RGE Monitor – Is Resource Nationalism Back?

Triggered by today’s OPEC meetings and last week’s announcement of new regulations governing Brazil’s offshore oil, we are devoting this week’s note to examining whether government control of the resource sector is increasing as commodity prices continue to creep up.

Traditionally as commodity prices rise, national governments have sought to boost their share of the proceeds, either to save or to spend it. When prices fall, by contrast, they have tended to loosen their fiscal regimes to encourage investment and extraction. The period from 2005 through the middle of 2008 was par for the course, in this respect. As the oil price increased, countries ranging from Kazakhstan to Russia to Venezuela sought to reduce the share of key projects managed by foreign oil companies; even the Canadian province of Alberta tried to change its royalty regime. While these policy changes may be politically popular—and according to some analysts may even help fund infrastructure development–they also run the risk of further deferring investment in the oil and gas sector. The combination of weak demand, lower prices and tighter credit all contributed to a reduction in investment in hydrocarbons. While the investment outlook is still weak, some countries eased regulations early in 2009 in an effort to boost revenues and increase investment.

Last week’s announcement of new rules governing deep-sea oil deposits off the Brazilian coast has reignited debate over resource nationalism. Deposits in the pre-salt layer deep beneath Brazil’s seabed are one of the more promising, if expensive, sources of new supply available globally. President Lula unveiled the new rules on what he called an “Independence Day for Brazil.” Among other things, they suggest that Petrobras, the publicly traded but state-run oil company, have a majority stake in any new developments of the deep-sea oil. The move, which marks a change to the country’s profit sharing agreement, would not apply retroactively. Brazil also wants to create a new social fund, channeling some of the country’s profits into social and infrastructure spending—potentially narrowing extreme income divides.

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