Cover story July 95

Holy oil

For decades, oil in Brazil has been a state monopoly and the vast majority of Brazilians believed this was the best arrangement in the best of worlds. Dramatic changes have occurred on this field in the last few weeks. The imminent fall of the petroleum monopoly in the country is just the beginning of a new Brazil where foreign and private capital will be invited to contribute to the growth of the 10th biggest economy in the planet.

Rodolfo Espinoza

"O petróleo é nosso" ("The oil is ours") was the battle cry vocalized by students and workers on the streets of Brazil during the 40's and 50's. Swept up in nationalistic fervor, they wanted and were able to prevent the government from opening the Brazilian subsoil to the private sector and, God forbid, to foreigners. On October 3, 1953, President Getúlio Vargas ended up creating Petróleo Brasileiro (Petrobrás), a state monopoly in charge of exploring, developing, refining and distributing oil in the country.

In recent weeks, "O petróleo é nosso" has again been chanted and scribbled on banners in universities and factories. But this time all the furor is only the last hurrah of a campaign that has already lost its breath, unable to face the reality of a world economy and still trying to prevent Congress from declaring the end of Petrobrás's monopoly. Even those in favor of breaking up the monopoly appropriated the "O petróleo é nosso" phrase, explaining that the oil belonged to the Brazilian people, and not to Petrobrás itself, which has become a state within a state.

Again in 1995, the aim of the demonstrators was to keep oil untouched by non-state hands. Resorting to a strike that almost brought the country to a standstill, however, the protesters gave the government and legislators their most potent argument for ending the monopoly. Strong-arm tactics were used even as the vote was introduced on the floor in the House of Deputies. A pro-Petrobrás group crashed through a glass door and invaded the galeria, the row of seats reserved for the public in the hall of Congress. Two weeks into the strike, several groups had made physical attacks against first-rank members of the administration. The bus transporting President Fernando Henrique Cardoso himself as he rode in Campina Grande, in the state of Paraíba, was pelted by stones. The president's press secretary Ana Tavares was struck during the attack.

The House of Deputies' amendment ending the monopoly won by a 364 to 141 margin, 56 votes more than the 3/5 necessary for a constitutional revision, an impressive victory for the anti-monopoly crowd. A few months earlier, such a success seemed impossible, and only a few weeks before the vote was deemed improbable. The attendance of the legislators was impressive. Only five of the 513 lawmakers failed to show up for the vote.

As striking as the victory was, however, it represents only the beginning of the struggle to dismantle Petrobrás. The law must go through a second vote in the lower house and needs to be voted on twice in the Senate. The definitive opening of the Brazilian oil industry to private and foreign investment is still two years away.

Fearful of losing votes during the last lap of the run, the President attacked on two fronts. First, he did what's traditional in Brazilian politics on such occasions: he promised second echelon posts to some of the representatives who were ambivalent about their allegiance. Second, he sent emissaries to the legislators with the purpose of explaining that the monopoly wasn't really being broken since the Union would still be in possession of the subsoil wealth.

President Fernando Henrique Cardoso didn't want any surprises at the last minute, much less desertions from his party as it faced threats from several lawmakers in the PSDB (Party of the Brazilian Social Democracy). The morning of the vote, Cardoso, who had made putting an end to several state monopolies a platform of his presidential campaign, released a document in which he promised to maintain Petrobrás.

He promised that the company, which is called Petrosauro—as in "dinosaur"—by some of its opponents, would maintain control of the oil wells already in production. "It's nonsense to imagine the privatization of a firm worth $100 billion," stated Cardoso. Economist Paulo Rabello de Castro, encouraged by the House vote, drew a colorful parallel with a historic fact from 1888: "Sociologically this vote is as important as the abolition of slavery."

JUST THE BEGINNING -- The end of business-as-usual at Petrobrás is only part of a large privatization project that contemplates total or partial sale of state monopolies in the fields of electricity, telecommunications, mining, and other areas where the hand of the state has been too heavy and ineffective. The day before the vote to open the oil industry, the legislators had passed another amendment privatizing the country's antiquated telephone system. The changes should drastically change the way Brazil, the world's 9th largest economy, conducts its global business.

