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Emerging Markets

Winning big

Petrobras’ CEO Jose Sergio Gabrielli defends Brazil’s new oil exploration legislation against critics who say it reeks of resource nationalism. But investors will have to decide for themselves

Few people outside Brazil’s government think new legislation for the exploration of recently discovered oil reserves is fair.

The proposed new rules will allow Petrobras, Brazil’s state-controlled oil company, to take the lion’s share of exploration below a thick layer of salt in ultra-deep waters, some 300 kilometres away from the Brazilian coast. It will also become the sole operating company in the area, and enjoy a minimum stake of 30% in all consortia.

Some critics have lashed out at what they see as a return to resource nationalism, which has blighted the development of the oil industry in other Latin American countries, notably Venezuela.

Petrobras, which first identified pre-salt reserves in the Tupi basin two years ago, will see its borrowing capacity boosted by a large and controversial capital increase, which may flout some minority shareholders and lead to an increase in the government’s stake.

The Brazilian government will guarantee Petrobras the right to 5 billion barrels-worth of future output in order to finance its capital increase (while minority shareholders will have to pay in cash if they do not want their stakes to be diluted). There is no precise figure for the capital increase, although various estimates from industry analysts and politicians have put it in excess of $50 billion.

The new rules have been laid out in four bills, pending approval by Congress.


But to Jose Sergio Gabrielli, Petrobras’ chief executive, the company’s privileges are well deserved – 10 years after the abolition of the state monopoly in the oil sector – especially in the case of the pre-salt reserves.

Why? “Because this has been conquered by Petrobras. It is the one that discovered [the new reserves], it is the one that acquired the knowledge and invested in it,” he says in an interview with Emerging Markets. “So this is not a favour to anyone, this is not a gift – not even good luck, because no one drills 300 kilometres away from the shore with such depth by chance.”

Other players in the private sector are not convinced. “The talk about pre-salt has strong nationalist undertones,” says Marilda Rosaldo, a Rio de Janeiro lawyer who works with the Brazilian Institute of Petroleum (IBP), a group which speaks on behalf of private-sector companies. “The new regulatory framework lacks transparency and legal stability. Giving away a minimum of 30% to Petrobras in all pre-salt oilfields is not consistent with the purpose of attracting foreign investors,” she says.

Gabrielli rejects any notion of discrimination against foreign investors. “There is no closing of the Brazilian economy,” he says. “The regulatory framework does not exclude foreign companies. It is just that Petrobras will be operating all of these areas. It means that we will probably be partners in various companies.”

Critics are also concerned about the possible interference of a new state-owned company, called Petro-Sal, in operational committees. IBP president Joao Carlos de Luca told a Senate commission in Brasilia that “as things stand, participating private companies will only act as mere financial investors... and would not even be able to decide the level of investments that is required in these projects.”

The Brazilian government, which also intends to introduce a production sharing agreement for the new reserves to replace the concession model in place since 1997, has argued that the risks have been reduced substantially. And Gabrielli is adamant: “It is almost a winning lottery ticket. The exploratory risk is minimal. It does not mean that there is no operational risk, but the probability to get it right is very high.”

He adds: “Our success rate in the Santos basin is 100%. In other locations that are not so great, it is 87%, while the world average is between 20% and 30%.”

Pre-salt oil reserves, which are located off the coast between the states of Espirito Santo, in eastern Brazil, and Santa Catarina, further south, have been described as one of the most important hydrocarbonates discoveries in recent decades. New reserves identified in four key basins (Tupi, Guara, Parque das Baleias and Guara) amount to an estimated 10 to 16 billion barrels, which compares to Brazil’s current proven reserves of 14 billion barrels. But the potential in other areas is as yet unspecified.

However great Petrobras’ fire power may be – it has secured $31 billion in financing this year from official and private sources at home as well as in China and the US – the Brazilian company will need partners to meet its huge demand for capital. Yet ironically, the prospect of the new legislation may curb investor appetite exactly at a time when more capital is needed to pump out the oil trapped in deep waters.

Industrial capacity to supply the oil industry in drilling and other equipments is another challenge that may potentially hamper growth in the sector. As part of its industrial policy, officials have been calling international suppliers to operate in Brazil. “We have a lot of interest in attracting Chinese companies to produce locally,” says Gabrielli. “They can be inserted in the oil supply chain. We have a huge volume of purchase involving dozens of deep water drills, hundreds of transport and support ships, thousands of kilometres of tubes.”

In the meantime, suppliers have also been wary of Petrobras’ increasingly dominant role in the Brazilian oil industry.

Nevertheless, president Luiz Inacio Lula da Silva has raised the political stakes so high while announcing the new regulatory framework for the pre-salt reserves late August that there is little doubt that the government will use its majority in Congress to implement it – without major concessions.

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