Petrobras: Brazilian Oil Takes One Step Closer to Nationalization

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

Comments

[sligoo:]

So, Petrobras shareholders are in a "bind". What about the shareholders of their partners,e.g. BG Group, Hess, Repsol, Galp,etc. What happens to them?

2008 Sep 11 08:14 AM

[Steven Ward:]

Lula is caught up in the "Russian Disease", where actual ownership of the oil is more important than the money gotten from the oil.

Mexico used her oil successfully to cut their poverty level in half in 17 years, Lula wants to do the same.

But all he has to do is raise taxes or alter roduction sharing agreements.Whatever it takes to increase the development of the oil ala Libya rather than Venezuela.Major companies are flocking to Libya where Libya is only offering up to 13 percent for oil and 25 percent for gas to the drilling companies. Yet, BP, Chevron, XOM and many others are biting. Why? Verenex,in her first attempt at Libyan oil has discovered 4 billion barrels, tht's why?
Petrobras suffers immeasurably, BG Group (my top international integrated pick prior to the Brazilian discoveries), along with Galpa and the others suffer as well but ironically, not as much as Petrobras due to that companies majority shares in all the projects.

There is enough for everybody depending on Lula's model, Mexico, Venezuela or the Libyan or Malaysian models. The latter two seem to not suffer from a shortage of drillers wanting in.

2008 Sep 11 09:22 AM

[Steven Ward:]

To slige: I can only offer insight into BG Group on the possible takeover or nationalization of the Santos Basin oil.
BG management always played down the discoveries as compared to the other two entities, Petrobras and Galpa. In fact, they seemed non-plussed about the whole matter and turning their corporate attention to the coal bed methane gas of Australia instead and so much so that they are engaged in a takeover battle with Origin. BG's stock never rose as far and as high as Petrobras or Galpa either. Again as a result of Bg's down playing of the discoveries. As to the American oils such as Hess I do not know as I do not follow them.

But as for BG, they are far flung and excitingly profitable without the Brazilian oil and will have continuing profit streams comming on elswhere in the next 5 years. In fact, BG is in the position to say to Brazil: "Give us a few billion dollars and we are out of here."With no effect on the stock.

2008 Sep 11 10:25 AM

[mixter:]

If Mexico used their ill gotten oil money to cut poverty in half, just why in the hell are so many of them illegally crossing the border to get into the United States?

Socialism and nationalization does not work in the long run. Too bad liberals can't seem to recognize this!

Are you listening, Obama?

2008 Sep 11 11:25 AM

[mlyn:]

Are you listening, Hank? The U.S. nationalized risk. At least they are nationalizing profits or potential profits.

2008 Sep 11 02:30 PM

[torto:]

This story is totally uninformed the developments about this whole nationalization mess. There's probably going to be a new state-owned company that will license exploration in wells that haven't been auctioned yet, which means wells licensed to PBR will remain untouched (such as the recent Iara well).
This new company will be an office that will only sell exploration rights to other companies, amongst which PBR has a much more comfortable position.
One must understand the situation regarding the previous auctions and the many blocks/wells at stake in order to see the big picture here, which is not bad for PBR at all.

2008 Sep 11 04:53 PM

[The honest ...:]

Yea.

It's not like the government will take Tupi and Iara from Petrobras shareholders. I'm brazilian and can attest that they wouldn't dare.

Henrique Meirelles, president of Brazil's Central Bank knows international markets, he was the former CEO of BankBoston. He will tell the president not to do it... We'd have the oil but lose all other foreign investment most likely... The country would be sabotaged.

2008 Sep 11 08:31 PM

[Steven Ward:]

To mixterP:stats are stattic, rigid. If I make 100 bucks a year over the poverty line I'm no longer considered in poverty at least by the statisticians. But your point is well taken on illegalimmigration. Estimates are that 20 billion is sent back to Mexico from illegals here,so maybe poverty is truly down for several reasons, not just oil wealth.

Big problems now and in the near future. Cantarell is dropping at 37 percent a year in production which will lead to major budget cuts in education and housing spending.
Mexico could become a pressure cooker with less welfare spending and increased border security.
Mexico has had two revolutions in her history: one for independence, the second to remove one man despots. If she has a third revolution all I will say is that this time they had better get it right.
A little revolution now and then is not a bad thing.

2008 Sep 12 02:59 AM

[Don4682:]

I am unimpressed with this article for several reasons.
(1) It fails to distinguish between existing lease holders with contracts, and unsold tracts. Brazil can do what it wants with unsold tracts not yet under contract with oil companies.
(2) It equates Brazil with Ecuador, Venezuela, and Bolivia in its policies, apparently because President Lula also uses "socialist" as part of his political description, but gives no evidence other than speculation.
(3) It ignores the practical issue that Brazil can't simply take away the drilling rights and go do it themselves. This will not be $2 a barrel lifting costs - hundreds of billions of dollars will be needed, Brazil can't fund it internally, and good luck and getting any foreign investment if you cheat the existing leaseholders. If you want to see what would happen if they tried, do a google search on "Mongolia" and "Ivanhoe" to see the ongoing soap opera over mining rights to a gold and copper deposit. The govt. wants all the money, no one will build the mine until the royalty rules are set, so the government gets nothing and nothing gets mined.

I think offshore Brazil has more regulatory risk than exists for a US Gulf of Mexico lease, although the US Congress can do windfall profits taxes, etc. so that is not risk free. But Brazil has a lot better track record (so far) of being fair to foreign investors than places like Venezuela.

2008 Sep 12 12:28 PM

[David Aragon:]

If arab and nordic people can transfer oil money to education and health care to their population, and still be good places to invest, why the hell brazilians can't do it?

As a brazillian and a president Lula supporter, I assure you foreign investors, contracts will be respected, but you cannot rationally expect for recently discovered oil reserves to be delivered to your hands so easily, that wouldn't be fair to us.

You want the oil? Pay the fair price! Not more, not less than that!

Jan 02 05:38 PM