Session 2010-12
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Evidence heard in Public

Questions 1 - 66



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Oral Evidence

Taken before the Foreign Affairs Committee

on Wednesday 27 April 2011

Members present:

Richard Ottaway (Chair)

Mr Bob Ainsworth

Mr John Baron

Sir Menzies Campbell

Ann Clwyd

Mike Gapes

Andrew Rosindell

Mr Frank Roy

Sir John Stanley

Rory Stewart

Mr Dave Watts

Examination of Witnesses

Witnesses: Neil Atkinson, Director, Energy and Utilities Research and Analysis, Datamonitor, Paul Domjan, Director, John Howell and Company Ltd., and Dr Frank Rosillo-Calle, Honorary Research Fellow, Imperial College London, gave evidence

Q1 Chair: I welcome everybody to this session of the Committee, our first oral evidence session for the Committee’s inquiry into UK-Brazil relations. The purpose of this session is to examine three discrete areas of activity in Brazil that directly affect the UK’s interests: energy security, crime and the environment. I start with an apology for the fact that the witnesses and members of the public have been kept waiting. We had a rather pressing matter to attend to, and I thank you for your indulgence.

I give the first three witnesses a very warm welcome. It is very much appreciated that you have taken the time to come and see us. Perhaps I could start the questioning on the oil sector. Could you set out how important you see the sub-salt fields are both to global oil production and to Brazil as an aspiring power? The recent discovery of what has been a pretty substantial oilfield there is obviously of huge economic and political impact, and I would be interested to hear your views. Mr Atkinson, do you want to go first?

Neil Atkinson: I am happy to start on that one. We face a situation where demand for oil is continuing to increase at a fairly rapid rate for the foreseeable future-

Q2 Chair: Globally or nationally?

Neil Atkinson: Globally, led of course by developing countries such as China, India and indeed Brazil itself. The issue will arise more urgently over the next decade or so of the challenges to meet that demand by finding oil and gas around the world. There are people, of course, under the heading of peak oil, who believe that the challenge of finding that supply will be more difficult than others believe.

To cut to the chase, Brazil in the past few years has become an increasingly important source of future supply. The pre-salt reserves, which were estimated at something like 80 billion barrels, are an enormous find, and an enormous source of future supply. To put that into context, the current crude reserves of the UK are something in the region of 3.5 billion to 4 billion barrels, depending on whose figures you believe, and the crude reserves of Saudi Arabia are something in the region of 250 billion barrels, again depending on whose numbers you believe, so this is a very significant, almost game-changing find in global terms. As for what it will mean for Brazil itself, as I said a moment ago, Brazil’s own demand for oil will continue to rise quite strongly because its population is rising fast and its economy is developing fast, so it will have a large own use for oil; however, if it is successful in developing the pre-salt reserves of 80 billion barrels, in addition to the other resources it has, Brazil will be, or should be, in a position to be a significant exporter. Brazil is going to have an increasingly important role to play in the global oil and gas picture for the next 20 or 30 years or so.

Paul Domjan: I agree with that. I think the discovery is on a global scale, but I would argue that if we look over the next 10 years-I will take this from more of a supply side than a demand side-it still is primarily a Brazilian story. If we look at Petrobras’s numbers, we are talking about something in the order of 1 million barrels a day in incremental production by 2020, which is 1% or 2% of global production at that stage. What we have already seen, though, is that Brazil’s success with the drill bit, at expanding production, has made the world’s ninth-largest energy consumer, and its eighth-largest economy, a net oil exporter, as Mr Atkinson just said, which has had a major impact on Brazil’s reserves and balance of payments, as well as contributed to stabilising the world energy system.

By 2020 the pre-salt will account for 25% of Brazilian production, which will make Brazil a meaningful oil exporter, with something in the range of 1 million to 1.3 million barrels a day of exports. In terms of Brazil’s total economy, however, oil exports will rise from 9.5% of total exports today to approximately 38% of total exports. That increases the share of Brazil’s top three exports, which we treat as a measure of export concentration, from roughly 26% to 60%, so it has a major impact on the shape of Brazil’s economy, if not on the global energy system in quite the same way.

One of the most important impacts on Brazil will be the debate on establishing a sovereign wealth fund. Brazil could today establish a $110 billion sovereign wealth fund, roughly on a par with Russia, and still maintain its import cover at seven months, which we consider a benchmark. Today, Brazil has a fund that invests in state companies, but not one that saves foreign currency earnings. Obviously, this production will be a huge source of new foreign currency earnings. For that reason, when we think about the UK-Brazil relationship, we should be thinking about the financial side as well as the oil side, because of the revenue the oil will produce.

Dr Rosillo-Calle: I apologise to the Committee-I have a very bad throat, so if I talk too low, please let me know.

Chair: I will wave my pen.

Dr Rosillo-Calle: Okay. I agree with what Paul and Neil said. One thing that has not been mentioned here is that, according to quite a few studies, Brazil has reserves of between 70 billion and 100 billion barrels, and some other studies point to even higher volumes. In future, Brazil is going to be a major player, I am convinced of that. I have my data here. Brazil has about 7.5 million square kilometres of sedimentary areas, of which only 4% have been fully explored, so there is huge potential. I do not know whether we will be able to find more oil, but all the new studies indicate that the potential is far greater than thought up till now.

Another point I would like to make is that Brazil is in a unique position in the world because, contrary to many other oil-producing countries, Brazil has something unique: it has a path that will enable it to become energy self-sufficient. Brazil can produce energy now and will be able to do more in the future. Brazil already produces about 46% of all energy consumed in Brazil from renewables. It also has a biofuel industry which is the most important, well developed and economically viable biofuel programme that we have in the world today. To that, you have to add to that the potential agricultural production. Everything is intertwined, so we rely not only on oil but also on the biofuel, renewable energy and agriculture sector. The country has enormous policy flexibility to become a major exporter of oil and also be able to diversify the energy supply.

Q3 Chair: Do you think Brazil’s energy credentials are damaged by the discovery of this field?

Dr Rosillo-Calle: No, I don’t think so because in the past, people said, what happened to the biofuel programme if Brazil becomes energy self-sufficient because we discover more oil? It is very difficult to say, but I think the Government have realised that keeping the biofuel programme for environmental, socio-economic and political reasons, is more important than shutting it down. The policy is to keep growing oil, become a major exporter of oil, develop the biofuel system which will be largely used in the domestic market, and also become an exporter of biofuel, because we have the capacity and skills to do so.

Q4 Chair: Can you tell us how difficult it is to exploit these fields? The high costs of doing it must be challenging. Can you see economic difficulties with this field? Are there any lessons to be learned from the feasibility of extracting oil that we had in the Falkland Islands, which turned out to be rather expensive?

Neil Atkinson: I think the Falklands is rather small beer compared to what we are talking about here. Somebody 40 or 50 years ago promised to drink every drop of oil that would be produced in the North Sea, and I am tempted to offer to do the same for Falklands oil. That is probably a reckless promise, but the Falklands is small beer.

Brazil is hugely serious because of the vast quantities, but also because of the fact that a very high proportion of Brazilian oil is produced in very deep waters, so it is very technically challenging and very expensive. As we move forward, we think Brazilian production could rise to over 5 million barrels a day or so by 2020 or 2025-something like that-and over 3 million barrels a day of that production will be from deep waters, which is essentially below 2,000 metres. That is a massively challenging resource to exploit, which raises questions about how it is going to be done and by whom, because-forgetting the capital for a moment-the expertise required to carry out investments of that type, and successfully and safely to produce the oil, is the kind of expertise that Brazil has a great deal of, or some of, but it will almost certainly require external help. To receive that external help and investment, it will need to offer an investment climate that is attractive to people with the expertise, which raises a whole new question about how it will develop the resources. They are very challenging because they are in very deep waters. The salt resources are, I think I am right in saying, probably the biggest discovery and potential development of its kind we’ve ever seen around the world, although there have been other examples.

Q5 Chair: With the Americans calling yesterday for an upping of production to push the price down, would a falling price actually affect the economics of this?

Neil Atkinson: Yes. These are very broad indicators, but obviously the more technically challenging the prospect is, the more expensive it is to develop. There are very ballpark figures, but if the oil price were to fall-it is actually quite unlikely-below $60 or $50 a barrel, a lot of the more technically challenging resources, such as the Brazilian fields and other places around the world, such as the Canadian tar sands, would be questionable. However, that is highly unlikely, and in any event the call from the Americans to produce more to put the price down is a typically facile response to high gasoline prices.

