On an oil platform off the Brazilian coast, President Luiz Lula da Silva this month dipped his hands into the first crude to flow from promising reserves discovered in the country’s waters. Although it is difficult to be precise about the new finds, Ministers are working on the assumption that there is 10 times that amount waiting to be found.
The reserves, though hard to reach, are expected to propel Brazil up the table of oil producing nations. Tony Hayward, chief executive of BP. Europe’s second biggest oil company, 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.
The discovery could lead to a battle between both foreign equity investors and international oil companies for one of the world’s most important emerging economies. Many in the leftwing government seem determined to avoid sharing the coming bonanza. The future shape of the industry may be decided by short-term political imperatives ahead of presidential elections due in 2010.
Whilst the oil is hard to reach, Petrobras, a world leader in deep-sea exploration, is seen by many observers as ideally placed to lead the task of tapping what are some of the most inaccessible oilfields on earth. But the government has other plans. On September 19, an inter-ministerial commission is due to present its recommendations on the future structure of Brazil’s oil sector. The shortest odds are on the creation – recently backed publicly by Mr Lula da Silva – of a new national oil company, 100 per cent under government control, to take ownership of the new reserves and develop them in partnership with Petrobras and others.
International oil companies may be locked out of one of the biggest parties of the industry for some time. That is bad news when these companies are failing to replace used reserves with new discoveries. Petrobras and others are likely to be offered the chance to participate through service contracts – in which companies are paid to bring up the oil and gas but have no commercial rights over it – or production sharing agreements, in which they are given some of the oil they produce to cover costs and some as profit but have limited control over how much they may produce and when. What seems almost certain is that the current concessions system, in place since 1997, will change.
Politicians who usually support the government have been alarmed by the proposals being floated by the president and senior ministers. “An assault on Petrobras’s minority shareholders,” is how Francisco Dornelles, a pro-government senator, describes the idea of the new company. The reserves already belong to the people and the idea that they must be reclaimed “is devoid of any meaning, confuses public opinion and serves only for electoral purposes”, declares Sérgio Guerra, a senator in the opposition centrist PSDB, which introduced the 1997 law.
Sérgio Gabrielli, chief executive, says Petrobras can take on the task and describes talks with the government as heated. The company’s strategic plan for 2008-12 includes investments of more than $112bn, of which just $8bn must be financed. The plan was drawn up on the basis of oil at $35 a barrel and before the discovery of the new fields – a revised plan is due to be announced this month. Mr Gabrielli says that with much higher oil prices and with new discoveries adding to reserves, Petrobras will be in a much stronger position. “We think we can develop the pre-salt fields on our own,” he adds, although modifying the assertion by saying: “Perhaps not 100 per cent, as we don’t know 100 per cent of what is there.”
But Mr Lula da Silva seems determined to create a wholly state company modelled on Norway’s Petoro. Brazil has begun talks with Norway about how it managed its oil and gas discoveries in the North Sea.
People close to the talks say the stake that Brazil’s version of Petoro gained in each project would be limited by the fact that it will also have to invest and pay its share of the costs just like other partners. A senior executive of one national oil company says: “If Norway is any guide, having a new partnership of that nature in the future would not be a reason to be scared.”
Brazilian critics are less confident. “It just doesn’t make sense,” says Adriano Pires, an oil industry consultant in Rio de Janeiro. Petrobras has been able to invest and grow precisely because it has private shareholders, he says. “Where will the new company get money for investment?”
In arguing for different treatment of the new reserves, Mr Lula da Silva has revived an old nationalist slogan popular when Petrobras was created more than 50 years ago: O petróleo é nosso – “the oil is ours”.
That prompted a sharp rebuke from Antonio Palocci, formerly his finance minister. The biggest challenge, Mr Palocci said, would be to attract the necessary investment. “Either we make this investment possible,” he warned, “or we will be saying, ‘the oil is ours – ours down there under the ground’.”
Author: Jo Amey
