Leaks: The United States and Brasil’s Oil

In mid-2013, just before large street demonstrations rattled São Paulo, Rio de Janeiro and other Brazilian cities, news broke of Edward Snowden’s leak of secret internal documents from the NSA, GCHQ and allied FVEY surveillance services.

Early observers in Brazil paid particular attention to a map which measured the intensity of surveillance in the ‘Boundless Informant‘ programme. On this map, Brazil appeared to be approximately as surveilled as Russia. Some U.S. Journalists in Brazil sought to minimise or make light of this, attributing it for example to the number of undersea cables that come to Brazil’s shores, and other circumstances. However as the weeks and months went on, it became apparent that this was no freak coincidence – Brazil appeared, in the eyes of the NSA and perhaps the North Atlantic alliance as a whole, to hold a status closer to enemy than ally.

TV Globo’s current affairs show “Fantastico”, later reported on a package of top secret documents from former NSA contractor and whistleblower Snowden, which were provided to the program by Intercept (then Guardian) journalist and Brazil resident Glenn Greenwald. The documents included a May 2012 presentation which had been used to “train new agents step-by-step on how to access and spy upon….the internal networks of companies, governments, financial institutions—networks designed to precisely to protect information.”

Petrobras featured heavily. Paulo Pagliusi PhD, who analyzed the documents for Fantastico concluded they were evidence of “systematic spying which had continued for some time” which shatters a claim by the NSA that it does not surveil for economic purposes.

Motivation behind such interest in Petrobras is quite obvious, and the importance of Brazil to the world’s Oil Market well recognised. The United States Energy Information Agency (EIA) highlighted in a brief on the country dated February 28, 2012, how Brazil recently discovered “large offshore, pre-salt oil deposits” that “could transform Brazil into one of the largest oil producers in the world.”

The report called “state-controlled Petrobras” the “dominant participant in Brazil’s oil sector.” Petrobras held a “monopoly on oil-related activities in country” until 1997, when the government opened the sector to competition from Royal Dutch Shell, as the first foreign crude oil producer. Chevron, Repsol, BP, Anadarko, El Paso, Galp Energia, Repsol, Statoil, BG Group, Sinopec, ONGC and TNK-BO also became foreign producers of Brazilian crude.

Brazilian officials suggest that the spying is motivated by the US government’s interest in their massive discovery of oil and natural gas. Minister of Communications for Brazilian President Dilma Rousseff, Paulo Bernardo, stated, “The spying is of a commercial, industrial character. It is the interest [of the US] to know about issues of the Pre-Salt [offshore oil finds] and other issues of economic and commercial weight.”

Rousseff suggested in a meeting with ministers that the “Pre-Sal” or Sub-Salt Oil Reserves were what had driven the NSA to spy on the company.

Many in Brazil find this narrative obvious, yet it is rarely reported outside, certainly not from a Brazil persepective. Public fears over Oil and other natural resources are instead often dismissed by US Journalists, some with direct connections to the Oil industry, as a cartoon “Anti-Americanism”.

Mainstream media response to the NSA attack on its sovereignty was mixed in Brazil, with conservative, traditionally Pro-Washington outlets unsure how to report, while in the United States itself, Forbes’ Christopher Helman even asserted that the NSA actually should be spying on Brazil & Petrobras, because of both its resources and relations with neighbouring countries unfavoured by successive U.S. administrations.

Yet even Whitehouse advisors are now saying that the U.S. needs a better and more honest relationship with Brazil.

Bidding wars

There was a major auction scheduled in October 2013 around the time of Rousseff’s cancelled visit to Washington, DC. US oil companies planned to participate, and if any of these oil companies received tips related to any of the intelligence collected on the reserves up for auction, that would’ve provided an edge to that company:

Petrobras Director Roberto Villa remarked at the time “It’s a very peculiar auction. The auction of an area where we already know there’s oil, there’s no risk”, he says. What no one else should know, Villa says, is which are the richest lots. “Petrobras knows. And I hope only they know.” He considers that such information, if stolen, could give someone an advantage. “Someone would have an edge. If this information was leaked and someone else has obtained it, he would be in a privileged position at the auction. He’ll know where to invest and where not to. It’s a handy little secret.”

Instead though, to the surprise of observers, no major US companies bid in the auction, with some pundits even suggesting that they might have had inside knowledge of hidden risks or potentially poor returns. The auction itself came under attack from a Black Bloc group.

“They are professionals and we are amateurs.”

Petrobras has not only been of interest to the NSA and the EIA but also the US State Department, and Diplomatic cables published by WikiLeaks show a focus on the operations of Petrobras and a clear enthusiasm to battle for the interests of US oil companies while conducting meetings with Brazilian officials.

Most high profile of these was a 2009 cable which featured then presidential hopeful José Serra.

“They are professionals and we are amateurs,” reportedly said Patricia Padral, director of Chevron in Brazil, on the law proposed by the government. According to her, José Serra promised he would change the rules if elected president.

