The Curmudgeon on Gas and Oil

Opinion, by Michael Royseter

RIO DE JANEIRO, BRAZIL – Last Thursday, the two biggest news stories were (1) Russia and Qatar had been chosen to host the World Cup in 2018 and 2022, respectively; and (2) Brazil’s Congress voted to change the rules about the distribution of revenue from oil drilling offshore. There is an obvious link in these items—namely, oil & gas. But there are a few more, so read on.

Russia was no surprise, save to the English, who maintained that the whistle-blowing BBC articles about FIFA officers (including Brazil’s Ricardo Teixeira) would not affect their chances amongst FIFA officers. Predictably, England got only 2 out of 22 votes on the first ballot, one of which cast by their own representative. Supporters of the USA bid purported to be amazed that they were, once again, “shellacked”.

This has led Brazilian conspiracy theorists (the Curmudgeon loves a good conspiracy, at least in theory) to opine that the real reason the UK and the US put on a bid for the 2018 and 2022 World Cups was to show that they are both ready right now, so if Brazil fails to meet FIFA standards by 2012, either of them can step in host the 2014 Cup.

But back to oil and gas. Russia and Qatar’s governments promised to sink billions of petrodollars into WC 2018 and 2022—and FIFA, unsurprisingly, believed them. Both countries have the reserves and the resolve, and neither one is the sort of democracy where such fickle things as elections might change the situation a decade from now. A few years back, when Brazil was awarded the World Cup, its government also promised to sink billions of dollars into WC 2014. To an even greater degree, Rio de Janeiro owes the decision to let it host the 2016 Olympic Games to those very same almighty dollars.

The anticipated source of this bounty, of course, is the Pre-Salt reserves that the Federal Government promised to nationalize—as it just finished doing last Thursday. Both FIFA and the IOC trusted that Lula, like Russia’s Putin and Qatar’s Sheikh Hamad bin Khalifa al-Thani, if not still in power themselves, would anoint a successor who would assure support for games through 2016, notwithstanding intervening elections. They were right.

The problem for the Brazilian federal government now is that the interests of Brazil as a whole in 2014 (World Cup sites are spread around 14 locations thousands of kilometers apart) are antithetical to those of Rio de Janeiro in 2016. The State of Rio de Janeiro and its municipalities now rake in fully two-thirds (2/3) of all government revenue from offshore oil exploration. The remaining 25 states get the scraps under the table.

Rio’s bid for the 2016 Olympic Games requires spending huge chunks of that windfall revenue on the Olympic Games. Lula promised the IOC that governmental money would be there. Unfortunately for him, the latest re-writing of the Pre-Salt rules by a Congress fed up with table scraps will literally decimate that revenue—Rio will have only 10% of what it now receives. If that happens, Rio will not have the money for the 2016 Games and the federal government will have to ante up.

On his way out the door, Lula will veto the royalty provisions of the Pre-Salt law and in 2011 rowdy battles will be waged in Congress, the courts and other corridors of power, over sharing oil and gas revenue. In the end, while Rio de Janeiro will lose some funds, it will keep enough to host the Olympics in 2016. After that the plug will be pulled.