Q6 Chair: Will anyone have a stab at what the price per barrel would have to be to make it economically viable?

Neil Atkinson: For Brazil, I think at least $30 to $40 a barrel-something like that.

Paul Domjan: If we think about marginal supply and the price falling, there’s a lot of supply that goes before Brazil, so this isn’t really a price-driven game in that sense. Supply will contract and push prices back up before it gets to the level at which this starts to become uneconomical.

Neil Atkinson: Operating costs are the key to keeping oil production going. Most of the production around the world is from mature fields, where the capital costs were sunk years ago. As long as operating costs have been covered, which are significantly lower than $30 or $40 a barrel in most countries around the world, it isn’t an issue.

Paul Domjan: would agree that technically it is something that Brazil has the expertise to do, but if we look at the scale of the challenge financially, these are $100 million well completions, which are expensive wells and that is one of the main sources of cost.

Q7 Mike Gapes: There has been a lot of commentary over the past couple of years about the impact of so-called peak oil. I am interested to know whether the Brazilian discoveries are factored in to that equation, or whether what is happening in Brazil actually changes the debate and moves the crisis point forward several years or decades.

Neil Atkinson: I started analysing oil markets for the very first time in about 1980 or 1981, and at that time peak oil was supposed to have arrived by about 1990; by 1990, it was 2000; by 2000-and so on and so on. Inevitably, a day will come.

The point is that the Brazilian discoveries are exciting and they will yield much higher production from Brazil as we move forward, but there are other places around the world where production is falling. Here in the UK is the most obvious example, perhaps not helped by recent tax changes-or maybe they won’t have an impact; we will wait and see-but there are other countries where production is falling.

The issue is whether technological improvements and better knowledge of reservoirs, as we gain it, will enable more to be produced than was previously expected from existing fields. So far, we are producing more than we thought, and the day when peak oil really comes-when total world supply can go no higher, and will only start to fall-has been pushed back well into the next decade, I believe.

Paul Domjan: There is another wrinkle to it, which is important in the energy security area in particular. We can divide the world’s oil into three buckets: the oil that is technically relatively easily accessible in stable, mostly democratic countries that are easy to do business in; the oil that is technically accessible in politically challenging environments, which may not be politically accessible; and technically difficult oil. That creates what I would call a political peak oil problem. We would not be in a peak if we could exploit all the resources that are out there, but there are some very large resources-whether they are in Middle East or the US outer continental shelf-that are simply off the table for political reasons.

Neil Atkinson: That answer will segueway neatly into the third part of the set of questions, which involves Brazil’s relations with organisations such as OPEC, so I suspect that we may come back to that.

Dr Rosillo-Calle: Brazilians admit that the costs of production vary. My data showed me that in some of the deep water, it is about $40, but in others it is about $50 or $60, because some of those findings are in very deep water.

Brazil now offers one of the best environments for foreign companies. In fact, all the main oil companies are investing in Brazil. All the big companies are bringing their own technological know-how-especially the British in the North Sea-which is being applied to Brazil. There is a very important role for the UK to transfer more know-how to the Brazilian side. North Sea oil is very difficult to extract, because the weather is far rougher than it is in Brazil. There is a lot of potential co-operation here, which is happening now that the oil companies are putting a lot of money into the Brazilian oil industry.

Paul Domjan: It goes to the core of the technical challenge, which is that Tupi, the first pre-salt field, has been online for two years, so the technical challenge is addressed. This oil is successfully produced; it is technically possible. The question is then about mobilising the human capital-the physical capital, the financial capital-to expand that.

Between now and 2014, Petrobras plans to invest something like £224 billion globally, about half of which will go into the pre-salt. But there are real questions, given Petrobras’s financing situation, about whether it will be able to come up with the financial resources. If it is going to be the operator of all these fields, will it have the engineering capability and the physical plant to be able to do what it plans?

Q8 Mr Watts: Can I follow that up? What opportunities are there for British companies with the discovery of the sub-salt fields? What are the Foreign and Commonwealth Office and UKTI doing to maximise the potential for the British economy out of the finds in Brazil?

Paul Domjan: I can talk about the opportunities; I cannot comment on the FCO’s ability to recognise them. At the moment, Brazil is about to change its regulatory environment to make Petrobras the designated operator, which has been greeted with some disdain in the UK. However, there are some good reasons why the Brazilians want to do that. That is not necessarily an impediment to UK investment-it does not prevent it. Petrobras will still need financing and technical support. It will still need to rent vessels, and it will need engineering and a whole range of other services. The UK is a world leader in all those areas. Petrobras will need to raise another $60 to $70 billion, if I remember correctly. The City of London is one place to do that. The Brazilian market will need to build literally dozens-perhaps as many as 100-of new drill ships, staff those ships with engineers and hire contractors to do all that work. A lot of those contractors will be UK-based, from Aberdeen. The real competition is the extent to which there is a tension between developing a domestic industry, which Brazil is keen to do, and bringing in foreign contractors, whether they are from Houston or Aberdeen. There is a role for the FCO and UKTI: to what extent can they show the Brazilians that working with the UK is an opportunity to develop the domestic industry, rather than a zero-sum game for the domestic industry?

Q9 Mr Watts: Are there any signs that we are taking those opportunities? Are we out there in numbers?

Paul Domjan: BG has a project there in the international oil company space. The real opportunity is not going to be the international oil companies as equity participants; it is going to be the service companies that are supporting Petrobras. That’s where I think there’s still a big game to be played.

Neil Atkinson: There are opportunities, as we’ve said. What we must remember is that there are opportunities, first, because the Brazilian opportunities themselves are good, but also because other countries around the world are becoming increasingly hostile to the international oil companies and the international equipment manufacturers, for their own reasons. It is no longer so easy for foreign companies to operate in, for example, Venezuela or Russia, and there are other examples that we could choose. One of the overall problems that the international oil companies face, as well as the manufacturers and service suppliers, is that they are opportunity constrained in many cases. Brazil is a favourable environment and a huge opportunity, so they should be all over Brazil like a rash, frankly, because it is one of the best opportunities on the planet for British companies and anybody else with deep-water expertise in particular, which we have.

Paul Domjan: One way to think about this is that the regulation says Petrobras must be the operator, and it must have up to 30% stake in oilfields. Given Petrobras’s financial resources, that probably means that it will have a 30% stake in oilfields, so there is 70% equity participation left to play for in the international arena. On top of that, this kind of blanket operatorship-and we have seen this in other countries such as Kazakhstan, where there is a variant of it, to some extent-means a lot of opportunity for foreign companies to come in as co-operators, joint operators, or as technical operators on part of the project, so there’s still a lot of scope for the UK to play a part in this.

Q10 Mr Watts: You touched on the decision by the Brazilian Government to take more control over their oil company and also over the salt fields. What implication has that got for the future relationship between British companies, potentially, and Brazil?

Paul Domjan: British companies need to understand what the Brazilian Government’s motivation is, respect that, and ask how Britain can help to advance that motivation. I think that motivation has, at a very high level, three components. One is maintaining a role in directing the course of pre-salt development, and that may include slowing the speed of pre-salt development to an extent. Oil often appreciates more quickly in the ground than in the financial markets as revenue. It means maintaining a substantial share of that revenue, both as licence payments, and as equity in Petrobras and dividends of Petrobras to the state. However, I think the third one, which really gives an opportunity to the UK, is developing the local oil services industry. It is about UK companies showing that they can actually be partners with Brazilian firms, that they can develop Brazilian expertise, train Brazilian engineers, and develop an industry in Brazil that is world class.

Brazil is already, for example, in discussions with Pemex to export Petrobras expertise to Mexico. It is very pleased to be seen as a world leader in deep-water expertise, and the UK can help build that. That is particularly important if you look at the structure of the Brazilian industry. Normally, you expect a whole collection of smaller firms that are very innovative, which then contract to large firms, with technical innovations flowing down from large firms but also up from small, innovative service companies. In Brazil, technical innovation is clustered in Petrobras. The kind of community of smaller firms that make an innovative cluster is not there, so that’s then an opportunity for the UK firms to help develop Brazilian subsidiaries that will meet part of the Government’s goal by becoming this broader, innovative cluster.

Q11 Mr Watts: Would I be putting words in your mouth if I suggested the answer to the question is that the changes have taken place? More control being taken by the Brazilian Government means that the relationship between anybody and the Brazilian Government will be a crucial factor in success out there. Would you go as far as to say that?

