate, says Michelle Billig of Pira Energy, a consultancy. The first is the world recession and the fall in the oil price—factors that lay behind disappointing bidding rounds in Algeria and Iraq earlier this year. The second is political risk.

Over the past two years Venezuela’s president, Hugo Chávez, has nationalised large parts of the economy, including dozens of oil-service companies (which are still awaiting promised compensation). Two oil giants—Exxon Mobil and ConocoPhillips—are mired in arbitration over government changes to their contracts for their operations in the Orinoco belt. The proposed new contracts contain no provision for arbitrating disputes.

Such is the thirst for oil that some companies, especially state-owned ones from countries, such as Russia and China whose governments are friendly to Mr Chávez, may eventually hold their noses and dive into the Orinoco’s sticky sands.

Brazil's oil policy

Preparing to spend a “millionaire ticket” from offshore

The government has unveiled plans to give the state the lion’s share of the money from vast new oil discoveries. Will this wealth be invested or squandered?

BY TRADITION Brazil invests little and saves less. Brazilians like to borrow and spend, and ao inferno with the future. This may be a legacy of stubbornly high inflation for most of the second half of the 20th century. It may also be an inheritance from further back. Eduardo Giannetti, an economist and philosopher, thinks that the Brazilian ethnic mixture of indigenous nomads, Portuguese settlers seeking a quick fortune and Africans brought to the country in chains bequeathed an entrenched habit of spending now and saving some other time. Whatever the cause, the discovery in 2007 of potentially vast new offshore oil deposits deep beneath the Atlantic seabed will be a crucial test of Brazil’s moral fibre: depending on how it is used, this new wealth could help the country overcome poverty and underdevelopment, or exaggerate its spendthrift ways.

After almost two years in which his government has pondered the question, on August 31st President Luiz Inácio Lula da Silva unveiled four new bills setting out how the windfall should be gathered and spent. His rhetoric on what he called “independence day” was triumphalist. The oil deposits were “a gift from God,”“a millionaire ticket” and “a passport to the future.” But he also pointed to the problems that oil has caused some economies, and explained how Brazil plans to avoid them. The bills, which have to be approved by Congress, will not affect existing exploration and development contracts held by Petrobras, the state-controlled oil company, and five foreign oil companies. These contracts govern parts of the Tupi field, which contains between 5 billion and 8 billion barrels of oil. But plenty of oil and gas would fall under the new laws. Officials believe that in all, there may be up to 50 billion barrels of oil and gas offshore—enough to turn Brazil into an oil giant.

One bill declares the oil in the new fields—dubbed pré-sal because they lie beneath a shifting layer of salt—the property of the state, rather than of the companies that buy concessions. In each block, half of any oil produced would go to the state. The remaining half would be subject to a production-sharing agreement between Petrobras and any companies that partnered it, in proportion to their costs. Another bill creates a new state oil company called Petrosal to represent the state’s interests in each block. In theory this will be a small entity, staffed by technicians. In practice it may swell, particularly if it is controlled by politicians, as they may stuff it with supporters. The state will also inject the monetary equivalent of 5 billion barrels of oil into Petrobras, with the aim of ensuring it has the financial muscle to remain the dominant operator. Since 60% of Petrobras’s shares are traded on the market, this capital boost will dilute existing shareholders. The company’s share price fell sharply on the day of the announcement, wiping $7 billion from its market value. In addition, the government plans to set up a social fund to spend Petrosal’s billions.

Officials have argued that the discovery of so much oil in the Tupi field has eliminated geological risk. That, they say, merits guaranteeing the state a fatter slice of the revenues. But this could have been done by tweaking the existing arrangements, for example to impose a higher royalty. The pré-sal fields are technologically complex and expensive to develop. Two recent wells, one drilled by Britain’s BG Group and the other by America’s Exxon Mobil, proved dry. Some industry experts question the decision to scrap the current rules in which concessions are overseen by the National Petroleum Agency (ANP). “You have a system that has worked well for ten years and is transparent, in a country that often has problems with corruption in public works projects,” says Marilda Rosado, a former director of both the ANP and Petrobras and currently a partner in a Rio law firm, “and you decide to scrap it?”