“Let these guys (PT) do what they want. The bidding rounds will not happen, and then we’ll show everyone that the old model worked … And we’ll change back”

Can the oil industry beat back the pre-salt law?” is the title of an extensive cable sent by the American Consulate in Rio de Janeiro to Washington on December 2, 2009, which detailed the strategy adopted by the industry lobby in Congress. A major concern for the U.S. was that the model favoured the Chinese competition, since the state-owned enterprise in China could provide higher profits to the Brazilian government.

EIA laid out the scale & importance of the Pre-Salt discoveries: “A consortium of Petrobras, BG Group, and Petrogal discovered the Tupi field in 2007, which contains substantial reserves in a pre-salt zone 18,000 feet below the ocean surface under a thick layer of salt. Following Tupi, numerous additional pre-salt finds were announced in the Santos Basin, such as Iracema, Carioca, Iara, Libra, Franco and Guara. Additional pre-salt discoveries were also announced in the Campos and Espirito Santo Basins. Estimates for the total pre-salt resources vary. Some analysts place total extent of pre-salt recoverable oil and natural gas reserves at more than 50 billion barrels of oil equivalent.

Though pre-dating the discovery of the Tupi field in 2007, an unclassified cable from 2006, shows US firms complaining about “Brazil’s inadequate climate for foreign investment.” Representatives from Exxon-Mobil, Chevron and El Paso indicated “Petrobras’ dominant position meant that independent companies, even large ones, needed to act with caution

“While doing business in Brazil was certainly easier than operating in Bolivia, we were told, in many ways the majors found investment conditions worse than those in Venezuela,” according to the cable.

“Chevron’s Tim Miller noted that even though his company often partners with Petrobras on the E&P side, it sometimes receives the thumb-screw treatment from the company’s gas division.” And, “In one off-shore field where Chevron had found gas reserves, Petrobras, which owned the only pipeline to the shore, had offered the company a mere 70 cents per million BTU for the gas, knowing full well that Chevron’s only alternative was the risky gambit of re-injecting gas into an underground reservoir.”

Animosity in the industry toward Petrobras is clear. Exxon-Mobil Brazil President John Knapp called it an “800-pound gorilla” and complained that its “state-run status gave it access to key information about specific blocks which ensured that it always was able to purchase the most promising parcels.”

In January 2008, another cable discussed an “oil roundtable discussion with US oil companies” and US Ambassador Clifford Sobel, including the “CEOs of Chevron, Exxon Mobil, Devon Energy, Anadarko and Hess Corporation” and it provides further evidence of the extent of the US government interest in helping oil companies overcome dominance of Petrobras.

“Expressing the view of all present, John Knapp, President of Exxon Mobil, confirmed that Exxon had a great deal of interest in Brazil because of perceived substantial undiscovered potential beyond even the Tupi field that Petrobras recently discovered,” according to the “sensitive but unclassified” cable. Knapp “expressed concern about the recent unstable investment environment caused by Rio State tax changes, oil blocks being removed in the last two auctions, and the Government of Brazil’s (GOB) apparent willingness to change the oil concession contracts.”

President of Devon Energy, Murilo Marroquim claimed “Petrobras had lied about the easy prospects of finding oil in under-salt areas due to the Tupi discovery. He believed Petrobras influenced the GOB to remove the blocks from the 9th oil auction to avoid stiff competition with other bidders. Devon asserted that Petrobras did not have sufficient drilling equipment so had an interest in removing those blocks to allow more preparation time for it to bid for those blocks in future auctions.”

In 2007, when billionaire Eike Batista launched his oil venture OGX, intended to challenge Petrobras share of the market, a “sensitive but unclassified” cable sent on June 27, noted that OGX had hired former Petrobras personnel such as President Francisco Gros and had “lured more key executives away from their positions at Petrobras in exchange for equity in Batista’s companies, making them instant millionaires.”. It goes on to explain that “In October 2007, just one month before Brazil’s ‘Ninth Bid Round’ lease sale for new offshore exploration blocks, OGX delivered an especially damaging blow to Petrobras’ interests. Petrobras’ Manager for Exploration and Production Paulo Mendonca and Contracts Manager Luis Reis defected to OGX, bringing with them intimate knowledge of Petrobras’ bidding strategy in the upcoming auction such as which blocks Petrobras wanted and how much it was willing to bid.”

While it is by no means not certain whether the State Department was as pleased as foreign oil companies were to see this new player taking on Petrobras, the diplomat who wrote the cable commented:

“OGX’s dramatic entry into the Brazilian oil industry is significant. With the financial backing of Batista, OGX has built a formidable team. U.S. oil company contacts have privately shared how they are reveling in Petrobras’ frustration with having to deal with real competition from a domestic company for the first time. Worth watching is Petrobras’ further reaction as OGX gears up to drill wells. Though OGX can hire top people and win exploration blocks with money alone, it will need partners to drill for and produce oil. We are hearing that Petrobras is strongly discouraging (i.e. threatening to cut them off from Petrobras projects) its own partners from working with OGX. It remains to be seen if OGX can successfully convince potential partners to stand up to Petrobras.”. Batista has since been declared bankrupt and stripped of his interests in the sector.

Shortly after the first proposals for the regulation of Pre-Salt, the consulate in Rio de Janeiro sent a confidential cable gathering impressions of the oil executives.

