Petrobras: Brazilian Oil Takes One Step Closer to Nationalization

Includes: EWZ, PBR
by: Contrarian Profits

By Irwin Greenstein

Unless you’re tapped into Brazilian media, you may not fully understand how serious the current regime is about nationalizing oil.

On August 28, we wrote a piece that questioned whether or not Brazilian President Luiz Inácio Lula da Silva would follow the leaders of other South American countries to exploit oil for the greater good of the populace.

If Brazil does move ahead on this agenda, it could be really bad news for Petrobras (NYSE: PBR) - especially since the stock may have priced in some huge recent offshore finds.

While nationalized oil is a way of life in the Persian Gulf (think OPEC) and some Nordic countries, South America has a certain way of wrapping it all with vitriolic rhetoric under the banner “El Petroleo es Nuestro!” - the oil is ours. In a word, it’s all about socialism.

If you think about the old adage that oil and water don’t mix, that certainly applies to the offshore drilling by the socialist regimes of Latin America.

Venezuela’s Hugo Chavez is the populist, anti-American leader who has nationalized oil to the detriment of everyone concerned. Production is down, major oil companies are taking him to court to reclaim seized assets and it is a source of boring saber rattling.

Still, nationalized oil in Latin America has entered the regional dialogue.

Bolivia, Ecuador and other countries find it appealing that oil money can be used to cure all social ills - except government corruption.

I came across a startling article in The Latin Business Chronicle titled “Brazil: New Oil Company?” It gave a real insider glimpse about how serious Lula is about nationalizing Brazilian oil in light of the discovery of potentially tens of billions of barrels of offshore, sub-salt oil in the past year.

The article was actually an interview with three experts: Georges Landau, Head of Prismax Consultoria in Brazil; Roger Tissot, independent energy consultant; and Erasto Almeida of the Latin America Research Associate at the Eurasia Group.

The conversation centered on the idea that President Lula may go for a new national oil company that would compete against Petrobras.

Landau was of the opinion that although there is a degree of uncertainty around the nationalization movement, he does point to Lula’s statements favoring a new state-run oil company.

Landau described this possible new venture as one that “would by-pass Petrobras.” He went on to explain that Petrobras’ enormous financial resources required for successful drilling of these new, vast discoveries plays against Lula’s sense of national pride - even xenophobia.

Tissot sees Lula’s policies as underlying a way to avoid the “curse of oil” in which only a few wealthy insiders benefit from the profits while the rest of people suffer in squalor.

Tissot points out that Lula has suggested that oil revenues from the massive pre-salt discovery could be used to pay the social debt by allocating these revenues to education. According to Tissot, one idea is to create a new national oil company in charge of operating the pre-salt blocks.

He believes that Lula’s administration is at a crossroads.

If Lula chooses the easy, populist answer of capturing all the rent and using it for social spending, he would secure future electoral successes for his party but at the risk of sending his country backward on a ‘rentist model.’ By adopting the stabilization fund, he is at risk of upsetting his loyal base, which has supported him for years under tight fiscal policies.

Worse, if Lula does form a new government-run oil company, he could easily alienate many of the shareholders who invested in Petrobras.

Tissot is of the mind that some sort of middle-ground could be reached - although its boundaries still remain murky.

Disclosure: none