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).