Petrobrás is the 15th largest oil company in the world today. In Brazil, it is the number one business concern, producing 750,000 barrels of crude oil a day. Only Mexico and Venezuela can boast a bigger production in Latin America. The company's net profits in 1994 were $1.7 billion out of $13.7 billion in earnings. Petrobrás directory notes that profits increased 159% as compared with 1993.

The privileges of Petrobrás were too abundant and too ingrained, and it was clear from the beginning that the monopoly wouldn't go out without a fight. The union leaders, most of them linked to the PT (Workers' Party), the party which lost the presidency in the last election, decided to have a showdown with the government. What they didn't expect was that the population in general, and even their own relatives, would turn against them.

The strikers also miscalculated how the stoppage would affect public opinion with respect to ending the Petrobrás monopoly. According to a series of Vox Populi polls, the strike generated a lot of sympathy for the break-up. While in March the difference between those for and against breaking up the monopoly was one point -- 39% in favor and 38% against -- the gap increased to 23 points after the strike. Today, 47% of Brazilians are in favor of ending the state monopoly on oil as opposed to 24% against it.

The strike by oil workers, compared by some to war rationing, cut deepest into the skins of the poorest people. They were the ones who didn't have the option of a microwave oven or going out for lunch or dinner. They were the ones standing in mile-long lines trying to get a gas container for cooking, since gas at home is a luxury enjoyed by a small fraction of Brazilians, including 1.5 million in São Paulo and 600,000 in Rio.

It was a bitter defeat for the unions linked to CUT (Unified Workers Federation) a very organized and active force opposing the President. The movement's leaders were at a loss as to what to do next, unable to foresee the obstacles, to act properly when they happened, or to draw solidarity from other quarters. On the contrary, they alienated most of the working class, since Petrobrás workers were seen as a privileged lot, receiving healthier salaries and better benefits than the common worker.

Even some strikers went against their leaders. In a visit to a factory on strike, Congressman Jair Meneguelli, while trying to end the stoppage, was helped by an employee who asked, "Who's going to pay for this? Who has ordered this strike?" In the end, the strikers had to do without one month's salary, didn't get a cent more in their next paychecks, and received no promises beyond the one that there would be talks as long as they went back to work.

The Brazilian media seemed entirely on the side of the government. The main argument cited in editorials and signed opinion articles was that Petrobrás's workers had no reason to strike at this time since their contract wouldn't end until September. The union leaders, however, insisted they were only trying to force the government to make good on ex-President Itamar Franco's verbal promise of raising salaries.

THE REAL CARDOSO -- The typical Petrobrás worker is 35 years old, toils nine years for the company, has a wife and two children, and makes $1,000 a month. The bureaucratic side of the company works in an air-conditioned modern building in downtown Rio and receives 30% more for the so-called insalubrity additional in their salaries. Contrary to the neck-tie crowd, however, the blue-collar workers in the refineries (6,000 of them) and in the drilling platforms (4,000) have their faces smeared with soot and must work hard after having endured grueling admission tests.

At the end of the strike even Antônio Carlos Spis, FUP's (Unified Oil Workers' Federation) president, recognized how ill advised the stoppage was. The union leader, whose parents came from Austria, kept his cool during the strike even though he wasn't able to sleep more than four hours a day, but he still showed some contrition. "Our mistake was to allow that the whole society would be harmed by the lack of gas."

Although Cardoso has a past as a leading socialist scholar and activist, his standing on this strike brought comparisons to President Ronald Reagan who crushed an air traffic controller strike on August 1981, and prime-minister Margaret Thatcher, who in 1984 weathered a 51-week strike by 120,000 miners in Great Britain. By a strange coincidence, Cardoso had met the Iron Lady in London just three weeks before the strike's beginning.

Aside from the middle man who charged desperate consumers 1000% more on gas containers (25 lb. containers that normally cost $5 were being sold for as much as $50 by some gougers in São Paulo), in the end apparently nobody profited from the longest strike in Petrobrás's history. The workers had to give up their demands for a 28% raise. The government won a political victory, demonstrating that it could stand up to strikers, but at a very high economic cost. Fernando Henrique put on a show of force sending hundreds of soldiers, tanks, and military trucks and jeeps to occupy four refineries is São Paulo and Paraná states.