The reason for doing so, according to Mauricio Tolmasquim, head of the state-run Energy Research Company (EPE), is to give the government more control over the oil business. EPE looked at the regulatory regimes in the 20 countries with the biggest oil reserves. Only three—the United States, Canada and Brazil—operate a pure concession system with minimal state involvement, it found. The new set-up, says Mr Tolmasquim, would allow the government to take things such as the exchange rate into account when it takes decisions on exploration.

Even if Congress heeds Lula’s plea to act speedily, it cannot approve the bills until December. In practice, they may become bogged down by wrangling. One of the new measures reduces the share of oil revenues that go to the states and municipalities closest to the fields, aiming to spread the wealth more widely. That is reasonable but will face political resistance. José Serra, the governor of São Paulo and the man opinion polls tip to succeed Lula in a presidential election next year, has urged Congress not to rush. The government spent 22 months coming up with its proposals, so congress and society should also be given time to debate them, he says. It would certainly suit his campaign if they did. Conversely, the electoral chances of Dilma Rousseff, Lula’s chosen candidate, might be boosted by speedy approval.

There are still many details to be sorted out. The proposed social fund was originally conceived as being earmarked for education and infrastructure spending. It was supposed to be inspired by Norway’s oil fund, most of which is saved. Now its mandate has spread to the environment, culture and even the financing of new industries. The worry is that the money will be spent today rather than saved or invested, further bloating a state whose revenue is already equivalent to 36% of GDP, compared to 20% in Mexico.

Of course, these are nice problems to have. And Brazil is better placed to deal with them than many other countries. Still, as Lula pointed out, what looks like a winning lottery ticket can all too easily become a curse. Anyone who has been following the recent corruption scandals in Brazil’s Congress will know that such a disaster is well within the powers of the country’s lawmakers.

Buttonwood

Be thankful they don't take it all

Governments will need to find new ways of raising tax

“IF YOU drive a car, I’ll tax the street/ If you try to sit, I’ll tax your seat.” The Beatles may have been joking when they wrote the lyrics of “Taxman”, but the authorities could soon be tempted to use some of their ideas.

The credit crunch has revealed as many holes in government finances as the Fab Four found in Blackburn, Lancashire in “A Day in the Life”. Some nations, including America and Britain, have lurched into budget deficits of more than 10% of GDP, a scale of shortfall not normally seen in peacetime. That may simply be an indication of the depth of the recession. But it may also be a sign that tax revenues have become more volatile, making it much harder for governments to judge the health of their finances.

Instead of storing up surpluses in the fat years so as to cushion their finances in the lean ones, governments were sorely tempted to spend their inflated revenues, in the hope of buying some electoral popularity. A European Commission report published earlier this year concluded that tax-revenue growth was “exceptionally high” in most European Union countries during the period from 2003 to 2007. But even with the money pouring in, Britain actually managed to increase its spending at an even faster rate.

A bust in tax revenues has swiftly followed the boom. What explains such marked volatility? The property cycle is one possibility. Higher property prices boost tax revenues directly, through levies on capital gains or on transactions (such as stamp duty in Britain). They also have an indirect impact via the wealth effect, as consumers increase their spending in response to improvement in their balance-sheets (see article). Britain and America raise a higher proportion of their revenues from taxes on property than other countries. The commission notes tartly that “revenue windfalls during asset-price boom periods are often misread as durable improvements in the underlying budget position.”

Another explanation is that both Britain and America have been highly dependent on the finance industry. In the good years, bumper bank profits inflated both corporation-tax receipts and the income-tax take from bonuses. The credit crunch has slashed the revenue from both.

The banking boom was also partly responsible for the widening wealth and income inequalities in the Anglo-Saxon world. The result has been a narrowing of the tax base. In 1986 the top 1% of Americans were responsible for 25.4% of all income taxes paid; by 2005 their share had risen to 38.4%. Since the pay of these plutocrats is highly variable, a bad year for them means a bad year for the taxman.

Even though bank bonuses are on the rebound this year, the industry is smaller than it was. Unless the system is changed, tax revenues from the financial system may never reclaim the heights they reached earlier this decade.

As countries try to eliminate the shortfall, it is tempting to hope that they will do so purely by cutting waste in public spending. But they won’t (and probably can’t). So they will find other things to tax.