Paul Domjan: I would put it slightly differently. The degree to which the aims of the Brazilian Government are supported will be crucial to success.

Q12 Mr Watts: To do that, you’d have to have a relationship and you’d have to know what they want.

Paul Domjan: For certain. A lot of these smaller contractors won’t have a direct relationship with the Brazilian Government, but they will be supporting the Government’s policy aims through their relationship with Petrobras.

Q13 Mr Ainsworth: Can we shift to ethanol? Brazil has almost a monopoly of sugarcane ethanol, which has a higher conversion rate there than other forms of ethanol. What are the politics of that? Is there political significance to that monopoly and the way in which it would pan out if it was an oil situation?

Dr Rosillo-Calle: I think things have changed since the alcohol program started in 1975. The industry was dominated by domestic capital. They did not like foreign capital. That has changed and I think in the last 15 years-no, less than that; maybe five or seven years-the industry realised that it needed foreign capital to invest. They allow a lot of foreign capital. For example, BP has recently acquired about 60% of a big company and is investing something like $300 million. Like BP, you have Shell and many other oil companies, and other biofuel producers in Europe are investing in Brazil.

Brazil is unique because it has a unique experience in using sugarcane, which is a very good raw material. It is very efficient and economically viable. There is a distillery, which is the closest we have to a biofuel refinery. You produce ethanol, sugar and all the heat and electricity that you need for your operation. You have an efficient boiler and you can produce surplus electricity that you can sell to the national grid. On top of that, you can produce animal feed, CO2, yeast and so on.

A lot of capital is moving now. It is opening a lot and there are many good opportunities for the UK, basically helping the Brazilians to develop sustainable criteria. I have some points to make. At the moment, you need to ask for greater co-operation on the research and development of biofuel-especially R & D, second and third generation. You need to help rather than impose sustainability criteria on the Brazilians, and there are also the agricultural issues. We need to develop a mutually agreeable certification scheme. The UK has a good experience with the renewable transport fuel obligation. It can play an important role in opening up the Brazilian market, which will be a major importer, and the cheapest, so I think there are many opportunities for UK companies to co-operate with the ethanol production industry.

Q14 Mr Ainsworth: What effect do the import tariffs that the EU maintains on ethanol have on EU-Brazilian relations?

Dr Rosillo-Calle: There have been many problems and I think Brazilians have complained about that. One thing we need to do-Europe and the UK, which have very strong free market philosophies-all the import tariffs should be, if not abolished, at least reduced considerably. If you want to compete, you should not use high tariffs. We need import tariffs that are economically viable, which does not happen in Europe. There needs to be a balance here so that some tariffs might be applied, but they have to be much lower. The UK could help a lot in achieving those things.

Q15 Mr Ainsworth: Why have we maintained those tariffs?

Dr Rosillo-Calle: As I see it, it is because Europe-basically, France-has a lot of potential to produce ethanol, and the raw material is the key factor. The raw material in Europe is very expensive. Therefore, a way of protecting the domestic supply is to impose a high tariff, so you can compete. Somehow, we need to look at that, because it is not fair that the less efficient producer is supported while the more efficient are penalised.

Q16 Mr Roy: Turning to oil and diplomacy, I have a three-part question. How has Brazil’s oil wealth affected its foreign policy? Is it fair to characterise it as being more assertive as a result of the increase in oil? Specifically, have UK-Brazilian relations changed because of the oil wealth? Thirdly, we spoke earlier about oil prices in relation to OPEC. Will a new more aligned alliance of Brazil, Russia and so on be a direct competitor to OPEC?

Neil Atkinson: I have been a camp follower of OPEC for many years-I mean in terms of following it, rather than being a camp follower. I worked for many years for the national oil company of a country that is a member of OPEC, and I used to support the OPEC delegation. I believe that OPEC is an entity that countries are more likely to leave than to join, and there is a simple reason for that. Why on earth would a country like Brazil wish to join an organisation with which it has very little in common politically, other than the ownership of large oil reserves? It wishes to see those reserves developed and attract foreign investment to help that process, but the only way it can attract that foreign investment, and indeed reward its domestic investors, is by providing a return. That return is provided by increasing production and selling the oil to markets that are growing.

The OPEC countries are different from Brazil in that they are sitting on reserves that, as a proportion when set against their population and various other indicators, are absolutely enormous. They have the ability to limit their production from time to time without significantly damaging their economy, should they wish to protect oil prices. Rather like the United Kingdom in the 1970s and 1980s when production was growing, Brazil has nothing in common with any kind of OPEC strategy. I do not believe that Brazil will ever join OPEC in the same way that Kazakhstan, another rising producer, has shown no sign whatsoever of joining OPEC. Despite efforts by OPEC in recent years, Russia shows no signs of joining, and the OPEC organisation, particularly in the current environment where oil prices are very high, can continue to produce pretty well as much as it needs. It is a fairly toothless organisation these days anyway.

You talk about critical relationships. The BRIC countries-Brazil, Russia, India and China-have held, I think, more than one summit now. There was one quite recently in India. A political entity of some sort is beginning to emerge as a grouping of the BRIC countries, and Brazil is beginning to assert its increasing wealth on the world stage. It has forged other political relationships with countries such as Iran and Venezuela. I may be missing another member of the bad boy’s club-ah Cuba; who could forget Cuba? Brazil is forging its own way as it becomes increasingly assertive, but I do not believe that in the long run it will join the oil producers club, because it is not in its interests to do so.

Paul Domjan: I certainly agree with that. It is reasonable to say that Brazil will probably be happy with oil prices in the sort of $70 to $90 region. That would be more than adequate and OPEC is perfectly happy with that. If there is any benefit to working with OPEC, it would be only from the outside in the way that Russia occasionally does. It is important to bear in mind OPEC’s desire to maintain prices. Its target price has probably risen a bit now that Saudi Arabia needs to pay for the gift that the King has just given, which is probably something like $10 a barrel in Saudi production for the next five or so years.

There is another interesting wrinkle to this, which is that Brazil is in the process of shifting to a more statist approach to industrial policy. As a growing oil exporter, and a country that already has substantial foreign exchange reserves of $240 billion, there is a question about to what extent Brazil would be tempted to and choose to use its national reserves to support its national champion industries abroad. Whether that would mean taking a role similar to that of China, or a more benign role that involves less direct foreign assistance, we do not know. It may be that Brazil does not choose that path at all, but it is certainly a question that is being actively debated, particularly as Brazil increasingly looks to China as a potential model for industrial policy.

Neil Atkinson: Brazil’s ultimate objective, if I understand it properly, is a seat on the UN Security Council.

Q17 Chair: A permanent seat?

Neil Atkinson: Indeed. Obviously, Russia and China are already there. India and Brazil are not, but they are of course rising significantly in international importance. The ultimate goal of Brazilian diplomatic policy would be to become a permanent member of the Security Council, so it will always seek to act responsibly and fairly, balancing the interests of the different blocs around the world, which is why I do not believe it would touch an institution like OPEC with a bargepole. Brazil is looking to achieve that objective-to cement its place at the top table as a great country, a big powerful country with a huge industrial base and take what it thinks is its rightful place.

Dr Rosillo-Calle: Brazil is very unlikely to join OPEC because the economy in Brazil is very different. You have three key sectors: oil; biofuels and renewable energy; and agriculture. Brazil doesn’t depend on oil as a major revenue. It is only part of the revenue for Brazil. It is not a major revenue. Because it is very diverse, I think, as Neil said, that there is no incentive for Brazil to join OPEC.

Q18 Mr Roy: What unique attitude does Brazil’s new oil wealth bring to its foreign policy, if any? What does Brazil have that other countries that have no interest do not have? We know that they have an awful lot going on Haiti, for example. Do they have a favoured area or region of the world? Do they have a favoured project type mentality towards anyone else?

Neil Atkinson: I am not aware of that.

Dr Rosillo-Calle: My understanding is that the Brazilians so far have earned a lot of money from ethanol, but the money they have earned has gone into two areas. First, they have reinvested it in the oil industry for new exploration and, secondly, they have distributed it in social uses. For example, Brazil is a very unequal society. President Lula and the new Government are putting a lot of emphasis on reducing poverty, so a lot of funds from oil revenue are going to be redistributed across society. That is my understanding.