During the 31 days that the strike went on, the country had to spend an extra $500 million importing oil and its by-products. The Oil Workers Union (Sindipetro) said that the workers saw a loss of $57 million on salaries alone. There is a slight discrepancy there, with Petrobrás's executives asserting that the lost amount was $22.5. The difference has to do with the headcount of strikers, depending on the side that talks. While the company says that 15,000 workers sat on their hands, the union puts this number at 38,000.

According to an InformEstado poll, the big losers after the strike were the population and the nation's economy. Almost 66% of interviewees gave this response. Only 13.2% think the oil workers themselves had the most to lose. Petrobrás's 11 refineries produce 63 million gallons of gasoline, diesel and heating oil every day. During the strike this output was reduced to about 10 million gallons a day. All over Brazil, people had to stand in line for hours to buy cooking gas. There were also lines of cars at gas stations --when there wasn't the feared "empty" sign on the pump -- and dozens of factories were forced to stop work due to the lack of gas. The union movement was also seen as a loser by 10% of those polled, and 3.5% believed that President Fernando Cardoso had lost prestige with the stoppage.

The owners of the 29,000 gas stations across the country think they had to suffer more than anyone else. Luiz Gil Siuffo, President of the National Federation of Fuel and Lubricants Resellers (Fecombustíveis) reported that gas stations lost $700 million due to the work stoppage. "Some resellers will have to fire workers to cut expenses," said Siuffo. "At least they will give anticipated vacations to everyone of their employees."

THE PRIVATE DANCE -- Brazilian history shows that the country was never able to decide what would be the best approach to exploring its natural wealth. According to historian Maurício Vaitsman in his book O Petróleo no Império e na República (Oil During the Empire and the Republic), Pedro II, Brazil's emperor from 1831 to 1889, allowed the national and foreign private sectors to search for oil in the country. Decree 1,044 signed on September of 1852 granted Antônio Mendes D'Almeida and Constantino Conde de Zabielo the authorization to "incorporate a company with national and foreign stockholders with the aim of exploring mines of fossil fuel, copper or any other mineral in the provinces of Maranhão and Piauí".

American businessmen seemed to secure the best deals. Decree 2,352, from November 1864 for example, granted American Thomaz Demy Sargent "faculty for 30 years to extract peat, oil and other minerals in the counties of Camamu and Ilhéus, in the province of Bahia." Sargent was authorized to do whatever he pleased with the land, including selling or swapping it for something else. He was even allowed to expropriate private land needed for mining, "provided that it could be proved that all friendly means had been used to obtain such property."

The reign of the private sector in the natural resources department crumbled together with the Empire when Pedro II was deposed in 1889 by general Manoel Deodoro da Fonseca, who became the first Brazilian President. The 1891 constitution transferred from the Union to the states the sovereignty over the mines in their territories.

According to Vaitsman, this approach delayed for at least three decades the exploration of oil in Brazil. "The mining impetus coming from the Empire paralyzed the Magna Carta. Promising researches were abandoned," writes Vaitsman in O Petróleo no Império e na República.

Three times before this last battle, congress was the stage for heated discussions about oil monopoly. First, during the dictatorship of Getúlio Vargas, who governed from 1930 to 1945. At the end of the 20's the private sector had reorganized itself to explore the Amazon river, which was divided into eight zones for mineral prospecting. Six of these areas were handed to three companies belonging to an international consortium. In 1930, contracts were signed but the real work never started -- to the delight of a group of nationalist tenants defending a hard-line regime and the strong hand of the state on the country's natural resources. They were able to lead the argument on mineral wealth during the discussions of the 1933 Constituent Assembly. The 1934 Constitution ended all private rights to the subsoil and gave back to the union total rights to prospect for mineral resources.

After winning the presidency in 1946, general Eurico Gaspar Dutra toyed with the idea of giving foreign companies the right to search for oil. His ideas, however, were met with a wide coalition of military, students, politicians and journalists who joined forces for the O Petróleo É Nosso campaign. These forces created the Center for Oil Studies and Defense, a nationalist lobby. The House started discussions about the Oil Statute in March 1948. In May, Dutra, not being able to resist the pressure anti-privatization had already decided to forgo his privatizing ideas.

