Brazil: Looking Inward On Oil

Courtesy of The New York Times, a report on the Brazilian government’s decision to step back from more than a decade of close cooperation with foreign oil companies and more directly control the extraction itself.  As the article notes:

“…The move is part of a nationalistic drive to increase the country’s benefits from its natural resources and cement its position as a global power. But it could significantly slow the development of the oil fields at a time when the world is looking for new sources, energy and risk analysts said.

Earlier this month, Brazil’s government said it wanted the national oil company, Petrobras, to control all future development of the deep-sea fields located in 2007, which international geologists estimate could hold tens of billions of barrels of recoverable oil.

The change would make Petrobras the operator for the 62 percent of the new area that has yet to be bid out, consigning foreign companies to the role of financial investors. That would limit their ability to help set the pace for the oil fields’ development, while giving Petrobras significantly more power to generate jobs and award lucrative contracts.

The oil lies beneath about 20,000 feet of water, shifting sand, and a thick layer of salt. This so-called pre-salt region, stretching hundreds of miles, is the biggest oil reserve being developed in the world today, especially given the lack of headway in accessing Iraq’s extensive deposits, said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, an energy research consultancy. It is also expected to be among the most complicated set of projects in the history of the oil industry.

“The timing and scale of the development of the pre-salt will be one of the most significant factors for the global oil balance in the next decade, and even more so after 2020,” when Brazil is expected to ramp up production even further, Mr. Yergin said. “If it doesn’t happen it will be a big setback for Brazil in terms of revenue, and a significant loss for the world in terms of new oil supplies.”

For Brazil, the stakes are high. Many here see the oil as a magic bullet for tackling the country’s biggest social challenges. Luiz Inácio Lula da Silva, Brazil’s popular president, wants to alter energy laws to funnel more revenue from the undeveloped fields to government coffers and set up funds to improve education and health care. His proposal will be delivered to Congress sometime next week, one of his aides said Monday.

Despite its recent economic boom, Brazil still struggles with extreme poverty, inequality and an illiteracy rate over 10 percent.

Government officials here insist Brazil will not be swept up in the sort of nationalistic fervor that has washed across Latin America in recent years. As Mexico did in the late 1930s, Venezuela, Bolivia and Ecuador have seized control of energy assets and forced out foreign companies, only to have their production of oil and natural gas stagnate or decline.

Mr. da Silva’s government is not proposing that foreigners be excluded altogether from energy projects, or even that they not be given the chance to win majority stakes in some cases. Foreign companies are already involved in the first set of pre-salt projects, including the giant field, called Tupi, that Petrobras estimates holds five to eight billion barrels of oil and natural gas.

Even without the next group of pre-salt fields, Brazil is looking to more than double its oil production to 5.7 million barrels a day by 2020.

Brazil discovered big oil late in its economic development and has a diversified economy, which will help it to avoid the “Dutch Disease” of natural resource dependence that has afflicted several of the world’s oil powers, said José Sergio Gabrielli, the president of Petrobras.

“Petrobras is very big,” Mr. Gabrielli said, “but Brazil is bigger than Petrobras.”

He said the nationalism bubbling up now “is not nationalism against foreigners” but rather a debate over the speed of the development, who will get the largest share of the income stream, and over who will benefit from the related technology and knowledge.

Still, he acknowledged that nationalistic winds were beginning to blow again. With Brazil’s green and yellow flag draped over the stage, oil union members watched a new documentary here last month, “The Oil Must be Ours — Ultimate Frontier.” In the film, geologists, union leaders and even a 92-year-old physician, Maria Augusta Tibiriçá, discuss how the new fields could generate “trillions of dollars” and transform Brazil’s future.

A dozen union members led off the evening with a rendition of Brazil’s national anthem, then “It Will Happen,” a song written for the movie that blends bossa nova and samba rhythms.

If oil “is very deep under the sea,” they sang. “Will we play to win?”

The new nationalistic fervor recalls the 1970s and 1980s, when Brazil’s military government declared that “the Amazon is ours” to ward off foreign encroachments on the rain forest.

And that evokes the initial protectionist concerns that were raised after a trickle of oil was discovered in Brazil in 1939. A few years later, a general declared “the oil is ours” amid fears that American oil companies would find a way to take it. Protesters demonstrated through the 1950s outside of Standard Oil’s Esso Building in downtown Rio.

It was in that populist climate that, in 1953, President Getúlio Vargas founded Petrobras and awarded it an oil monopoly. Only in 1997 were foreign companies allowed to participate in exploration and production.

Mr. da Silva’s plans for more control of the new fields will face a stiff battle in Brazil’s Congress, where opposition leaders say they will push to delay the plan, to deny him a victory that could be a political boost to Dilma Rousseff, his chief of staff and chosen candidate to succeed him in next year’s election.

Ms. Rousseff, who is in charge of the government’s pre-salt proposal, is also the chairwoman of the Petrobras board of directors. The company is 55.7 percent government-owned; other members of the board are also political appointees.

“The government is going to use every ideological, nationalist and emotional argument to try to get this approved before next year’s election, but it is going to be very difficult for it to pass,” said Tasso Jereissati, a senator from the Brazilian Social Democratic Party who is critical of the government’s proposal.

Brazil’s Senate is already coping with a broad investigation into irregularities and improprieties at Petrobras, an inquiry brought by Mr. da Silva’s political opposition.

Mr. Gabrielli, the Petrobras president, argues the government has good reasons for wanting to limit foreign participation. In 1997, oil prices were much lower and Brazil’s economy was struggling. Today, Brazil has more than $220 billion in foreign reserves, oil prices are higher and Petrobras has become the fourth-biggest company in the Americas.

“The financial condition is completely different,” Mr. Gabrielli said. And the development of the new fields, once seen as risky, “now is a winning lottery ticket.”

With concerns over whether Brazil can procure the estimated $600 billion it will take to develop new fields over the next 20 years or so, the government is banking on international oil companies’ willingness to bid high.

“This is the only large oil discovery in the last few years; there is no other,” Ms. Rousseff said this month in an interview with Brazilian newspaper Valor Econômico.

But the decision to give Petrobras operational control is shortsighted and risky and could delay Brazil’s ability to use the oil to help transform the country, said Christopher Garman, an analyst at Eurasia Group, a political risk consultancy in New York.

“What if we have a technological breakthrough in renewable energy, and five to eight years from now the price of oil is not what it is today?” Mr. Garman said. “Is Brazil going to maximize investments now or keep the oil in the ground for longer?”

Lost in the debate, Mr. Gabrielli said, is the reality that the equipment needed to drill the new fields is in short supply. Petrobras executives are trying to motivate suppliers around the world to develop equipment.

Through 2017, Petrobras will need 40 oil rigs capable of drilling deep enough to reach the new fields — more than half the total number of such rigs that exist in the world today, Mr. Gabrielli said. The company is requiring that 28 of them be built in Brazil.

Mr. Gabrielli said the company was keeping its international expansion spending at $16 billion, so that it can focus on developing deepwater fields at home.

“The question is not whether to speed up or not to speed up,” Mr. Gabrielli said. “We are at the limits of the world capacity for the industry.”

This entry was posted on Monday, August 17th, 2009 at 3:22 pm 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. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.