Brazil's Oil Power Grab Could Hit Petrobras

By Carl Delfeld of Chartwell ETF & ETFfolio

Brazil’s (EWZ) newly discovered reserves, both huge and hard to reach, are expected to propel Brazil up the table of oil producing nations according to Joe Carrol of Bloomberg. British Petroleum CEO Tony Hayward says the new finds are “as significant as the North Sea” – which in the 1970s was one of the new frontiers that helped pull the world out of its last big oil shock.

But many in the center-leftwing government seem determined to avoid sharing the coming bonanza. The future shape of the industry may be decided by short-term political maneuvering leading up to presidential elections in 2010.

Petrobras, the top holding in the iShares MSCI Brazil ETF, a world leader in deep-sea exploration, is a natural leader for the difficult task of tapping what are some of the most inaccessible oilfields on earth. But the government may have other ideas. On September 19, an inter-ministerial commission is due to present its recommendations on the future structure of Brazil’s oil sector.

The likely outcome is a proposal to create a new national oil company, backed by Mr Lula da Silva, under 100% government control, to take ownership of the new reserves and develop them in partnership with Petrobras and others.

While Petrobras is controlled by the Brazilian state through a majority of its voting stock, most of its capital is in non-voting shares. Some 60% of total capital is held by minority shareholders, a group of mostly foreign investors that would miss the opportunity to benefit from exploiting the offshore discoveries.

This a type of insiduous political risk not usually appreciated by investors in emerging markets. Chartwell ETF and ETFfolio pay as much attention to political risk as valuations and momentum in selecting country ETFs.

Comments

[cfant:]

But many in the center-leftwing government seem determined to avoid sharing the coming bonanza." That iis a strange statement.

First, I hold both Petrobras and EWZ. But if anyone isn't "sharing," it is the corporations and politicians who keep most of the country in poverty. Unless they all decide to "share" with the nation as a whole, guess what? That's how revolutions, communism, and "left-wing" ideologues get control.

2008 Sep 12 09:05 AM

[R. Ennis:]

You might want to cover your short position today!!!

But nice try...

2008 Sep 12 10:28 AM

[mekats:]

Developing an earnings model or asset value for PBR over the next 10 years is riddled with risks. The noises out of the country indicate that investors will be last to see the rewards of their technical success. You will be better off living and working there but not investing there.

2008 Sep 13 08:13 AM

[John-Galt:]

It is difficult enough to assess the political risks of investing in the USA right now, and I live here. We have already seen two major "confiscations" in the name of stability. BSC and FNM/FRE. What the Bush cronies are doing is no better than Venezuela, Russia, and maybe Brazil. Long term investors need to figure out where to invest when capital becomes at risk by being big and successful. An Obama win means that oil companies are at risk. Make no mistake that an excess profits tax is to no better than confiscation, just wearing different clothing. And a McCain win will screw you too, as the Bush doctrines get embedded in govt until no one is safe. Maybe Brazil is not so bad. But Ayn Rand had it right over 60 years ago.

2008 Sep 13 05:53 PM

[jimsep:]

Watch out! No matter what the defenders say, there is BIG risk in Petrobas.

2008 Sep 14 02:02 AM

[uderman:]

Lula, our president, did stated several times that Petrobras will be fortaized, with the help of the govern, with Pre-sal exploration.

What is likelly to happen is that the govern will buy more participation of Petrobras shares, buying it with the Pre-Sal oil to be explored.

A new company to explore the oil is madness and will not happen. But the govern will raise it's participation on the profits of the exploratioin, and create a found to be invested in misery elimination and education.

Don't worry, Petrobras will be fortalized with this.

- Uderman

2008 Sep 17 07:06 AM