ARROGANT BUT EFFECTIVE -- Still without a car industry in place, Brazil in the early 50's was spending $250 million to import oil. An oil field in Bahia being operated by the National Petroleum Council produced only 2% of the country's needs. Against this backdrop and the notion that foreign firms had had their chances to find oil in the past but didn't look for it in order to maintain Brazil as an underdeveloped nation, President Getúlio Vargas, elected by popular vote, created Petrobrás. Willing or not, all owners of cars, buses, trucks, boats and planes were required to be shareholders of the company, buying the shares according to the weight of the vehicle.

Interestingly enough, Vargas, considered the father of the bill that created Petrobrás, took a very ambiguous stance on the oil monopoly. The President tried his best to have US Standard Oil and other American oil firms participating in the prospecting of oil in Brazil at the same time he was deciding to create Petrobrás. The state oil company would work as a holding company with national and foreign subsidiaries, which would be in charge of exploration, refining, and distribution.

Contrary to popular perception and despite its arrogance, Petrobrás is not a place where government godchildren can get an easy job. The company has become an island of excellence inside the Brazilian work market, requiring rigorous admission tests and continuous training courses for those willing to work there.

After 1968, Petrobrás became a holding company and started to compete internationally through Braspetro in a number of sectors, including mining, fertilizers, and shipping. While disputing foreign markets, however, the company turned into an untouchable in the domestic scene, transforming itself into a state within a state. Those who would dare to criticize the firm were called unpatriotic or worse.

PETROBRÁS CHRONOLOGY

1852 -- Emperor Dom Pedro II authorizes the creation of a private company to prospect for oil in the northeastern states of Piauí and Maranhão.

1918 -- The federal government for the first time participates in the oil industry lending equipment and technicians to a private company.

1919 -- The Agriculture Ministry gets funds to start searching for oil on its own.

1934 -- Constitution forbids private sector to have rights over the subsoil.

1939 -- On January 21, in Lobato (state of Bahia) for the first time oil flows from a Brazilian well.

1948 -- O Petróleo é Nosso campaign prevents the federal government to allow the entry of foreign capital to prospect for Brazilian oil.

1953 -- Petrobrás is created by President Getúlio Vargas through law 2,004.

1960 -- The Oil National Council (CNP) is incorporated to the Ministry of Mines and Energy.

1995 -- Congress votes to end the oil monopoly as exercised by Petrobrás.

THE STRIKE CALENDAR

August 1, 1994 -- Oil workers present Petrobrás their revendications for the 94/95 period, including a 105% raise in salaries.

September 20, 1994 -- Negotiations stop. TST (Supreme Labor Tribunal) intervenes and establishes a 13.74% salary readjustment for oil workers.

September 29, 1994 -- Oil workers begin strike.

October 6, 1994 -- Former President Itamar Franco meets in Juiz de Fora (Minas Gerais state) with Vicente Paulo da Silva, the Vicentinho, president of CUT (Unified Workers Federation) and Antônio Carlos Spis, president of FUP (Unified Oil Workers Federation). Oil workers want a salary readjustment varying between 12% and 18% depending on the wages. They drink draft beer at Brazão restaurant and the President makes some promises, but signs no document, with the argument, "Don't you trust the President's word?" The next day the strike ends.

November 1994 -- Mines and Energy Minister Delcídio Gomes meets with Labor Minister Marcelo Pimentel to ratify the President's oral agreement. Pimentel alleging tiredness leaves the room before signing anything. Soon after, he reneges on the agreement. Petrobrás, employer of the 50,000 oil workers, refuses to accept the terms of the accord. A new strike begins on November 23.

May 3 1995 -- 85% of oil workers go on strike. Again they want a raise, but this time they are also protesting against the proposed constitutional amendment to break up Petrobrás's monopoly. Petrobrás appeals to TST (Supreme Labor Tribunal).

May 5 -- Oil production falls 55% and natural gas, 35%. Petrobrás imports $60 million in fuel.

May 6 -- Strikers and Petrobrás meet. No agreement.

May 7 -- TST declares strike illegal and abusive.

May 10 -- Petrobrás announces the firing of 25. Workers menace with collective resignation.

May 11 -- Antônio Carlos Spis, FUP's president, heads the list of fired workers. Petrobrás announces a list of 34 more fired leaders.

May 15 -- Workers appeal to the bishops. The response comes from the President: There won't be any dialogue before they go back to work.