Paul Domjan: I think it is important to keep this in perspective. In 2020, Brazil’s economy will not look like Saudia Arabia’s. It will not look like Kazakhstan’s. It will look like Mexico’s or Malaysia’s in terms of the scale of oil production in the economy, so it is not necessarily a fundamental change. It will not turn into Saudia Arabia. It will still be a diversified economy. The Brazilian trade mission to China last month focused on industrial exports. The 300 business leaders went to China to sell jets, trains and manufactured goods. It is very different from what you would expect of a trade delegation from an oil-dominated economy. What Brazil is looking for in China is not a market for its oil. It has that. It is not an investor in its oil. It knows it can get that. It is a market for manufactured goods. We need to bear in mind that Brazil is still going to be a middle-income, manufacturing, and as Dr Rosillo-Calle said, very diversified economy.

It is important that we keep bioethanol in perspective. It has been a huge success in Brazil, but that means it has displaced something like 14% to 17% of transportation fuels. It is 4% of Brazil’s energy, as opposed to 41% for oil and 39% for hydro. It is an important export earner, but it’s not going to drive Brazilian international policy in the way that even oil or manufactured goods would.

Q19 Rory Stewart: To keep hammering the simple point: are there any specific political security or defence threats posed by Brazil’s emerging wealth? Is there anything that you could see over the next 20 years which the US, the UK or the West should be anxious about?

Paul Domjan: I would not say anxious. I think there is an opportunity. Mr Atkinson alluded to Brazil’s desire to have a seat at the top table in international affairs. One can characterise Brazil as a responsible, developed market economy with a strong democratic foundation. It is the country that we would like to have at the top table in international affairs. We would like to shoulder a larger share of the burden. I am much less troubled by Brazil’s emergence than I might be if it had happened in many other places. It is very encouraging. We just need to keep a dialogue with Brazil. The danger is to push Brazil very quickly into a sort of caricature position because it is now an oil producer. It does not change what Brazil is, which is not fundamentally about oil.

Dr Rosillo-Calle: Brazil is not China. Brazil shares the philosophy and culture of the western world. We have been very focused on either the United States or Europe. I do not think that it is possible for any Brazilian Government just to refocus completely and say we are going to be totally independent. China poses a greater danger; it is a very different culture. I do not think that that will happen with Brazil. It shares too many of the values of the west. However, politics is impossible to predict.

Q20 Rory Stewart: What are the implications for the UK Foreign Office in engaging with Brazil over the next 10 to 12 years? How should we be using the levers to help move Brazil into such a position? What should we not be doing?

Dr Rosillo-Calle: The UK has to take into account that Brazil is unique. I say "unique", because it has something that would benefit your country. It has a huge amount of energy resources. It has a lot of natural resources that are used in different ways, such as in biomass and biofuels. The Brazilians are also very keen to export agriculture systems. Brazil has perhaps the greatest potential in the world when it comes to agriculture. Agriculture is very important for Brazil, for the economy and for export. Brazil is looking at the European Union especially, and the US and China because China will import a lot of products. There are many areas on which to co-operate. Do not think of Brazil as only having one area with which to work. There is energy, agriculture and many other areas. You need to look at the country as a whole rather than focusing on a particular area. That is how to keep very much involved with the Brazilians.

Paul Domjan: I certainly agree. Brazil’s export structure today is, first, iron ore, then petroleum, then sugars and sugar-related products such as ethanol, then manufactured goods. The real opportunity for the UK at the moment is to look at how all that is producing substantial export earnings, substantial foreign currency earnings and substantial appreciation of the real. It raises a risk and an opportunity. The risk is that Chinese economic growth falters, which is quite plausible-that will be an interesting topic for a future hearing-as a result demand for many of these products falters, and we have some really serious short-term economic problems in Brazil because of the collapsing commodity prices. Brazil is increasingly tied to global commodity markets, but not exclusively global oil markets. It would be a challenge for the UK to manage its relationship with Brazil and to ensure that Brazil still sees opportunities in working with the UK in that type of environment.

The real opportunity that I want to focus on-it is important for determining the course that Brazil takes, as well-is for the UK to work with Brazil to encourage it to set up a framework for managing all of its revenue. Such a framework would usually include establishing some sort of sovereign wealth fund and rules for how the revenue will be used-when it can come on to the budget, when it needs to be saved overseas and doing that to prevent foreign currency appreciation. That would benefit the UK directly because some of that money would come here to the City of London.

There is a real role for the UKTI that I personally think it does not fully appreciate in promoting the City of London as a source for saving oil revenue. It is also important because it helps to support the institutions that Brazil needs to remain a robust democracy in the face of substantial oil revenue. You need transparency about revenue, very clear rules that require revenue to be debated in Parliament, and obstacles to using revenue to win elections. One-off windfall revenues and substantial oil revenues should be saved for the future. That this generation has produced a one-off endowment does not mean that only this generation should benefit from it. Encouraging Brazil to set up that kind of revenue management framework will do a lot both to keep Brazil on the right sort of path as a responsible oil producer and to strengthen the UK-Brazil relationship.

Q21 Chair: We think we have asked you all the pertinent questions, but have we missed anything? In the couple of minutes we have left, are there are any points on aspects of energy security that you think we haven’t covered?

Dr Rosillo-Calle: One thing that the UK needs to pay more attention to is capacity building in the oil industry. It is a problem for anybody who works in the oil industry that a lot of its people are getting old. At the petrocollege, we had a meeting and all major energy users came to us saying "We have a problem," and the problem was they had no sufficiently skilled personnel. Petrobras has faced this problem. The UK is in a very good position to offer local capacity building in this area through universities, corporations, grants, or whatever. I think it is an important area because the UK has been leading in the North Sea for many years and it has very good universities, which can inform a lot of good people in the petroleum industry. Looking at the relationship between the UK and Brazil, I see that that is an area which offers good possibilities. People do not come to the UK because there is no sufficient grant or the cost of coming to the UK is too expensive. If there could be a way of having more scholarships, or something like that, it would be worth considering.

Paul Domjan: We can even take that one step further, which is that UK companies-I started my career at one of them-often see local content as an obstacle. They expect HMG, the FCO, BERR, the DTI and UKTI and everybody to be fighting against local content requirements, but local content requirements are a very reasonable thing if you are an oil-producing country. Oil production employs very few people, and it employs people with a very narrow set of skills. There are only two ways that you can really turn that into a long-term industry: you save the money and use it to develop other industries, or you export oil services. Texas, where I come from, has almost no oil left, but it produces lots of oil; it just produces it in other countries, and that has become a growth industry.

There is a real role for the British Government institutions, particularly for UKTI, BERR and the FCO, to help companies understand that Brazil’s local content requirements are not something to fight against, that opposing them isn’t a core part of UK foreign policy in Brazil-that, in fact, they are an opportunity for UK companies. They are an opportunity for UK companies to become partners with Brazil and an opportunity for UK companies to establish a base from which to supply the rest of the Americas; for example, to leverage. It is notable that when Pemex was developing its policy for opening and reorganising the Mexican oil industry last year, it looked to Sao Paulo and not to Houston or Aberdeen as a source of expertise. UK companies in Sao Paulo would be participating in that, and that is an opportunity that you-the UK Government as an institution-need to help UK companies to see more clearly.

Neil Atkinson: But there will always be strong competition for skilled engineers and engineering resources from many places around the world. In a previous role, I worked in a British company offering consulting services in the oil refining industry. Finding skilled chemical engineers and other forms of process engineers to work on projects around the world was extremely difficult-frankly, we were raiding golf courses to find retired people and bring them back into play. There is a very serious point that the oil industry in many parts of it is an ageing industry. Because it has tended, historically, to be a boom and bust industry, during the bad periods recruitment dries up, people are fired and they go off into other work, so when a boom returns and good days come, there just aren’t enough people to staff projects. Companies are now roaming the world, looking for people with skills and there is very, very strong competition everywhere. Brazil, to the extent that it will need foreign expertise, which it will, will have to fight against competition from many other countries around the world.

Chair: Opportunities.

Neil Atkinson: Indeed.

Chair: Thank you all very much. It is really appreciated that have you have taken the time to come here. As we have a Division in one minute’s time, I propose to adjourn until 4.15 pm if there is one vote and 4.25 pm if there are two.

Sitting suspended for a Division in the House.

Examination of witness

Witness: Mark Bishop, Head of Strategy, Co-ordination and Development, International Department, Serious Organised Crime Agency, gave evidence.