That task will be made more difficult by the greater mobility of corporations (and high-earning individuals) in the modern world. Competition among EU member nations has forced the top corporate-tax rate down by ten percentage points since the mid-1990s, according to Elga Bartsch of Morgan Stanley. In America, low-tax Nevada is among those trying to lure businesses away from high-tax California (where tax revenues have been extremely volatile).

Competition also explains why governments are unlikely to be tempted by the recent suggestion of “Red Adair” Turner, the head of Britain’s financial services regulator, to impose a levy on capital-market transactions. It would only work if everyone else, including the Swiss and Singaporeans, did the same. Instead their energies will be focused on closing “loopholes”—witness the recent assault on offshore tax havens. That may result in some one-off windfalls, but not enough to plug the revenue gap.

Because governments are limited in their ability to tax the mobile, they will tax the static. As noted above, property is already highly taxed in Britain and America (and may be years away from another boom). So consumption taxes are the more likely answer. They are hard to avoid and fairly stable, since spending patterns do not change sharply from year to year. But they tend to fall more heavily on the poor than the rich. A crisis created by investment bankers will be paid for by shop assistants and office cleaners.

Trade agreements

Doing Doha down

Regional trade deals are no substitute for a Doha agreement. Indeed, they are its enemy

SOMETHING is usually better than nothing. Shorn of all of the economic jargon and legal niceties, that is the logic behind the booming business in bilateral trade deals that is sweeping Asia. As the Doha round of world trade talks languishes, Asia’s trading nations say that they cannot afford to sit on their hands and wait for Doha to revive. Better, they argue, to loosen up trade with simpler deals between a couple of countries or, if you are truly ambitious, a handful.

Some regional trade deals in the right circumstances have indeed added to economic well-being. But the sorts of deals that are now being signed in Asia, just when multilateral trade desperately needs supporting, are likely to do less for their countries’ economies than for the egos of the politicians who sponsor them. Taken as a trend, they amount to a dangerous erosion of the system of multilateral trade on which global prosperity depends.

In 2001 there were just 49 bilateral and regional free-trade agreements (FTAs) in place. A deal signed last month between India and South Korea raised the total to 167 (see article). That recent agreement was trumpeted as a boon for both economies. South Korean firms say they are keen to make more use of India as a manufacturing base from which to export to the rest of the world. In return, Indian programmers will more easily be able to set up shop in South Korea.

More such agreements are likely to follow. And who could object to that? In a world of collapsing exports and rising protectionism, the fashion for bilateral deals looks like a welcome boost to the idea that trade is good. Peer deeper, however, and the message is far less reassuring.

Noodles all round

For a start, bilateral deals impose so much paperwork and bureaucracy on trade that companies rarely make use of their provisions. Only about a fifth of 609 firms in four Asian countries surveyed by the Asian Development Bank in 2008 took advantage of the agreements that applied to them.

When bilateral agreements are attractive to companies, it is often for the wrong reasons. Many bilateral trade deals offer favourable treatment to a few companies from a particular country at the expense of all the rest from elsewhere in the world. The companies that lose out may well be lower-cost producers, since such agreements are dictated more by politics than by economics. If so, the economy will suffer. Even if such a deal is eventually superseded by a broader one, it may already have caused long-term damage by allowing less efficient firms to become entrenched. Economies that are too small to extract concessions from their bigger bilateral negotiating partners fare particularly badly.

Then there is the complexity of the growing number of bilateral and regional deals. Each has its own rules and administrative requirements, leading to a confusing spaghetti (or perhaps noodle soup) of preferential agreements, instead of the predictability that multilateralism promises. As such agreements multiply, there is less chance that they create the wealth that their authors claim.

Some claim that the tricky issues that stand in the way of a multilateral deal can be more easily resolved when only two countries are sitting at the table. That rarely happens: in the rush to conclude an agreement, such issues are often shelved. India’s deal with ASEAN last year, for instance, put aside the poisonous question of farm trade, which was one of the deal-breakers in the Doha talks last July.

Bilateral agreements, thus, do not, on the whole, serve as stepping stones to a comprehensive global deal. On the contrary, they both distract governments from the multilateral process and offer cover for politicians’ failure to advance it. Moreover, the fear of losing favourable treatment in a bilateral agreement can deter governments from talking tough in multilateral negotiations.

Some defenders of bilateralism admit all this, but cling to one argument they regard as clinching—that bilateral agreements are at least possible, whereas the chances of concluding Doha seem ever more remote. The comparison, they say, is not between local deals and a global one, but between regional deals and no deals at all.

