BRAZIL GOV'T TO CONTROL CHOICE OIL ASSETS, HOLDS BACK DIVIDENDS

From today's Times:

Faced with the world’s most important oil discovery in years, the Brazilian government is seeking to step back from more than a decade of close cooperation with foreign oil companies and more directly control the extraction itself.

Question: Who could possibly have seen this coming?
Answer: Anybody who read my May posts. Or who knows the first thing about Brazilian history.

This month, Brazil’s government said it wanted the national oil company, Petrobras, to control all future development of the deep-sea fields discovered in 2007, which international geologists estimate could hold tens of billions of barrels of recoverable oil.

The change would make Petrobras the operator for the 62 percent of the new area that has yet to be bid out, consigning foreign companies to the role of financial investors. That would limit their ability to help set the pace for the oil fields’ development, while giving Petrobras significantly more power to generate jobs and award lucrative contracts.

And there's this, too, from today's Bloomberg:

Centrais Eletricas Brasileiras SA, Latin America’s largest utility, is delaying a 10 billion real ($5.4 billion) dividend as it negotiates timing of the payment with Brazil’s government, its biggest shareholder.

The Rio de Janeiro-based company held back the dividends, which date as far back as the 1970s, to invest in projects such as the construction of the Itaipu hydroelectric dam along the border with Paraguay. Each voting share is expected to receive 10 reais in dividends.

“To pay all the dividends, we still need money from the government,” Chief Financial Officer Astrogildo Quental said in an Aug. 14 interview from Rio de Janeiro. “We’re in talks with the Treasury to find a solution.”

The delay underscores the risks for shareholders in state- run companies, said Edison Garcia, superintendent of Brazil’s Minority Shareholders Association, which represents investors with about 300 billion reais in assets. Nine of the 58 companies in the Bovespa stock index are controlled by the federal or local governments. Among them are Petroleo Brasileiro SA, Cia. Energetica de Minas Gerais and Banco do Brasil SA.

“This situation creates an environment of legal doubt for people investing in Brazilian state-controlled companies,” Garcia said. “The Brazilian Treasury must find a way to pay its obligations.”

Why is it I'm not exactly surprised here?

ETHANOL FUEL ADVANTAGES DEMONSTRATED IN THE INDY 500

I worked with Tom MacDonald from April to August 2007. He has a long track record at the California Energy Commission with fuel ethanol, with knowledge about "the many energy, environmental, health and safety, and economic advantages of alcohol fuels".

MacDonald Associates continues to apply a long career experience working with alcohol fuels in California to analyzing and documenting the broader national and international potential and benefits of alcohol fuels. As another example...

Today’s Indy 500, won by Brazilian driver Helio Castroneves, adds more dramatic evidence of the safety-related advantages of alcohol fuels. Graphic footage seen by worldwide audiences of the major pit fire experienced by the #14 AJ Foyt Racing team and driver Vitor Meira (also a Brazilian) illustrates several of the important differences between alcohol fuels and petroleum-based fuels that weigh heavily in favor of alcohols – further validating the selection of alcohol fuels for Indy racing following the explosive gasoline-fuel crash that claimed drivers Eddie Sachs and Dave McDonald in the 1964 500.

First and foremost, today’s pit fire sequence shows the fire-fighting advantage of alcohol fuels, an advantage that should be recognized and duly appreciated by everyone involved with fuel-related fire safety. The use of water application to quickly extinguish this fire, ALLOWING THE CAR AND DRIVER TO RESUME THE RACE, would clearly not have been possible if the car had been gasoline-fueled!

Secondly, the lower volatility/explosivity and lesser heat release associated with ethanol was another important factor in minimizing and containing this fire and preventing injury to the driver, the pit crew and others nearby. While the fire briefly engulfed the entire vehicle and the driver, the lesser energy release and the rapidity with which the crew was able to extinguish the fire avoided a much more serious incident that would likely have resulted from a similar mishap with gasoline.

The distinct visibility of the above fire, even on the television screen in broad daylight, was also noteworthy given past safety issues involving the lower flame luminosity of alcohol fuels. The fact that the fire was instantly so visible is strong evidence that lower flame luminosity may not be as much of a concern for ethanol-fueled fires as has previously been suggested for alcohol fuels.

The above incident – and various other crash sequences in today’s Indy 500 coverage – add to an accumulating body of evidence with ethanol’s use for racing fuel that, if properly assembled and utilized, can offer a compelling testimonial to the safety-related advantages of alcohol motor fuels.