Chair: I welcome colleagues back from the Division. Welcome, Mr Bishop. I apologise for the fact that we are running a bit late.

Q22 Mike Gapes: Mr Bishop, can you tell us something about crime in Brazil? How serious is crime in Brazil, and how does it compare with other countries in Latin America?

Mark Bishop: We can comment only on the organised crime aspect, because that is primarily what we focus on. We collaborate with Brazilian partners to combat a range of mutually important organised crime threats, including cocaine-trafficking, cybercrime, financial crime, people-exploitation and people-trafficking. Brazil is not a significant drug producer. However, it shares borders with key cocaine-producing countries. The 40 large container ports on its coast have contributed to it becoming a major transit route for cocaine from South America to mainland Europe and Africa. There is limited intelligence to suggest that it is a direct cocaine threat to the United Kingdom. There is some evidence of commercial consignments going directly to the UK, but primarily, the key nexus points are from Brazil into Europe and Brazil into West Africa, which in turn relates to indirect supply on to the UK from there.

Q23 Mike Gapes: You have talked about the cocaine issue, but I am initially interested in talking about crime overall in Brazil. I understand that it has a high murder rate and that there is a serious problem with areas of the country where the security level is very low. Can you comment on that?

Mark Bishop: There are, for example, 600-odd favelas-shanty towns-in Rio de Janeiro. The State Secretary for public security in Brazil aims to pacify some of those areas before events such as the World cup in 2014. What the Brazilian police do is drive out the leaders of the criminal gangs through sustained action, which they follow with a phase of stabilisation, including education, public health projects and community policing to gain the trust of the area. There is some evidence of success in how they do that.

Q24 Mike Gapes: Does that include an active crime prevention strategy?

Mark Bishop: As part of the community policing aspect, there will be a crime prevention angle. One other additional problem that we have to touch on is Brazil’s domestic cocaine problem. They have quite a significant one, second in size only to that of the US. That is growing, and it is a particular focus for our partners in the Brazilian federal police.

Q25 Mike Gapes: Is that mainly based on imported cocaine?

Mark Bishop: It’s cocaine that is routed through the country, but a percentage of that is for the internal market.

Q26 Mike Gapes: You have referred to the favelas. There have been, as I understand it, attempts in the last six months or so to have a co-ordinated clearance, including shoot-outs, and the figure that I saw was that 37 people died in the operations. Is that popular with the public? Is there a public perception that you need to take a "no holds barred" policy and just get the places cleaned up?

Mark Bishop: This is one that, following Baroness Neville-Jones’ visit, the Home Office examined in some depth, and it will be able to comment in much more detail on the particular favela policy.

Q27 Mike Gapes: You’d rather not comment on that.

Mark Bishop: I’d rather not go there. I don’t think that that is my particular area of expertise. That’s about internal Brazilian activities.

Q28 Mike Gapes: Can I ask you about prisons in Brazil? Do you have any knowledge of them?

Mark Bishop: I don’t.

Q29 Mike Gapes: Okay. I was recently at an Inter-Parliamentary Union meeting where we had a discussion with people dealing with prison policy in certain countries in Latin America, and comparisons were made between different countries, and I would be interested to know what the perception is of what happens to people when they are locked up. Is there a rehabilitation programme? Is there a diversion programme? Or do the prison estate and the prison policy contribute to long-term difficulties?

Mark Bishop: As it is not an area of SOCA’s competence, it would not be right for me to comment, but I am sure that the Home Office would be willing to participate in this, if it has not already been asked to do so.

Q30 Mike Gapes: A final question from me: what is being done to combat this problem of cocaine from Brazil’s neighbours-Colombia, Bolivia, Peru or wherever? Is there co-operation between the Brazilian authorities and the Governments in those neighbouring states, or is it very much a domestic effort?

Mark Bishop: It is a mixture of a number of different things: it is a domestic effort and it is Brazil engaging regionally with its partners, particularly Bolivia. One of the things that we are trying to get Brazil to engage more on is engagement further afield in locations such as Africa, where we think that it can have a real impact. Certainly, as the Brazilian internal cocaine problem mounts up or increases, a lot of the Brazilian federal police’s focus has gone towards that. As part of that focus, they realise that they must engage upstream with their partners, which are Bolivia, Colombia, Venezuela-a transit country to a certain extent-and Peru.

Q31 Mike Gapes: When you say working in Africa, do you mean that the Brazilian authorities will actually send people from their Government organisations to work in African countries on a permanent basis?

Mark Bishop: Yes, basically. We are looking to encourage them-through things such as EU projects, SEACOP, Ameripol and others that I can go into in more depth-to get much more involved in Africa, primarily through the Portuguese-speaking countries.

Q32 Mike Gapes: Angola, perhaps.

Mark Bishop: Guinea-Bissau is also fairly key, and Brazil has done some police training, for example, in Guinea-Bissau. There’s an organisation called the Comunidade dos Países de Língua Portuguesa-my Portuguese is not really up to it and I apologise for my awful accent-which is the mechanism largely by which Brazil shifts aid, and there’s about $4 billion of it every year to Africa. We think that there is scope for that to be much more involved in issues that really affect Africa, such as drug trafficking. In that CPLP, you have Guinea-Bissau, Equatorial Guinea, which is an observer, Angola, Senegal, which is also an observer, Cape Verde, Mozambique, Brazil and Portugal. They are all key areas for us when it comes to tackling class A drugs.

Mike Gapes: Thank you. That is very helpful.

Q33 Mr Ainsworth: You have given us a flavour of why we are involved in Brazil, and that almost seems to be mainly drugs and associated activities. In big handfuls, what is that? Is it 80% of our interest there? Is it 50%? Is it the majority? How much of it is drugs?

Mark Bishop: If we were to break it down into crime types as they affect the United Kingdom, our primary interest in Brazil is the trafficking of class-A drugs. To break it down into percentages is always difficult, but certainly it is the largest percentage of the number of parts that I mentioned at the start, which includes things like organised immigration crime and money laundering. Cybercrime is a particular area of rising concern-Brazil is in the top ten list of areas of concern for cybercrime. Yes, if you have to break it down into rough proportions, tackling cocaine is certainly the largest proportion.

Q34 Mr Ainsworth: It is the majority of our interest. How would you know? Do you have an office there? How many people have you got there?

Mark Bishop: We have two offices within Brazil and we have a relationship with the Brazilian police that goes back the best part of 20 years, both during SOCA’s time and previously as Her Majesty’s Customs and Excise. They are a key partner for us, not just in tackling the cocaine that moves to West Africa and Europe, but in the influence that they can have regionally and globally. We have engaged with them on Project SEACOP and Project Ameripol, two EU-funded initiatives, to try to tie together intelligence flows in relation to South America and West Africa. There is a lot of work going on to really strengthen that co-operation. We are hopeful of signing a further memorandum of understanding this year with the Justice Minister José Cardozo, about which the Home Office can provide further detail.

We have also undertaken a period of upskilling and capacity building. This isn’t just about our assets on the ground; it is about what we can bring to the Brazilian police force. We have facilitated various training courses and rummage courses for vessels, which have shown immediate results. We have got them focused on container profiling and port searches by both federal police and the Brazilian customs service, with our support. There are undoubtedly issues coming up-the Brazilian federal police’s budget has been cut by some 20%, they have fairly small numbers, and they are obviously facing considerable pressure to tackle the domestic issues in the run-up to the World Cup and the Olympics.

Q35 Mr Ainsworth: Why is Brazil not a producer country, when several of its neighbours are?

Mark Bishop: I am not an expert coca grower, I think it is just not the right climate or the right location for it. There are much more conducive atmospheres. Drug trafficking, certainly the production side, as we well know from our experience in Afghanistan and elsewhere, moves towards the area of least resistance when it comes to the level of policing activity. The most productive outturn you can have in relation to-

Q36 Mr Ainsworth: Brazil is surely not well policed is it? It is a huge country, with massive areas of frontier land.

Mark Bishop: There is certainly a very large area to police. I think when you look at Brazilian police, you have to look at capacity to undertake investigations, capability to undertake those investigation, and willingness. Those are the criteria that we normally look at when talking to and engaging with partners. In comparison with other partners around the world, the Brazilian police force is certainly a key partner and is well equipped. For example, very few other of our partners invest in pilotless drones for law enforcement activity, as they have done. They have taken possession of three pilotless drones for use in border drug operations, so there is certainly a willingness to undertake these things. Certainly geography is going to play its part, because of the sheer size and scale of the country they have to police.