This argument ignores the lessons of the past. The history of the multilateral trading system is littered with rows, hiatuses, disillusion, despair—and sudden success. In the 1970s many people wrote off the precursor to the World Trade Organisation. The ministerial meeting of 1982 failed and the later Uruguay round of talks nearly collapsed, before being successfully concluded. Even now, amid deep pessimism about ever finishing Doha, the Indian government is holding a summit of trade ministers in the hope of restarting the talks. If they truly want Doha to succeed, the bilateralists need first to acknowledge that their own deals are poisoning its chances.

Google books

Tome raider

A fuss over Google's effort to build a huge digital library

PAUL COURANT, the dean of libraries at the University of Michigan, jokes that he also runs “an orphanage”. Among the books on his shelves are such seminal texts as “Blunder Out of China” and “The Appalachian Frontier: America’s First Surge Westward”, which are protected by copyrights belonging to people who cannot be found. Known as “orphan” books, such titles are one element of a controversial plan by Google, the world’s biggest internet company, to create a vast online library.

Several years ago Google began working with research libraries in America to create digital copies of their collections, parts of which it made available online. Not long after, a group of authors and publishers sued the company for breach of copyright. Now Google and its former antagonists are seeking judicial approval for a deal they reached last year to settle the class-action suit. Among other things, this would allow the company to scan millions of out-of-print books, including orphan works, without seeking permission from individual copyright holders. Google could then sell individual works or access to its entire library, provided it paid a share of the proceeds to owners of the copyrights, if they can be found. (It has already set aside $125m to that end.) Publishers and authors had until September 4th to withdraw from the agreement; those remaining in it can ask Google to remove their titles from its library at any time. Next month a federal court is due to hold a hearing on the agreement, which will help shape the future of the digital publishing.

Opposition to the deal is brewing all around the world. On August 31st the German government filed a submission to the American court arguing that the agreement, which encompasses books by German authors published in the United States, would violate Germany’s copyright law. French publishers also claim the agreement will contravene laws in their homeland. They note that there are no plans for European representatives on the book-rights registry that would be set up under the deal to collect and distribute payments due to copyright owners. This has heightened suspicions that foreigners will be fleeced.

In Japan two noted writers have filed a complaint with local authorities about Google’s actions. Many American firms oppose the deal, including Microsoft and Yahoo!, two of Google’s big competitors, as well as Amazon, a big retailer of books in both paper and electronic form. Amazon argues that Congress, rather than Google and its allies, should decide how copyrights should be handled in the digital age.

Together with the Internet Archive, a non-profit organisation which runs a rival project to digitise libraries’ contents, these firms have formed a group called the Open Book Alliance to campaign against the agreement. A posting on the Alliance’s website claims that the agreement would create a monopoly in digital books that would inevitably lead to fewer choices and higher prices for consumers. Such complaints have attracted the attention of America’s Department of Justice, which is examining the agreement to see whether it is anti-competitive. It is due to send its findings to the court by September 18th.

In response, Google executives point out that the deal cannot be opened up to other firms because of the way class-action litigation works in America. However, it is a non-exclusive arrangement, so other companies are free, in theory, to seek a similar deal to Google’s. But in practice few are likely to enter this legal maze, and go to the expense of scanning millions of books, without any certainty of making money.

In spite of this, Google claims that rather than suppressing competition in the emerging market for electronic books, the agreement would increase it by offering a web-based alternative to expensive proprietary systems such as Amazon’s Kindle. Having bought a book from Google, customers would be able to read it on any device with internet access. Moreover, by clarifying the copyright status of millions of digital books, the deal would also make it easier for firms other than Google to strike deals to use them.

This may explain why the agreement is garnering support from some unexpected quarters. In a recent letter to the court, lawyers for Japan’s Sony, which also makes readers for electronic books, argued that if the agreement is approved it would have “numerous and significant pro-competitive effects”. Viviane Reding, the European Union’s commissioner for telecoms and media, has publicly hailed new business models such as Google’s, which she thinks will complement the EU’s Europeana initiative to digitise Europe’s cultural heritage. By promising to bring many more books like “The Appalachian Frontier” to an exciting new digital frontier, Google stands a fighting chance of winning its case.