Brazil: Drilling Under Petrobras?

Via The Economist, an interesting analysis of the Brazilian government’s debate whether to create a new, wholly state-owned, oil company to maximize its profit from the new fields recently found by Petrobras, the state-controlled oil giant which recently announced that it had uncovered between 5 billion and 8 billion barrels of light, sweet crude in a field called Tupi.  As the article notes:

“…This echoes a campaign in the 1940s that led to the creation of Petrobras in the first place, under the slogan “the oil is ours”. But much of Petrobras’s new stature and success comes from the decision of a previous government to float 60% of its shares on the stockmarket and to open up the oil industry, allowing foreign firms in as partners and competitors.

…Uncertainty has now caused Petrobras’s share price to wobble (see chart), taking the rest of the São Paulo stockmarket with it. At the moment, the government takes a royalty of up to 10% of the value of oil and gas. In addition, there is a second tax linked to production. Much of this second levy goes to the states where the oil is—mainly Rio de Janeiro. On top of this, of course, the government reaps dividends from its 40% share in Petrobras, which is the fifth-largest company in the Americas by market capitalisation.

A government committee is looking at how best to increase the state’s oil take, and will give some preliminary findings on September 19th. One of two options seems likely. First, as has been suggested by President Luiz Inácio Lula da Silva and by his energy minister, Edison Lobão, the government could create a new company that would partner any firm (including Petrobras) exploring in the pre-salt areas that have yet to be auctioned. Second, taxes on profits could be raised for new concessions. Either change is likely to need ratification by Brazil’s Senate.

Officials, including Mr Gabrielli, argue that since drilling in the pre-salt is now almost certain to yield oil, the rewards for investors in new blocks should reflect this lower exploration risk. That is in itself not unreasonable.

But there would be several dangers in completely rewriting the rules. Though Petrobras, subject to market discipline, is relatively lean, any new state company might quickly become puffed up by political appointees. Second, the government might be tempted to revisit existing contracts, which would be bad for confidence and disastrous for Petrobras and its partners (Britain’s BG Group has a 25% stake in Tupi and Portugal’s Galp Energia 10%). Third, shutting out Petrobras’s outside shareholders might scare off foreign investors from Brazil in general. Whether Petrobras will stand up for those shareholders is unclear. The company’s board is chaired by Dilma Rousseff, Lula’s chief-of-staff and seemingly his candidate for a presidential election in 2010.

The oil find comes in the twilight of Lula’s presidency. He seems to see ring-fencing social spending as a way to cement his legacy. He wants much of the oil money to be earmarked for education, which is one area where his officials are conscious of having fallen short. This has its own dangers: public education in Brazil is badly run and needs to be reformed before it is showered with money, or else much will be wasted. Yet before it gets ahead of itself, the government should first make sure that it does not damage the company that located the treasure in the first place.”

This entry was posted on Friday, August 29th, 2008 at 8:28 am and is filed under Brazil, Petroleo Brasileiro.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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