Q37 Mr Ainsworth: The Bolivians threw the Americans out, and I understand that we are trying to encourage the Brazilians to give some help to the Bolivians. Why would Brazil be more acceptable to Bolivia than the Americans?

Mark Bishop: There is a certain element of shared borders and shared interests, and the understanding that neighbours develop over time. I do not know whether one is necessarily more palatable than the other, but when it comes to relationship building, the Bolivians appear to have expressed a preference at the moment and the Brazilians should be encouraged to develop that as much as they can.

Q38 Mr Ainsworth: What is their attitude towards drugs? Do they have the same regime as there is here and in America? Do they believe that the law enforcement stream is the most important element in suppressing the drug trade and that that field needs to be chased into the production fields in the way that Britain certainly buys into?

Mark Bishop: I could not comment on how Brazil approaches its public health issues or anything else. That is not for me. As for law enforcement activity, it is certainly very active, very co-operative and very effective, and that works for us.

Q39 Ann Clwyd: You said that you were not an expert on the favela policy, but I understand that parts of the urban pacification programme are good and parts of it have been criticised by outside bodies. Would it be important for us to visit one of those programmes to see how the police deal with law and order and crack down on drugs?

Mark Bishop: I understand that a visit is scheduled for June, in which case I certainly urge you to see what our SLO is doing with its respective partners. I am sure that that can be arranged for you.

Q40 Ann Clwyd: On the point that you were making about the police, is there any conflict-as there is in Peru-between the police and the military over cracking down on drugs? In Peru, for example, the military seem to have all the resources, while the police do not have enough resources so there is a bit of conflict between them. Have you detected that in Brazil?

Mark Bishop: Nothing has been commented on in any way, shape or form by our liaison team there. No.

Q41 Ann Clwyd: Do the police co-operate with the military?

Mark Bishop: As far as I am aware, the police in Brazil have a number of partners, ranging from the environmental police right the way through. Police and customs work together. I assume that the military are on the list of partners, but I cannot say for sure. I know that the Brazilian police engage with a number of partners in their activities.

Q42 Ann Clwyd: Have you had any experience of the cracking down on child trafficking, which we know goes on in Brazil?

Mark Bishop: Yes. As part of the work that has been undertaken, we can touch on two areas. One is the sexual exploitation of children and the work that has been done by CEOP-the Child Exploitation and Online Protection team-which probably takes us into the realms of cybercrime activity. As for the sexual exploitation of children, our liaison teams regularly receive intelligence from the Brazilian federal police on internet child pornography, which has been paid for and accessed in the United Kingdom. We are the bridge between the CEOP investigators and the Brazilian police force to take it forward.

CEOP has said that the relationship works from its point of view. What would be useful for us is for CEOP and the UK police forces to provide feedback on the intelligence from the Brazilians. We are working towards that to demonstrate to the Brazilian federal police-its paedophile unit, in particular-that the UK is serious about tackling the online threat to children, and there have been outcomes from the intelligence that it has worked so hard to obtain.

One of the things on which our liaison team has been working with CEOP and the Brazilian police is considering how best to tackle the emerging threat from the growing numbers of European child-sex offenders who will travel to Brazil in the run-up to the Olympic Games and the World Cup. We have to have a plan in place with the Brazilians to manage that properly.

Q43 Rory Stewart: How do your resources compare with those of the United States, or any of the other major players, in engaging Brazil?

Mark Bishop: Clearly, our resources are considerably less than some of our counterpart agencies. The FBI’s budget last year, for example, was some $7 billion for its 14,000 agents. For our 4,000 agents it was considerably less.

Q44 Rory Stewart: What does that mean in terms of working out how you divvy up work in Brazil with other international partners and how you determine how best to punch above your weight?

Mark Bishop: It means that there is, as with all of our South American offices and a great number of our offices worldwide, a lot of engagement with agencies such as the Drug Enforcement Administration to determine how best we can come together to share some of the burden. It means that we are trying to encourage more and more of our European partners, such as the Bundeskriminalamt and the Spanish national police, to take some of the burden and contribute financially. It is also largely about how well we can access EU funding to try to corral some of those nations together. The two projects I mentioned earlier have gone some way towards that.

Equally, there is a considerable element of working with partner agencies here in the United Kingdom. The UK Border Agency and Her Majesty’s Revenue and Customs both have overseas networks, and we have been very effective in getting together and ensuring that things are deconflicted properly and that we are getting the best bang for our buck.

Q45 Rory Stewart: Will you give us just one example of an area that you might not touch, that might not make sense in terms of your resources and that you might leave to a better resourced partner such as the United States?

Mark Bishop: Certainly when it comes to the provision of extensive material support or contributions, the United States is much better resourced. We tend to focus on the provision of specialist training that can be cascaded outwards and specific smaller projects, rather than some of the bigger plans. In Afghanistan and elsewhere, for example, the United States trained the entire border police force. We certainly wouldn’t do that. We would rely on the United States to commit such resources.

In the United Kingdom, particularly when it comes to things such as organised immigration crime, we have engaged with UKBA, which is very much focused on issues related to overstayers here in the United Kingdom, rather than an organised immigration threat. So there is that dialogue and interchange.

Q46 Mr Roy: It is unprecedented for a country to be given both the FIFA World Cup and the Olympic Games in a two-year period. Presumably the chances for organised crime will be greatly increased with the many thousands of people from this country who will go to the World Cup. There probably won’t be too many from my country, actually, but the chances are that there will be many thousands of people going across for the World Cup. From an organised crime point of view, it is a dry run for the Olympic Games two years later. How have our authorities affected the debate on what will happen during that two-year period?

Mark Bishop: We have already contributed to the UK’s assistance to Brazil’s preparations for both those events. Cyber-security is part of the Olympic security strategy. There are lessons that we can impart to the Brazilians on the issues that we’ve picked up on the Olympic games. We’ve been able to facilitate contact between the Brazilian federal police and its Metropolitan police counterpart, which is in charge of policing our Olympics, to try to ensure that as many lessons are being learned as possible. I am sure that the Metropolitan police will be delighted to provide further information on Olympic preparations that it has undertaken.

Q47 Mr Roy: So do we expect large numbers of Brazilian authorities to be in London during the Olympic Games?

Mark Bishop: I understand so, yes.

Q48 Mike Gapes: In your answer to Rory Stewart you referred to a figure of 4,000 personnel. Can you clarify that that is your total SOCA employees?

Mark Bishop: It is.

Q49 Mike Gapes: How many of those are in Brazil and how many are in Latin America?

Mark Bishop: We have two in Brazil. I would have to come back you with the total number in Latin America, unless we can do a quick bit of maths behind me. I wouldn’t imagine it is more than 20, but we can certainly write to you with the exact number.

Q50 Mike Gapes: In addition, presumably, from time to time you have people going backwards and forwards.

Mark Bishop: Yes, absolutely.

Q51 Mike Gapes: In your priority countries-if you have such a thing-in the region, is Brazil the No. 1 country that you work with or does Colombia come up the scale?

Mark Bishop: Certainly, Colombia comes up the scale. I don’t think we can ever really clarify it just in terms of a league table, if you like, because as I’ve said for cybercrime, Brazil would be at the top. For cocaine trafficking, Colombia would be at the top, probably followed by Peru and Bolivia, where certainly we are starting to see much more production taking place.

Q52 Mike Gapes: What about for things such as money laundering and financial crime? Is that more concentrated in some of the countries in Central America and the Caribbean?

Mark Bishop: Certainly, we are getting more concentration of that in locations such as Panama. There is a threat to the United Kingdom from money laundering but it is currently assessed from Brazil, which is currently assessed to be low. We are seeing some evidence of organised crime groups buying property in the north-east of Brazil, in order to launder the proceeds of their crimes, but Brazil has become less attractive to money launderers than it was two to three years ago. As the value of the pound, the euro and the dollar has diminished, the Brazilian real has increased; I think it is about 2.5:1 now.

Q53 Mr Watts: You seemed to indicate that Brazil was perhaps at the forefront in Latin America of trying to defeat or frustrate the drug traffickers. Is that motivated by its own self-interest? Is there a growing drug problem in Brazil that is leading it to be so forthright in its opposition to the trade?