MacDonald Associates remains available to assist the ethanol industry and other ethanol stakeholders in efforts to better define and report on the many energy, environmental, health and safety, and economic advantages of alcohol fuels, and to help correct the misunderstandings and erroneous stories that typically affect public policy and popular views on these fuels.

Tom MacDonald
MacDonald Associates
Independent Transportation Energy Consultants
(and California Energy Commission – retired)
Sausalito California USA
(916) 529-6582

(click here for video)

BRAZIL GOVERNMENT CONSIDERING CREATION OF "PRE-SALT PETROBRAS"

“Divide and conquer.”
-- Julius Caesar

(Note: I recently pointed out Petrobras’ relevance to a global biofuels market in a previous post: “The Top 10 Reasons Why Petrobras Matters, Deeply, To the Development of a Global Biofuels Industry”. Please refer to that post to understand the importance of Petrobras’ future activities – including oil exploration).

So how, exactly, does the Brazilian government stifle competition and suck the life out of the extractive industries operating in the country?

For a better understanding of this centuries-long tendency, which supports a bloated government machine and influential friends, look no further than the current proposal being drafted by a presidential commission (1).

According to Folha de Sao Paulo, one of Brazil’s main newspapers, the commission is planning the creation of a state-owned company to control the areas around Petrobras’ recent pre-salt discoveries, the largest worldwide in over twenty years. These ultra-deepwater blocks have already been partially explored by Petrobras, which found oil and gas in all the wells it drilled.

Because of the size of the blocks, however, Petrobras was unable to explore their entirety (they span 5,000 square km, or about 2,000 square miles). Also according to Folha, the company then carved out the regions where oil was struck and has now returned the remainder of the blocks to the National Petroleum Agency, which regulates the petroleum industry in Brazil.

The newspaper further points out that oil companies normally return blocks that have been exhaustively explored, where they believe there is no more oil to be found. In the present case, the areas returned by Petrobras are close to the new-found fields and, potentially, contain huge amounts of oil.

The return of the blocks by Petrobras follows Brazil’s Petroleum Laws, which give companies five years for exploration. It is often said, however, that laws in Brazil are not worth the paper on which they are printed – Petrobras could easily have bought more time to fully explore the areas.

In spite of the fact that the National Petroleum Agency denied a request by Petrobras for a four-year extension, the two organizations have a very close relationship. Had the extension been granted by the Agency, the government would have been unable to start plans for a new state-controlled oil company to control the regions.

Now the Agency can auction the blocks off again in a competitive manner or, as appears likely, hand them over to the new state-owned oil company being planned by the presidential commission.

PetroX – The “Pre-Salt Petrobras”

Relatorio Reservado (“Reserved Report”), a newsletter from a Rio de Janeiro-based organization, suggests that a sort of "Pre-Salt Petrobras", dedicated exclusively to the development of fields found in these offshore regions, is in the works. It cites an unnamed Petrobras official who points to a primary stock offering of the new venture, dubbed PetroX. According to the newsletter,

“the (new) company would be taken to market, (a process) that would allow, using the recent (pre-salt) valuations as a benchmark, for stratospheric amounts to be raised. These funds would speed up not only the exploration (of fields already discovered), but also investments in contiguous areas."

With the oil blocks split up in such a manner, the Brazilian government would consolidate its stranglehold on the oil sector in Brazil, while maintaining a façade of competitiveness by allowing marginal access to foreign players active in the region, which include Anadarko, Exxon, and Shell, to name but a few. It would also be free to strike lucrative deals with players, Brazilian and foreign, while retaining control of the province.

(1) The presidential commision gathers the heads of several cabinet-level bodies, including the ministers of Mines and Energy, Finance, and Planning; the president of the state-owned Brazilian development bank, BNDES; Petrobras’ CEO; the head of the Brazilian National Petroleum Agency; and Lula’s Chief-of-Staff and the presumptive nominee of the ruling Workers’ Party, Dilma Rousseff (who is also the president of Petrobras’ Board – previous post).

LULA IN CHINA TO DISCUSS PETROBRAS' PRE-SALT OIL RESERVES

President Lula arrived in China yesterday on an official visit. At the top of his agenda is securing a USD 10 billion dollar deal to finance the development of the ultra-deepwater offshore oil fields known as the pre-salt reserves. Another important item is getting the Chinese to adopt a more flexible attitude towards Brazilian products, mainly meat and poultry, which have been all but shut out from the Chinese market.

