Brazil Wants In On the Big Oil Club

SÃO PAULO — Facing plunging petroleum prices, many global oil companies slammed the breaks on new investments in recent months. But Brazil, coming off one of the biggest oil finds of the decade, has hit the accelerator on capital spending as it positions itself to play a major role in an energy hungry world.

Brazil’s Petroleo Brasileiro S.A. – known as Petrobras – recently increased its five-year investment plans for everything from exploration to pipelines by more than 50 percent, from $112 billion to $174 billion. Brazilian authorities are also finalizing new regulations in preparation for opening up bidding on concessions to develop its vast sub-salt oil fields to international oil companies.

As other national oil giants in Latin America struggle with drops in production, Petrobras faces a smoother ride. The Brazilian government is expecting a larger share of revenue under future sub-salt concessions since the mega-fields offer huge exploratory potential with low risks, according to the state-managed firm.

“It’s like buying a winning lottery ticket,” said José Sergio Gabrielli, the chief executive of Petrobras, in an interview.
Gabrielli, who earned a doctorate in economics from Boston University, has set out to make the company one of the top five global energy companies in the world over the next decade. But more than half a century after its creation under the nationalistic slogan, “The oil is ours,” Petrobras must overcome huge obstacles before it will rival the major producers.

In news that startled and thrilled the petroleum world, Petrobras announced last year the discovery of three new mega-fields wedged under a layer of salt in ultra deep waters off the coasts of Rio de Janeiro and São Paulo in the Santos Basin. The “Tupi” and “Iara” discoveries, made in 2007 and 2008, boost Brazil’s proven reserves to more than 12 billion barrels, enough to supply the country’s energy needs for five years. Other fields have been found, but the volume of reserves has yet to be announced.

But extracting oil from those fields poses enormous technical and financial challenges.
Although Petrobras is known for its deepwater drilling expertise, it will have to develop the technology to drill more than three miles under the ocean surface through rock and then a hard layer of salt.

And the undertaking will be expensive.

Over the past five months, Petrobras has raised $30 billion, including $12.5 billion from Brazil’s National Bank for Economic Development, $2 billion from the U.S. Export Import Bank; $6.5 billion from a group of global commercial banks, and $10 billion from the Chinese Development Bank, in the form of a 10-year loan.

As part of the loan repayment terms, Brazil will supply the China Petroleum and Chemical Corp., known as Sinopec, with 200,000 barrels of crude oil a day sold at market prices.

But Petrobras will probably need to raise additional funds in international markets groaning under the constraints of a global credit crunch that has driven up the cost of borrowing.

Dany Rappaport, an economic analyst at Investport Asset Management in São Paulo, said banks will be charging more for lending.
An even bigger problem could be the prohibitive costs of exploration in the sub-salt basin, Rappaport said.

“In this environment, I don’t see the best of the worlds for Petrobras to have all [the finances] it needs,” he added.
Petrobras has been at the center of the government’s successful drive for energy self-sufficiency, both through oil exploration and the development of the sugar-cane ethanol industry. The oil company, which has 76,000 employees and operations in 19 countries, reported revenue of $110.3 billion and $17 billion in profits in 2008.

Investors and analysts say Petrobras ultimately benefitted from a 1999 decision by the National Petroleum Agency to allow international oil companies to bid for the right to participate in exploration and production in Brazil.

“Petrobras is clearly one of the better and more efficient state oil companies across the emerging markets currently,” said Christopher Garman, Latin American director for the Eurasia Group in New York. “They have a very good track record of corporate governance [and] developed tremendous expertise in deep sea oil drilling.”

The 1999 opening brought in foreign competition and helped boost efficiency at Petrobras, Garman said.

But two long-awaited decisions by the Brazilian government are expected to have a major impact on the company and the oil market.
Brazil’s Mines and Energy Minister Edison Lobão announced last April that authorities were considering changes to its existing exploration and production laws. That uncertainly has international oil companies concerned about the way the new offshore areas will be re-opened for concessions in the future.

“Changing rules slows the ability to act in Brazil,” said Houston-based oil executive Brian Rabe, adding that developing the sub-salt area will be extremely expensive.

“If oil exists all along the Campos and Santos Basins, then Petrobras, Exxon and Chevron all put together could not develop it over the next 20 years,” said Rabe, manager of business development at Devon Energy Corp., headquartered in Oklahoma City.

“This requires way too much capital, way too many people,” Rabe sad. “You have to open it to all the industry and let everybody take a shot at it.”

The currently mapped area of oil reserves in the sub-salt layer stretches 43,000 square miles (112,000 square kilometers) so far. Thirty-eight percent of the area consists of oil concessions acquired during the last round of bidding in late 2007. Petrobras itself holds the lion’s share of those concessions.

Officials drafting the new rules are also considering creating a new state-owned company, separate from Petrobras, to oversee the exploration and production in areas around the offshore discoveries.

Lobão has said he favored the creation of the new company. But Gabrielli, although he stresses the need to rewrite the current oil sector laws, said he doesn’t believe the government will create its own company to compete against Petrobras in developing these fields.