Mark Bishop: There is certainly a growing internal consumption problem of cocaine within Brazil. A lot of Brazilian federal police resources, as they will no doubt tell you when you go, have been focused towards tackling this. Indeed, they have their own version of what we tried to do, namely to tackle it upstream, hence the engagement with Bolivia and others to try and get more towards the source of the problem.

So yes, as with our relationships worldwide, there is always that element of self-interest, and this is perhaps where we get into the realms of this phrase that seems to be doing the rounds about law enforcement diplomacy. We may not agree with a lot of countries on territorial, nuclear or other issues, but if you turn up as a law enforcement officer and say to just about any nation, "Would you like to work together on drugs and crime?" the answer will be yes. It is one of those uncontentious areas, if you like.

Q54 Mr Roy: Isn’t there a danger that the more we tackle the drugs and the cartels in Colombia, Peru and Bolivia, as we get more success we are actually moving the problem? The problem then moves to a bigger country, such as Brazil.

Mark Bishop: There has been, for example, notable displacement of the key parts of the cocaine trade from Colombia, and indeed some of the key traffickers have found the going so hard in Colombia they have moved away to other locations. The production of cocaine we’ve seen increase in Peru and Bolivia as a result of this. This, in turn, increases the risk of domestic trade within Brazil.

Success in tackling the drugs trade upstream has made it more difficult for criminals to operate overall. That’s one of the central principles on which we operate. As far as the UK goes, for example, this has been evidenced by a sustained low availability for high-purity cocaine in the United Kingdom since early 2009, with wholesale per kg prices at an unprecedented high. So yes, it does displace it, but we see real effect, certainly from the UK’s efforts. Certainly we see real effect with other partners where we have invested a lot of time, money and effort, such as Colombia. Inevitably there is that element of squeezing a balloon, but it is about being ready for where it pops up next.

Q55 Mr Roy: But isn’t there a chance that the displacement goes east towards Brazil instead of the western side of South America? Therefore you are opening up the UK as a market.

Mark Bishop: As we said, there is not really an element of direct interaction between Brazil and the UK. For us that has also been about building up what we do in West Africa and Europe to tackle that market. Thus, for example, we have been able to have a real impact against Serbian organised criminals, who were bringing cocaine from Brazil into mainland Europe. From there, some of the points on mainland Europe were clearly a hub for onward distribution to the United Kingdom. So if we can have an impact there, clearly, as the figures show, we are having an impact on the United Kingdom.

Chair: Mr Bishop, thank you very much indeed. We are going to draw stumps there, and we really appreciate your taking the time to come to talk to us. It was very helpful. Thank you.

Examination of witnesses

Witnesses: David Norman, Director of Campaigns, and Sandra Charity, Head of Forest Programmes, WWF-UK, gave evidence.

Q56 Chair: Our third panel of witnesses is from the WWF: David Norman, the director of campaigns, and Sandra Charity, the head of forest programmes. I welcome you both and apologise for the delay in the programme. As we are running late, if you don’t mind, we will try to truncate this slightly, but we want to give you a good opportunity to say your bit. The questioning will be led by Rory Stewart. I don’t know whether you want to make an opening statement. Should we go straight into questions?

David Norman: Let’s go straight in.

Q57 Rory Stewart: Recently there have been some positive statements about Brazil and the environment. The Foreign Office stated that Brazil is on track to achieve targets of reducing deforestation by 80%. The Council on Foreign Relations says, "Climate change has become an area where Brazil has turned its clean-energy and environmental bona fides into a significant international voice" and that Brazilians are "the most environmentally concerned citizens in the world." What would you say about all these positive noises coming out about Brazilian action on the environment?

David Norman: The WWF supports that. Our sense is that Brazil is a positive partner in many areas of the environment. Not only does it have a critical set of environmental assets, but it is putting itself on the line in several international forums in trying to make a difference there; perhaps we could come into more detail on climate change. It is bridging the divide between the traditional bloc of developing countries and the G77, and the developed countries. In the Copenhagen climate summit, it put its own targets on the table, quite explicitly, for a reduction of emissions against business as usual-36% to 39%. They are very firm targets, and were quite important in moving on the negotiations.

The rationale behind that was very much one of leadership. It was in a sense saying, "We will do this anyway, whatever other countries do." This is pretty important. It already has a pretty clean energy mix, with significant hydropower and biofuel resources. It has a strong scientific community and forest monitoring capacity. As you pointed out, it is already making progress on its Amazon targets. So yes, we are very supportive of that.

Q58 Rory Stewart: Is there another side to this, particularly on the Amazon? Is there another side of the coin?

Sandra Charity: One issue that has been important, from the years when the Amazon was being cleared very aggressively, is the change in policy-for example, much more focus on sustainable timber production. WWF Brazil has launched and is now developing the criteria for sustainability standards for some of the main commodities exported by Brazil-for example, soy-and the Government are working very much with civil society to address the issues on sustainability standards. It is no longer just a focus on, "Let’s set up protected areas in the Amazon and have a belt of pristine forest that is untouchable"; it is looking at areas of sustainable development where they can lead and make a difference. Soy is one current example.

Q59 Rory Stewart: Are there things that you think the UK or the Foreign Office should be doing to help, support or in any way facilitate the Brazilian Government’s efforts?

Sandra Charity: Our experience is that the Foreign Office has been and is already playing an important role. The recent visit by Caroline Spelman to Brazil, about two or three weeks ago, was an example of the sorts of things that the Foreign Office can continue to do. The support that the FCO’s going to provide or that DEFRA’s going to provide to sustainability and biodiversity dialogues in Brazil is going to be instrumental. That was welcomed by the Brazilian Minister of the Environment, and the 48 hours that Caroline Spelman spent in Brasilia, which included a visit to the Cerrado, Brazil’s second-largest and less-famous biome, were very important for what Brazil is trying to do. It was very much an invite from the Brazilian Government, and I think that is the way to go.

Q60 Rory Stewart: Broadly speaking, you are confirming the rather positive impression that we are getting of both the Brazilian Government’s initiatives on the environment and the UK Government’s initiatives on supporting the Brazilian Government’s initiatives on the environment. May I give you an opportunity to say whether there are any warning notes, cautions, negative elements or things that push against that narrative that you would like us to be aware of?

David Norman: We can pick up the soya story in a little more detail. Arguably, the link between the UK and Brazil on soya is one of the fundamental environmental links, so you might be familiar with this. Soya production has doubled globally since the mid-1990s, which is almost entirely about feeding change in diets towards greater meat production, so 80% of this soya is going towards feeding livestock, particularly chickens and pigs, but also other livestock. This is an explosion, and this is very important in Brazil.

It is driving, in particular, the destruction of the Cerrado. Everyone knows about the Amazon and the existing success of the trajectory in terms of deforestation on the Amazon is already very good and on track to meet Brazil’s own targets, but if you look at the Cerrado, many people have not heard about it. When Caroline Spelman shone a spotlight on that earlier this month, that was very welcome because people do not know of this Brazilian savannah, but it is responsible for about 5% of the entire globe’s biodiversity. The greenhouse gas emissions caused by land use change in the Cerrado have now overtaken those of the Amazon. It is not monitored as well as the Amazon, but these are dramatic land use changes, which have biodiversity impacts as well.

It is not straightforward to offer recommendations of what Governments should do differently. This is about market action and a change in global diets, but the WWF has pressed particularly for recognition that the environmental impacts of soya production in Brazil are absolutely critical. For example, a certification standard such as the Round Table on Responsible Soy, where producer groups, NGOs and scientists all get together and try to set clear standards, which is a form of certification that retailers can sign up to, is again a way to make sure that soya that is imported into this country is not causing deforestation, for example.

Sandra Charity: One thing to add is that the UK can continue to play, or play a stronger, role in encouraging other European countries, given that the UK operates as a bloc in many of the international conventions such as the Conference on Biodiversity Conservation and the UNFCCC. The UK can play a bigger role. Just to go back to the soy example, China is the biggest importer of soy worldwide, but the EU is the second biggest importer, so it is important for the UK to continue to work with other importing countries in the EU to make a difference. If the UK or other countries were to reduce consumption or imports of soy, all that soy would still go to China in any case, so there is a role for the UK both with the EU, but also working closely with China, which is the major pull and the major driver of soy production in Brazil.

Q61 Mr Ainsworth: We are told that Brazilians are told at a very young age that they own the Amazon, so there is a certain prickliness regarding international organisations working in Brazil on conservation issues. How have you found that? Does that not make it difficult for organisations such as yours to work in Brazil, or are things getting better? What is the situation with the tension between the international desire to own the problem of the Amazon and Brazil’s stated and actual ownership of it?