China is now Brazil’s largest trading partner (previous post), having passed the United States this year. In Q1 2009, it snapped up enormous amounts of low-value products, including iron ore and soybeans.

But Brazilians’ feelings are bruised by what they perceive as Chinese indifference to relations between the two countries. In 2008, China invested a grand total of USD 38.4 million in Brazil, while investments in Africa have been significantly higher: in 2006, Chinese investments in the region totaled USD 1.1 billion.

Chinese find Brazilians inscrutable

Perhaps the Chinese are befuddled by the peculiar Brazilian way of doing business. Saddled with a leach-like state apparatus, Brazil can drive to despair even the most seasoned international wheelers and dealers.

Those who aspire to doing business in Brazil must pay dues to anyone and everyone who has a say in public affairs, at any level of government. From the lowly functionary at the notary public’s office to ministers of state, everyone is looking for a piece of the action, which may be licit (fees, charges, surcharges, etc.), or illicit (kickbacks, “commissions”, “favors” etc.). These payoffs are tolerated by the Brazilian State because they simply supplement a seemingly unending alphabet soup of taxes and contributions that ultimately serve the same function: channeling money into the hands of government employees and of the country's upper caste, industrial and rural, that the State represents.

Those well-versed in the art of doing business in Brazil know how to get around these issues, avoiding traps like the one illustrated by the story of a multinational computer company that was looking to get in on Brazil’s domestic market of about 200 million.

The company had sent a young MBA to supervise the beginning of its operations in the country. While attempting to clear the initial batch of products and equipment at Brazilian Customs, the executive was informed that one of a very lengthy stream of documents lacked a certain rubber stamp. This fact meant, he was told, that the entire largish shipment would have to be unpacked and inspected item for item, putting back the project for several weeks.

The Customs official obligingly and obliquely informed him that a small fee, paid on the spot, would waive the need for the missing rubber stamp. Feeling outraged at the suggestion, the executive told the Customs official that he could go right ahead and unpack the whole lot.

When a more senior executive at the US headquarters of the firm heard about the impending delay, he swiftly went into action. He found an insider in Brazil who could dispatch things in a more expedient manner, called back the executive, and got things moving roughly on schedule. In the process, corners were cut, rules were bent, and toes were stepped on. But no matter – the company then went on to become highly successful and profitable in Brazil.

Perhaps the Chinese think such hassle is not worth the trouble. It is one thing to invest in Sudan and Algeria, two of the largest recipients of Chinese money in Africa. Institutions there are much less developed than in Brazil, meaning that they are also more pliable and, thus, more conducive to furthering Chinese interests.

Hu’s Money Never Came – Wonder Why

The most vivid illustration of the consequences of this clash of civilizations is given by the scant results produced by President Hu Jintao’s visit to the country in 2004. At the time, Lula signed several memoranda of understanding with China for infrastructure investments, which never materialized.

With Lula's current visit to China, he hopes to cinch the deal on a promised USD 10 billion for investments in Brazil’s pre-salt fields, primarily by Petrobras, which is now under Congressional investigation for corner cutting, rule bending, toe stepping, and outright graft, overpricing, corruption, and embezzlement.

With this investigation as a backdrop to Lula’s visit, I wish the Brazilian president the best of luck.

