Oil discoveries put Brazil in big league

Many in Brazil see the oil as a magic bullet for tackling the countrys biggest social challenges

The move is part of a nationalistic drive to increase the country’s benefits from its natural resources and cement its position as a global power. But it could significantly slow the development of the oil fields at a time when the world is looking for new sources, energy and risk analysts said.

Earlier 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 per cent 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.

The oil lies beneath about 20,000 feet of water, shifting sand, and a thick layer of salt. This so-called pre-salt region, stretching hundreds of miles, is the biggest oil reserve being developed in the world today, especially given the lack of headway in gaining access to Iraq’s extensive deposits, said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, an energy research consultancy. It is also expected to be among the most complicated set of projects in the history of the oil industry.

“The timing and scale of the development of the pre-salt will be one of the most significant factors for the global oil balance in the next decade, and even more so after 2020,” when Brazil is expected to ramp up production even further, Yergin said. “If it doesn’t happen it will be a big setback for Brazil in terms of revenue, and a significant loss for the world in terms of new oil supplies.”

For Brazil, the stakes are high. Many see the oil as a magic bullet for tackling the country’s biggest social challenges. Luiz Inacio Lula da Silva, Brazil’s popular president, wants to alter energy laws to funnel more revenue from the undeveloped fields to government coffers and set up funds to improve education and healthcare. Despite its recent economic boom, Brazil still struggles with extreme poverty, inequality and an illiteracy rate of more than 10 per cent.

Da Silva’s government is not proposing that foreigners be excluded altogether from energy projects, or even that they not be given the chance to win majority stakes in some cases. Foreign companies are already involved in the first set of pre-salt projects, including the giant field, called Tupi, that Petrobras estimates holds 5 to 8 billion barrels of oil and natural gas.

Even without the next group of pre-salt fields, Brazil is looking to more than double its oil production to 5.7 million barrels a day by 2020.

Brazil discovered big oil late in its economic development and has a diversified economy, which will help it to avoid the ‘Dutch Disease’ of natural resource dependence that has afflicted several of the world’s oil powers, said Jose Sergio Gabrielli, the president of Petrobras.

He said the nationalism bubbling up now “is not nationalism against foreigners” but rather a debate over the speed of the development, who will get the largest share of the income stream and who will benefit from the related technology and knowledge.

The ‘Amazon is ours’ drive

The new nationalistic fervour recalls the 1970s and 1980s, when Brazil’s military government declared that “the Amazon is ours” to ward off foreign encroachments on the rain forest.

Da Silva’s plans for more control of the new fields will face a stiff battle in Brazil’s Congress, where opposition leaders say they will push to delay the plan, to deny him a victory that could be a political boost to Dilma Rousseff, his chief of staff and chosen candidate to succeed him in next year’s election.

Rousseff, who is in charge of the government’s pre-salt proposal, is also the chairwoman of the Petrobras board of directors. The company is 55.7 per cent government-owned; other members of the board are also political appointees.

Brazil’s Senate is already coping with a broad investigation into irregularities and improprieties at Petrobras, an inquiry brought by da Silva’s political opposition.
Gabrielli argues that the government has good reasons for wanting to limit foreign participation. In 1997, oil prices were much lower and Brazil’s economy was struggling. Today, Brazil has more than $220 billion in foreign reserves, oil prices are higher and Petrobras has become the fourth-biggest company in the Americas.

“The financial condition is completely different,” Gabrielli said. And the development of the new fields, once seen as risky, “now is a winning lottery ticket.”
With concerns over whether Brazil can procure the estimated $600 billion it will take to develop new fields over the next 20 years or so, the government is banking on international oil companies’ willingness to bid high. “This is the only large oil discovery in the last few years; there is no other,” Rousseff said.

But the decision to give Petrobras operational control is shortsighted and risky and could delay Brazil’s ability to use the oil to help transform the country, said Christopher Garman, an analyst at Eurasia Group, a political risk consultancy in New York.

“What if we have a technological breakthrough in renewable energy, and five to eight years from now the price of oil is not what it is today?” Garman said. “Is Brazil going to maximise investments now or keep the oil in the ground for longer?”

Lost in the debate, Gabrielli said, is the reality that the equipment needed to drill the new fields is in short supply. Petrobras executives are trying to motivate suppliers around the world to develop equipment.

Through 2017, Petrobras will need 40 oil rigs capable of drilling deep enough to reach the new fields — more than half the total number of such rigs that exist in the world today, Gabrielli said. The company is requiring that 28 of them be built in Brazil.

Gabrielli said the company was keeping its international expansion spending at $16 billion, so that it could focus on developing deepwater fields at home.

“The question is not whether to speed up or not to speed up,” Gabrielli said. “We are at the limits of the world capacity for the industry.”