Course:ECON371/UBCO20010WT1/GROUP3/Article5
Article 5 - Brazil Oil Panel to Release Data on Huge Libra Field Friday
Brazil Oil Panel to Release Data on Huge Libra Field Friday Off the shores of Brazil lies a massive oil field called the ‘Libra field’. Estimates for this field are wide ranging from as low as 7.9 billion to as high as 16 billion barrels of oil. No matter which number is the true quantity, this oil field is a huge boon to Brazil’s economy.
Prior to the discovery of the Libra field, there was a discovery called the ‘Tupi’ field in the Santos Basin, also off the coast of Brazil. At 5 to 8 billion barrels of oil, Tupi was the Western Hemisphere’s largest discovery of oil in more than thirty years. Thus, should the yield of the Libra field be as high as Brazil is hoping, it would be a truly extraordinary find.
In 2009, Brazilian President Lula da Silva proposed a system in which new productions, such as oil field development, would be auctioned to the consortium that pays the Brazilian government the largest share of profits. Although this bill has not yet been passed through Brazil’s Congress, it is expected to be law by early 2011.
It is very likely that the Libra Field will be the first ‘pre-salt oil field’ to be auctioned under this new system. ‘Pre salt’ simply means that the oil is located 5,000 meters below sand, rock and a shifting layer of salt.
Additionally, Brazil’s state-run energy giant Petroleo Brasileiro must have at least a 30% stake in any consortium which seeks to develop the country’s oil fields.
Analysis
Open Access Resource? Thankfully for Brazil, there is no open access resource problem here. The Libra field lies close enough to Brazil’s coast that it is considered to be owned by Brazil. These clearly defined property rights allow the Brazilian government to have sole control over the future of the development, which will theoretically allow it to choose the most efficient economic solution.
Publicly Funded
Furthermore, the group that discovered the oil field was hired by the government of Brazil. Thus far, this has been a state-funded and state-organized project. However, since the country is now selling the rights to the oil field to the bidder that promises them the greatest share of the profits, the government of Brazil will likely generate a good return on their investment.
The graph to the right illustrates the willingness of the oil companies to supply one additional unit of oil against the consumers’ willingness to pay for one additional unit. At equilibrium, as shown, the government of Brazil will extract its profits from the ‘producer surplus’ area.
The producer who is willing to give up the largest percentage of this 'producer surplus' area will be the one the government chooses to develop the oil field. This illustrates the firm's opportunity cost and allows the government to extract the largest potential profits from the oil field.
Cost Benefit Analysis
The fact that the Brazilian company Petrobras must have a 30% stake in any potential oil field developer will ensure that at least some of the revenue will go to Brazilians. As a Brazilian company, Petrobras is operated out of Brazil, employs Brazilians, and is focused on expanding Brazilian industry and energy.
Petrobras' 30% stake in the potential company, coupled with the government's profit scheme, will guarantee that a huge slice of the benefits of the project will be going towards Brazil and its people. Furthermore, the massive amount of oil means that Brazilians will be reaping the benefits of the Libra field for years to come. Even when discounting the future benefits, the Brazilian government expects the benefits for this project to greatly outweigh the costs.
The costs for this project will be any potential damages created by the oil drilling. A cost benefit analysis for offshore oil drilling will include the probability of an oil spill occurring. Our textbook, for example, places the probability of one oil spill occurring at approximately 12%, while the probability of no oil spills occurring is 77%. By multiplying the number of oil spills by the probability of occurrence, we get the expected value of the oil spills. When the probabilities of one or more oil spills occurring are totaled, we get the expected number of oil spills per year. In looking at the Libra field, analysts will multiply the expected number of oil spills per year by the potential damage caused by an oil spill to estimate the total costs of experiencing an oil spill.
Fortunately for this project, the oil field is located far off the coast. Although the effects of a spill would be destructive, it would not be as catastrophic as, say, an oil tanker capsized just off the delicate Alaskan shore would be. As we saw in the Gulf of Mexico spill (which would have been infinitely worse had the Horizon station been placed close to land), much of the oil will disintegrate in the open water before hitting land.
Tax per unit of oil If the government of Brazil chose to extract its profit through a tax on each barrel of oil, as the Alberta government does with its oil sands, it may be better off.(Source) An increase per unit of oil extracted would lead to a graph such as the one shown on the right. It illustrates how the y-intercept of the Marginal Cost curve is increased to MC2 after the tax. At an equilibrium with the marginal benefit curve, this leads to a decrease in the quantity of oil produced. However, if the area under the Marginal Benefit curve is greater at A than B, that is, if E+F+C+D > G+H+F+E, then the government would be better off pursuing an alternate royalty structure.
Prof's Comments
Nice. Some mention of the potential for inefficiencies in government operations would have been a good addition. Good on looking for alternative policies.