THE TOP 10 REASONS WHY PETROBRAS MATTERS, DEEPLY, TO THE DEVELOPMENT OF A GLOBAL BIOFUELS INDUSTRY

1. Transpetro, Petrobras' subsidiary in charge of transportation, has been piping ethanol in Brazil for over thirty years. It holds the most advanced technology in the world for such operations and is currently investing USD 1.2 billion in the construction of an ethanol export corridor that comprises a pipe grid, terminals, and large ocean vessels for ethanol. With total capacity of 12 million cubic meters per year, the project is the largest of its kind anywhere in the world. More on this - including detailed technical information - is available on Transpetro's web site (in English) here.
2. Petrobras is providing technology to a number of developing countries seeking to start a biofuels industry. In Nigeria, its is investing USD 200 million to build an ethanol production facility in partnership with the Nigerian National Petroleum Corporation, which will own 70% of the project. In Mozambique, it is working with state-owned oil company Empresa Nacional de Hidrocarbonetos to research and develop biofuels there.
3. In July 2008, its biofuels subsidiary, Petrobras Biocombustivel, was working on the development of 23 joint ventures for ethanol export - a critical move in the establishment of a global biofuels market. One of the projects, developed with Mitsui & Co., aims to export ethanol to Japan, which has authorized ethanol blends of up to 3% and is a strategic market for ethanol from Brazil and other countries.
4. Petrobras researches the development of new strains of sugarcane with higher sugar content, greater resistance to pathogens, and better adaptability to various climate and soil conditions - an essential process to jumpstart ethanol production in other tropical countries that would benefit from a biofuels industry. Research is being conducted at the company's Sugarcane Integrated Agri-Industrial Center in Quissama, Rio de Janeiro state.
5. Petrobras has research agreements with a number of foreign institutions, including the United States' National Renewable Energy Laboratory, with which it is collaborating on second generation biofuels research. The research project spans all parts of the production chain, including feedstock selection, cultivation, harvesting, and distribution.
6. Petrobras is using its expertise in Brazil, energy, and biofuels to build five ethanol plants around Brazil, in partnership again with Japan's Mitsui. The main objective is to ensure supply to the Japanese market - a pre-requisite for that country to invest in the infrastructure necessary to store, distribute, and use ethanol. The strategic importance of the Japanese market goes without saying.
7. Petrobras has biofuels partnerships with a number of key players in the global energy market, including ConocoPhillips, Portugal's Galp Energia, Italy's Eni, India's Bharat Petroleum and Oil and Natural Gas Corporation, the China National Offshore Oil Corporation, the Toyota Tsusho Corporation, Mitsui & Co., and Nippon Alcohol Hanbai. With the latter, Petrobras is planning to produce ethanol in southeast Asia for export to the Chinese and Japanese markets.
8. Petrobras is working with a number of foreign companies to open up markets for biofuels abroad, including firms like Korea's Samsung, Norway's Statoil, and the Petroleum Corporation of Jamaica, with which the company is developing a hub to trans-ship ethanol produced in Brazil and reduce its cost, as the fuel makes its way into the highly-protected US market.
9. Petrobras operates a pilot plant for second generation ethanol at its Cenpes research center. Through enzymatic hydrolysis, it was producing 220 liters of ethanol per tonne of sugarcane bagasse in July 2008. The company is currently working to develop more efficient enzymes, supplementing efforts in other research centers, in Brazil and abroad, which seek to produce cellulosic ethanol on a commercial scale. This line of research also leads Petrobras to investigate new processes for handling bagasse for use as feedstock. As Brazil is expected to produce upwards of 600 million tonnes of sugarcane this year, bagasse is considered the most viable feedstock worldwide for the production of cellulosic ethanol.
10. Petrobras is the lowest-cost producer of biodiesel in Brazil. It has three plants around Brazil and is working to develop a range of feedstocks that can be used in other tropical countries to produce biodiesel. In Brazil, it has successfully developed a production chain for castor beans as feedstock, and also uses soybeans.
    

In short, Petrobras is the largest and most active biofuels player in the world. Rest assured that the congressional investigation into Petrobras, approved yesterday, will do little to further the development of a global market for ethanol and biodiesel.

BRAZILIAN CONGRESS APPROVES COMMITTEE TO INVESTIGATE CHARGES OF CORRUPTION, OVERPRICING AT PETROBRAS

This just in:

From Folha de Sao Paulo, one of Sao Paulo's leading dailies:

"LULA ADMINISTRATION UNABLE TO STOP CREATION OF COMMITTEE TO INVESTIGATE PETROBRAS.

The Lula administration was unable to stop the creation, this Friday, of a Congressional investigatory committee, known by its Portuguese acronym CPI, on Petrobras. The government base did not convince the requisite minimum of six senators to remove their signatures from the motion to create the CPI, a move that would have stopped its establishment.

With the situation unchanged, the committee should be installed over the coming weeks in the Brazilian Congress."

More on this later. I look forward especially to dissecting the rosy projections of foreign analysts concerning future cash flows from Petrobras - projections that completely ignored the political risk of investing in a state-controlled company in a country about which they know precious little.

Please do check back to see how George Soros' favorite investment (previous post) fares in the hands of Brazilian politicians angling for a win in next year's presidential race.

