Brazil's unhappy national champion

2013-10-27 14:00

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Petrobras is at the heart of national aspirations for oil-importing Brazil to become an oil-exporting power within a decade

There’s an old joke that goes: “Brazil is the land of the future – and always will be.”

Having Brazil take its rightful place among the world’s great nations has been a preoccupation among the country’s elite and politicians for at least a century. It shows in the major cities’ conspicuous array of monuments and buildings, including the airplane-shaped capital city Brasilia, which was built from scratch in 1960, and the famous statue of Christ the Redeemer in Rio de Janeiro.

Today, a lot of the nationalist aspiration also rides on ­oil-importing Brazil becoming an oil-exporting power within a decade.

At the heart of it is Petróleo Brasileiro (Petrobras), the $100?billion semiprivatised state oil company that is the fifth-largest oil group by any measure and the world’s leading “ultradeep” oil producer with about 34% of global production.

The company is literally part of the Brazilian landscape, with its branded petrol stations visible everywhere. It has been the target of many of the protests that have gripped the country since June.

The company started life in 1953 as a state monopoly on oil exploration and by the 1960s, it was operating refineries to process imported oil for the Brazilian market.

By the 1980s, it had become a specialised deep-water player in the international oil business.

Then came presalt, a huge ultradeep oil find 300km off the coast of Rio de Janeiro in 2007. The name derives from its geological position underneath a 2km salt layer underneath the ocean bed.

The oil sits between 5km and 7km under sea level – some of the deepest oil anyone has ever tried to extract.

It has the potential to catapult Brazil into the league of the world’s top 10 oil-producing nations.

After licensing the first few concessions to oil companies, the Brazilian government embarked on an ambitious redesign of its oil regime.

It is a striking example of the contradictions and trade-offs that go with so-called resource nationalism.

Petrobras is central to the new regime, whereby the company has to buy 30% of every presalt oil block whether it wants to or not.

This is worlds apart from the 30% “free carry” being proposed for South Africa’s new offshore oil finds and potential shale gas sector. Petrobras is being forced to carry at least 30% of the development cost of every field.

Petrobras had been developing into a true multinational, worth about three Sasols at current prices, but now is extracting itself from several investments in order to concentrate on the presalt fields.

Effectively, Petrobras is being made to “monopolise the risks” associated with the new oil fields, says Fernando Holanda, an economics professor at Fundação Getulio Vargas, a leading research university in Brazil.

While Petrobras has to pay a significant share of development costs, it also automatically becomes the operator of every presalt concession, creating a kind of simultaneous carrot and stick for the private partners who would be buying up to 70% of every oil concession.

It is difficult to see anyone but the Chinese taking up these shares on these terms, Holanda said. The mandate given to Petrobras is a lesson on how to “destroy a company in four years”, Holanda told visiting South African MBA students from the Gordon Institute of Business Science last week.

While embarking on a five-year, $237?billion expenditure plan this year, Petrobras is also “being used to control inflation”, says Holanda.

It sells oil into Brazil at regulated prices well below market prices – a bone of contention between the company and its major shareholder, the government, which has contributed to Petrobras’ market capitalisation falling from $240?billion in 2010 to $100?billion today.

Brazil’s oil plans took an unexpected turn this week with the first major auction of a presalt concession after the new Petrobras-centred regime was put in place in 2010.

The auction scheme is designed to have rival consortia of oil companies bid against each other – not on price, but on the share of “profit oil” it is willing to cede to government. The minimum is set at 41%.

On Monday, the results of the auction of the Libra presalt field was announced amid protests and a heavy police presence in Rio.

Contrary to the expectations of Holanda and other people City Press spoke to in Brazil, two western oil majors formed part of the consortium, with Shell and Total both taking up 20%.

Two Chinese companies, CNOOC and CNPC, both took 10% and Petrobras beat its mandatory minimum to take 40%.

The strange consortium was the only bidder, making the much-anticipated auction a bit of an embarrassment for the government.

The consortium also didn’t raise its “profit oil” contribution to the state an inch above the minimum.

While this is good for Petrobras, it is a bitter pill for the government, which has scored the bare minimum from its first big oil auction.

» Van Rensburg was taken to Brazil by the Gordon Institute of Business Science

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