Sandra Charity: I think that assertion is correct from some time ago. The military regime has only been out for 30 years, which, comparatively, is not a very long time, and this is something that will take a generation to change. I think Brazilians do like to feel that they control the Amazon and that they have sovereignty over their part of the Amazon, but with the economic boom in Brazil, they have become much more open to international interest when it is genuine. We often witness that through the various international negotiations on things like climate change and the CBD. For example, the last CBD in Nagoya had a strong focus on access and benefit sharing, which is a classic area of tension, because, obviously, it includes patents and rights over genetic resources and so on, which is an example of where things could get very protectionist in Brazil, but Brazil is playing a more open game, at least in the view of WWF. We feel that, internationally, Brazil is trying to present itself as having a more modern, more progressive angle on the environment. Yes, I think that is the trend.

Q62 Mr Ainsworth: You said something about biofuel possibly being part of Brazil’s policy. Is there not a downside to that? Brazil is the world’s largest producer of sugarcane ethanol, and there must be some land use and biodiversity issues. There must be another side to that, although it might be viewed as broadly positive.

David Norman: There certainly is a potential downside. WWF’s starting point, if you look at our energy report from the start of this year, is that if you are serious about major emissions reductions globally, biofuels are quite an important part of that. We are not in the camp that says biofuels are inherently a bad thing. The issue is about setting standards that actually have traction in terms of the social and environmental potential impacts. The question is whether biofuels are genuinely beneficial in carbon terms. All sorts of biofuels, starting with maize-based biofuels in the United States, are absolutely not good for the environment: clearly, in terms of full life-cycle carbon accounting, they are very bad. WWF in Brazil did a report three years ago that looked at this in terms of ethanol from Brazilian sugarcane. It found that Brazil’s ethanol from sugarcane is probably the most efficient biofuel on the planet at the moment, which is a good starting point, but still, in terms of expansion, there is a need to look very carefully at the social and environmental impacts, particularly the social impacts. There will be dramatic changes in employment, for example, from traditional family-based farming, which is all year round labour, to highly seasonal labour, in which jobs are available only at planting and harvesting times.

The environmental impacts are exactly as you said. There is a potential impact on deforestation, but even in the early dramatic expansion of sugarcane, our report suggested that this did not have very much direct deforestation impact. The critical thing, and the most difficult to control, is the displacement effect on other forms of farming, which can be displaced to other forested areas. Yes, it is absolutely essential to get it right, but we are involved in the development of the Round Table on Responsible Biofuels. The point is exactly to do this-to work with industry to set clear standards that are capable of biting, and making sure that when we import those biofuels, we can have confidence that they do not have the negative impacts that are potentially there, even in Brazil.

Q63 Mr Watts: You said that Brazil has made a lot of progress in environmental terms over the last few years. How much scope is there for it being a force for good among its neighbours? Is that something that interests Brazil, or is it completely nationalistic in looking at individual environmental problems?

David Norman: On the global stage, it has already played a pretty important role. If you look at Brazil, South Africa, India and China in terms of the their power within the G77 in the climate negotiations, certainly Brazil and perhaps South Africa played a really important role in trying to bridge that divide, being prepared to say, "We also have a responsibility for setting targets, for making emissions reductions," and putting that on the table up front. That has broken through some of the impasse of saying that until the developed world had done everything, nothing was going to be done by the developing world. That has been tremendously helpful.

I think there is also a partnership role in relation to forest monitoring. Brazil has very strong scientific community. Part of its success in reducing deforestation in the Amazon is based on highly sophisticated methods for tracking it and responding to continued deforestation. Again, that looks like technology that can be shared.

Q64 Mr Watts: In regional terms?

Sandra Charity: Brazil is currently the main founder of many of the infrastructure projects in other countries, such as roads and dams-more so than the Inter-American Development Bank or the World Bank, for example. It is already playing a strong regional role in promoting development and lending. Importantly from the environmental point of view, it is also keen to incorporate environmental standards in its lending policies so as to avoid, let us say, the most impacting projects. It is not always all rosy. The WWF is working with a number of bilaterals and the World Bank, so that they and the Brazilian banks are tightening up their sustainability criteria for lending. Obviously soya is a big economic driver in neighbouring countries such as Bolivia and Paraguay. From the environmental point of view, we are very keen to have more of a regional approach. That approach is being promoted by the Brazilian Ministry of the Environment, and it is something that the current Minister of the Environment has discussed with Caroline Spelman.

Let us not worry only about Brazil; we must also think about the other eight countries that share the Amazon basin with Brazil. Although Brazil has 60% of the Amazon basin, there is another 40% covered by the other eight. Taking a regional approach is very much something that we would promote, and we would encourage this Government and other Governments to do so as well. We feel that Rio+20, which will happen in June next year in Rio in Brazil, is an opportunity to promote this regional approach, rather than a nationalistic approach on a country-by-country basis. At the end of the day, biodiversity and forest conservation and sustainable development depend on a more integrated collaborative approach.

As we were saying, there is a lot of South-South transfer of technology between Brazil and other countries, not in only satellite imagery technology but in other aspects of productivity improvement-of soy, for example and other agricultural and commodity-type economic drivers.

Q65 Mike Gapes: You touched in passing on the Copenhagen negotiations and said that Brazil played an important role in those. I am interested to know how influential Brazil is, given that on foreign policy it has a traditionalist, non-interference to other countries’ internal affairs approach. I am not going to go there, but it abstained in the vote on Libya in the Security Council, for example. Do you think that that is changing on some issues, particularly climate-related ones, and that that will have a knock-on consequence, as Brazil sees itself playing a greater role in the world as a member-temporarily at the moment, but with aspirations to be a permanent member-of the Security Council?

David Norman: That is right. Because of Brazil’s moral authority on deforestation issues and its having a pretty clean electricity sector, it is in a position where others are potentially swayed by its arguments. It is looked up to within the G77, so it already plays quite a significant role.

Also, it is partly down to the creativity of its negotiators in those UNFCCC negotiations. For example, the CDM-the clean development mechanism-under Kyoto came out of an idea from Brazil-we are going that far back. Because Brazil has been so closely identified from the outset with the climate change issue, in the context of those negotiations, it has already been and continues to be a positive force. That speech by the then President Lula in Copenhagen was critical. He was the first person I had seen who had put down an explicit statement on the targets. He said, "Brazil hasn’t come here to bargain. These targets don’t need external money. We will do this with our resources." That was pretty powerful because it was very different from what other major economies were saying at the time.

Q66 Chair: Thank you very much. You have exhausted our questions, but do you think that we have covered everything?

David Norman: Can we touch on the financing for reduced emissions from deforestation and forest degradation, which might be significant? There is a working assumption from the UK that not much money should go to countries such as Brazil that are growing strongly and are emerging economies that could be future economic superpowers. There has been quite important small-scale financing from the FCO on the ground, particularly for bringing together different actors such as the Brazilian equivalent of the CBI, together with different Ministries, but in terms of significant funds on REDD, this could be important and WWF’s view is that Brazil, as such a constructive partner, with a track record of spending that sort of money in a very effective way, proving that it is delivering global benefits in reducing deforestation and its associated emissions, should certainly be looked at.

Again, we are at a stage in development internationally where there is still a lot to be worked out. It is critical that that sort of financing also has some of the safeguards that we touched on in relation to biofuels-for example, a naive approach, focused narrowly on carbon, could easily end up incentivising the shift away from natural forests, which are tremendously important not only in carbon terms but in biodiversity terms, towards plantations. That would be a disaster. That is a word of enthusiasm in terms of the potential for Brazil to spend that sort of money effectively, and of caution in terms of requiring the kind of standards to make sure that the money is spent well.

Sandra Charity: To add a small point, emissions from Brazil are about 70% of the overall emissions, and 15% to 20% of all emissions come from deforestation and forest degradation. That indicates how important it is to address the issue of deforestation, which will also manage to address a whole range of biodiversity, social and economic issues, if the safeguards are in place. That is key, and as David said, WWF is heavily promoting that at the moment. The UK Government are still considering the best approach to their financial commitment, so it is important that a proportion of that goes for reduced emissions on deforestation and forest degradation.

Chair: Excellent. Thank you very much indeed. That is really appreciated. If we have any further questions on the environment after we have been there and spoken to people, we will come back to you.