The cable from August 2009 shows that Petrobras’ control over Pre-Salt is seen as an “anathema” by the industry. According to another diplomatic cable, “petroleum actors and insiders in Rio de Janeiro” derided “Pre-Salt reform” proposals as “pre-election politicking” by the administration of Luiz Inacio Lula da Silva. The proposal to have Petrobras be the “sole operator” of “unlicensed blocks” of reserves led Exxon Mobile’s External Relations Director Carla Lacerda, to suggest this “constituted a reversion to Brazil’s former monopoly system.” It could have an adverse effect on “US equipment and service supply to Brazil.”

Brazil’s Congress was successful against foreign & local industry opposition, in passing reforms intended to maximise Petrobras’ profits from the massive newly-discovered Pre-Salt fields.

In August 2013, Rousseff signed into being a new entity: Pre-Sal Petroleo, “a new state-owned company to manage contracts for large oil and natural gas fields in the offshore Pre-Salt region.” a decision which was heavily criticised.

Fernando José Cunha, CEO of Petrobras to Africa, Asia, and Eurasia, even remarks to the economic representative from the U.S. consulate that the new company would end up sapping resources from Petrobras. The sole purpose for him would be political: “The PMDB needs its own company.”

Even with such a claim, the cable makes it clear that American companies want to stay in Brazil to explore the Pre-Salt. For Exxon Mobile, the Brazilian market is attractive especially considering the increasingly limited access to reserves worldwide.

“The rules can always change later,” reportedly said Patricia Padral of Chevron.

Chevron suggested that possible future ambassador, Thomas Shannon, could have great influence on this debate – and pressed for confirmation of his name in Congress.

“Companies will have to be careful,” the document concludes. “Several contacts in Congress (Brazilian) consider that if talked about more openly, the foreign oil companies are likely to galvanize nationalist sentiment on the issue and hurt their cause.” ‘Resource Nationalism’ is a major concern for the U.S. expressed in State Dept cables from Argentina to Libya to Vietnam.

“The strategy now is to recruit new partners to work with in the Senate, seeking to approve essential amendments in the law, as well as push the decision until after the October (2010) elections,” concludes the cable.

This foretold the current situation where associated figures in the senate, such as Serra, are leading attempts to dismantle the system which gives Petrobras control over Pre-Salt.

“We’re not listening to your telephone calls.”

While cables and documents from Snowden contain no specific proof that oil company executives were given insider information on offshore oil exploration in Brazil, they do at least display an arguably unethical interest in helping oil companies succeed against Petrobras. Ferando Busquet of, which covers fossil resources in Pre-Salt regions responded that “Petrobras holds unique knowledge in offshore oil exploration in high depths and very high pressures and Brazil holds the largest world reserves known in the Pre-Salt….these technologies and information about exploration and production of oil and gas in ultra-deep wells….is of inestimable value to the oil industry.”

There is no doubt that whatever information was taken from the networks was stolen through hacking or network exploits, which means the NSA was indeed engaged in economic espionage.

Globo also reported that the NSA spied on the phone calls and emails of Rousseff and she demanded an explanation.

“This is what I asked: It’s very complicated for me to learn about these things through the press,” Rousseff declared “I read something one day, then two days later I learn something else, and this goes on piece by piece. I’d like to know what exists (about spying). I want to know what’s going on. If there is something or not, I want to know. Is it real or not? Besides what’s been published by the press, I want to know everything they have regarding Brazil. The word ‘everything’ is very comprehensive. It means all. Every bit. In English, ‘everything.’”

Barack Obama apparently told President Rousseff that he would look into allegations of spying in news reports, yet almost two years later there has been no public development on that front.

Now despite Petrobras breaking production records, foreign media are compelled to portray a ‘once iconic’ fallen giant as it begins to emerge from the Lava-Jato corruption scandal (which the U.S. Department of Justice offered to assist in prosecuting).

It is evident that Brazil’s size, natural resources, relationship with China and strategic position as the only BRICS member in the Americas mean it will remain in its northern cousin’s crosshairs, and in a country as complicated as this, the methods become more convoluted by the year.

UPDATE April 2017.

In 2016 Dilma Rousseff was controversially removed from the Presidency on a technicality, with her 2013 “passport to the future” proposal to dedicate all royalties from the Oil to public education & health already long forgotten. Post-Coup Foreign Minister José Serra succeeded in passing his legislation to break the “Pre-Sal Local Content Law” and allow foreign corporations direct access to explore and exploit Brazil’s Oil Reserves. It is just one of many erosions of Brazil’s economic sovereignty that have taken place since Temer’s Government came to power.

Foreign Companies who had ignored previous Pre-Sal auctions moved fast, with Norway’s Statoil capturing a one of Petrobras’s crown jewels, the Carcará field in the Santos Basin, for just US$2.5 billion. This was excitedly called a “Viking Conquest”.

With the Local Content law gone, Exxon, the only major US Oil Company without an existing foothold in Brazil, is planning its own moves into it’s offshore reserves.

Meanwhile, OPEC has predicted that Brazil will have the highest Oil Production in the World for 2017.