China and Brazil thirsty for oil: what happened with promises to reduce carbon emissions?

Over the last few years Brazilian president Lula da Silva has been nurturing a knew pet project: the creation of a state-owned oil company to manage exploration and production contracts for recently found deep-sea, subsalt oil reserves.

These are exemplary cases of the contradiction between promises to consider climate change policy and actual allocation of huge volumes of capital investment on fossil fuel. At least, China has also been aggressively investing in wind and solar power. Brazil doesn’t even consider these to be real energy alternatives. But China’s worldwide procurement for oil reserves indicates its projections are of long-run growing domestic demand for fossil fuels.

No serious drilling at real deep-sea subsalt fields is likely to take place with existing technology. The most optimist estimates are that enabling technology will become available around 2017, and will cost dearly. President Lula, however, seems determined to make the dream of oil wealth one of the central leitmotivs for next year’s presidential campaign, when he is betting on being able to turn his popularity into a majority vote for his candidate, Chief of Staff, Dilma Roussef.

China’s global push for oil is impressive, to say the least. In Argentina, two Chinese state-owned companies, CNPC and CNOOC are on a joint bid to buy 100% of the oil company YPF. From Venezuela, China got the promise of getting almost all its fuel oil output for three years, in return for an upfront payment of $8 billion. It has signed a deal with Ecuador, to get 69m barrels of oil over the next two years, for $1bn in advance payment. It has also sought to secure long-term supplies of Ecuadorean oil, in exchange for financial support to help the country face its liquidity crisis, after it defaulted part of its foreign debt.

Petrobras’ CEO has announced, on an interview, that the Brazilian state-owned corporation and its Chinese counterparts have signed several important agreements regarding oil supply and oil exploration contracts.

China National Offshore Oil and Sinopec are buying a 20% stake in Angola’s promising “block 32” from Marathon Oil.

Petrochina is acquiring a 60% stake on Canada’s two major oil sand projects.

China’s Sinopec Group gained oil rights in northern Iraq when it purchased Swiss Addax Petroleum. Other politically controversial Chinese investments were in Burma and in Iran. In Burma, it is pouring $5.6 billion on a gas project in the Bay of Bengal. In Iran, China is investing to develop the capacities of Abadan and Persian Gulf refineries. Besides, the Chinese company ZPMC signed an agreement on building 10 offshore and seven onshore oil rigs with the Iranian Engineering and Building Sea Installations Company. The offshore section of ZPMC’s project has been financed by the China Development  Bank.

China and Russia have recently closed a $25 billion “Oil Pact”, through which China has secured long-term supply of Russian oil. Kazakh and Chinese state oil firms are negotiating the joint acquisition of the private venture MangistauMunaiGas, that has oil reserves in the country.

In its neighborhood, Petrochina has bought half a refinery in Singapore; it has also agreed to buy $50 billion worth of liquefied natural gas – 2.25 million tonnes a year over the next two decades – from the yet-to-be developed Gorgon field off the coast of Western Australia.

In Brazil, president Lula hailed the unveiling of the oil legislation, increasing the role of the state in the oil economy, as “a new independence day” for the country. “We don’t have the right to take the money we’re going to get with this oil and waste it,” he said. Brazilian governors are already fighting for this future money, as it were already on the Treasury’s purse.

The Brazilian government has been conveying the idea to investors and the domestic public that this subsalt oil wealth is a unique Brazilian endowment. BP has announced a giant discovery in the subsalt deep waters of the Gulf of Mexico, offshore the US, just a week after Lula’s signing the oil bill. This coincidence should be taken by Brazilians as a sobering note. Offshore Angola, there also are rich deep-sea subsalt oil reserves. The Brazilian subsalt is not unique, and it requires huge investments in innovative drilling techniques.

China has, for the time being, an immense amount of hard currency to spend, so that it can reach globally to controversial, even uncertain oil reserves. It can also disregard the risk that, within the next 10 years, regulatory constraints and carbon taxation might significantly reduce the attractiveness of several long-term oil projects.

This is not the case for Brazil. Petrobrás has already showed financial frailties it never had before, having to borrow money from Caixa, the state-owned bank dedicated to finance housing and urban infrastructure projects, a rather unprecedented and unorthodox move. More recently, it has also borrowed money from the National Development Bank – BNDES. The increasing likelihood that carbon will end up by having a high price tag to help curbing emissions in less than a decade, feeds the risk that carbon prices will affect the return on investment of subsalt projects. If that happens president Lula’s hasty decisions may prove to be a major mistake in economic, social, and political terms. For the time being, however, while oil is just a dream, it can have some short-term symbolic political returns. Less justifiable is the opposition embarking on the subsalt fantasy, with only minor objections.

For our current afflictions, what really matters is that two leading emerging powers, that should be making serious strides towards a low-carbon economy, are boldly investing in oil. Brazilian subsalt adventure is provoking growing enthusiasm among investors. China’s global investments are encouraging countries like Canada and Russia, to remain captive of fossil fuel incomes. A bad omen for the climate deal, especially on the time span required by the no less disquieting signs of accelerating global warming.