GEORGE SOROS' DARLING, PETROBRAS, COLLATERAL DAMAGE IN SCRAMBLE FOR BRAZILIAN PRESIDENCY

Right now (7:30 New York, 8:30 Brasilia), the Lula administration is desperately trying to convince a number of Brazilian senators to withdraw their signatures from a motion to have a parliamentary investigative committee installed to probe a number of alleged irregularities involving Petrobras.

The Administration has between now and midnight to persuade at least five of the 32 senators who signed the motion to change their minds. The motion requests the installation of an investigative committee, known by its Portuguese acronym, CPI.

From a columnist with O Globo, one of Rio de Janeiro's main dailies:

"27 signatures are needed to create a CPI in the Senate.

The Petrobras CPI was created with 32.

The government is strongly pressing some senators to withdraw their signatures from the request (...)

It has until midnight today (note: 12:00 AM Friday night) to do so. A signature may be withdrawn with a simple faxed request.

Some (senators) sign and then back-peddle in exchange for certain favors. If you know what I mean..."

From Estado de Sao Paulo, one of Sao Paulo's main dailies:

"A request for the creation of a CPI was read this Friday in the Senate. The CPI investigating Petrobras will have 180 days to probe irregularities involving the state-controlled company and the National Petroleum Agency (note: the agency is the regulatory body for the Brazilian petroleum and biofuels industry).

According to the request, read today by Senator Mozarildo Cavalcanti, the committee would be charged with investigating:

1. Indications of fraud in procurement bids for the reform of platforms for oil exploration, detected during the Brazilian Federal Police's Deepwaters Operation.
2. Grave irregularities in contracts for the construction of platforms, as pointed out by the Tribunal de Contas da Uniao (note: similar in funtion to the US Government Accountability Office).
3. Indications of overpricing in the construction of the Abreu e Lima refinery in the state of Pernambuco, as pointed out by the Tribunal de Contas da Uniao.
4. Accusations regarding the siphoning off of petroleum royalties, which surfaced during the Brazilian Federal Police's Royalties Operation.
5. Accusation of fraud by the Brazilian Federal Attorney General's Office involving payments, deals, and compensation paid by the National Petroleum Agency to sugar and ethanol companies.
6. Accusation regarding the use of accounting artifices that resulted in the (non)-payment of taxes and contributions to the tune of BRL 4.3 billion (note: about USD 2.15 billion).
7. Accusation of irregularity in the use of promotional sponsorship funds by Petrobras."

The circus is on - for now. Let's see how convincing Lula's point man in Congress, Jose Mucio, will be between now and midnight.

The fundamentals still apply - Dilma Rousseff, Lula's Chief of Staff, is the President of the Board of Petrobras. Lula has publicly endorsed her to run as his party's candidate in next year's presidential elections (previous post).

The PSDB, the opposition party that Mr. Mucio accuses of seeking a CPI investigating Petrobras purely for electoral purposes, will likely nominate either the governor of Sao Paulo state, Jose Serra, or the governor of Minas Gerais state, Aecio Neves, as the candidate to run against the candidate of the PT, the party to which Lula and Ms. Rousseff belong. The PSDB surely views Petrobras as fair game - hence, their motion to have a CPI installed (the motion's sponsor, Senator Alvaro Dias, is a member of the PSDB).

How George Soros could have 20% of his portfolio (previous post) invested in a political target as easy as Petrobras is beyond me.

PETROBRAS' REGULATOR FORGES TIES WITH CHINA, NORTH KOREA, CUBA

Haroldo Lima is the head of the Brazilian government's National Petroleum Agency, known by its Portuguese acronym, ANP.

The ANP was created in 1998, around the time Petrobras was partially privatized. According to its web site, the ANP is "the regulatory body for activities that comprise the industries of petroleum and natural gas and of biofuels in Brazil".

Mr. Lima is a member of the Communist Party of Brazil, which has a long Stalinist tradition (click here to visit his page on the Party's web site).

The web site also describes Mr. Lima's stellar record as a Congressman and party member (my translation):

"Haroldo Lima's name is always identified with the defense of Petrobras, of government banks, of national sovereignty, of the Sao Francisco River, of blacks, of Indians. And above all, of Socialism. He is president of the China-Brazil Parliamentary Group and participates in the Cuba-Brazil and Korea-Brazil Parliamentary Groups."

As regulator of Petrobras' "pre-salt" oil reserves, the largest discovered worldwide in three decades, Mr. Lima is in a unique position to help those he professes to protect. Just imagining the size of his CIA file boggles the mind.