May 16 -- Fuel imports reach $100 million. Petrobrás menaces with the hiring of substitutes.

May 17 -- FUP asks reopening of discussions.

May 18 -- Cardoso meets leaders of allied parties in search of a solution. Rio starts to feel the lack of fuel.

May 21 -- Around 36,000 workers (from a total of 47,500) are back to work.

May 24 -- Army occupies four oil refineries

May 26 -- TST declares illegal the raise requested by strikers.

May 28 -- CUT (Unified Workers Federation) admits negotiations and goes back on its idea of a general strike.

May 30 -- Petrobrás's main negotiator with strikers die.

June 1 -- Strikers are only asking now that firings be canceled.

June 2 -- FUP recommends by fax that strikers drop all of their demands and go back to work. With the exception of Cubatão all other refineries accept the recommendation in assemblies.

THE WAY THEY SEE IT

Should Brazil open its subsoil to the rest of the world? The controversy is older than the republic. Monopolists and anti-monopolists have diametrically opposed positions. The pro-monopoly responses were taken from a document written by Petrobrás Engineers' Association; the anti-monopoly quotes are from the book Cartilha do Instituto Atlantis.

In the past foreigners denied that there was oil in Brazil so the country would buy from them? Why would it be different now?

ANTI-MONOPOLY: "Because only after the 1973 international oil crisis it became economically viable to explore Brazilian oil, since 90% of our oil come from big-depth underwater wells. Its exploration is too expensive, and it was necessary that the oil prices went up. With the 50's and 60's values this wasn't worthwhile."

PRO-MONOPOLY: "The multinationals only showed interest in coming to Brazil after the discovery of big oil deposits offshore and development of technology to explore it. Petrobrás has proved that is possible to produce deep-water oil at competitive prices with imported oil, this paid in national currency and generating jobs in Brazil."

The big oil multinationals are so powerful that they impose disadvantageous contracts to the countries producing oil.

ANTI: "This used to happen decades ago. Few areas of commercial law have advanced so much as the ones concerning oil. Nowadays, the contracts are highly technical and with plenty of guarantee for the countries where the fuel is extracted from."

PRO: "Since 1970 the right of property for raw oil has favored state companies which possess today more than 90% of the world's oil reserves. Only in countries with little oil reserve exploration is private."

Foreigners are going to take all our oil since theirs is ending.

ANTI: "Contrary to the thinking in the 70's there is no more any perspective of scarce oil. The Middle East, Mexico and Venezuela alone have enough oil to supply the world for the next 80 years."

PRO: "The US reserves decrease 3% a year, while in Brazil for every oil barrel produced, three new ones are discovered. Brazilian oil is enough for our consumption but not enough to export and end our reserves."

Without Petrobrás's monopoly oil prices will be going up.

ANTI: "Oil prices are low nowadays because the government pays the difference with the money that should be used to fund health, education and security programs. The only effective way to lower prices is though increase in production. To do such a thing we need resources that Petrobrás by itself does not have."

PRO: "Roberto Broughton, ex-president of Shell in Brazil, had established that his company would invest only if oil and fuel prices in Brazil were aligned with international prices. He suggested that foreign companies should have some privileges, that is, bigger prices and advantages in order to compete with Petrobrás."

Foreigners are going to harm Petrobrás and set the clock back on oil exploration.

ANTI: "The law that will regulate the sector's opening (Hydrocarbons Law) will prevent this kind of injustice. Petrobrás will have a volume of oil compatible with its ability to explore it. Furthermore, Petrobrás will be free to associate itself with foreign and national capital."

PRO: "The House Representatives will sign a blank check if they approve the measure. The government will end up saying that we should sell some refineries, rigs, oil fields, so we can use the money to invest in education, health, debt payment, etc... Whatever is left from Petrobrás will be privatized as it happened with YPF, Argentina's state oil company."

With the monopoly break-up there will be unemployment.

ANTI: "On the contrary. With the entrance of new companies in the sector, there will be a strong demand for qualified workers. In addition, many indirect jobs will be created in the supplying companies, which now have a sole client, Petrobrás."

PRO: "There will be unemployment at Petrobrás. Although the company is not afraid of competition, with the end of the monopoly it will have to think as a private firm, cutting investment in technology and research, for example."