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Oil Bust Forces Brazil To ‘Give Away’ Pre-Salt Assets

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The oil industry is about to see a huge benefit from the change of government in Brazil earlier this year. The Brazilian Congress just voted to open up the country’s oil sector to much more investment from international oil companies, liberalizing what is often considered the crown jewel of Brazil’s natural resource base.

Ever since massive volumes of oil were discovered off the coast of Brazil a decade ago, Brazilian officials have had dreams of the country becoming a top five oil producer. Former President Luiz Inacio Lula da Silva called it a “gift from God.” In 2010, the vast pre-salt oil fields were placed more or less under state control – that is, the state-owned oil company Petrobras was legally required to be the operator on all pre-salt projects, holding a minimum stake of at least 30 percent.

But Petrobras and Brazil’s Congress now see a downside in that requirement. Petrobras can no longer muster up the necessary capital and operational expertise to realize the lofty goals of doubling oil production by 2020 to more than 5 million barrels per day (production targets that have since been repeatedly downgraded). Petrobras amassed the world’s largest pile of debt, more than any other oil company. The twin crises of low oil prices and the widespread corruption scandal have hollowed out the company’s finances, and killed off any chance of substantially ramping up oil production in the pre-salt.

With output stagnating and many drilling projects put on hold, Brazil’s dreams of ramping up pre-salt production have been delayed. Companies like Royal Dutch Shell have been eagerly sitting on the sidelines, hoping to get a piece of the Brazilian pre-salt, but have had to work behind Petrobras and projects only move forward at the state-owned firm’s slower pace.

But Petrobras’ problems have opened up an opportunity for foreign oil companies. Sensing an advantage, Shell’s CEO Ben van Beurden suggested earlier this year that the Brazilian government should privatize some oil assets and liberalize the sector for private investment. “It’s up to congress to decide. But I think it makes sense to call on other companies who have the technology, who have the money,” van Beurden said in February. “I don’t see how this is not beneficial for Brazil.”

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Shell and its peers are about to get their wish. In the intervening months since van Beurden’s comments, the Brazilian Congress removed former President Dilma Rousseff from power, replacing her with the business-friendly Michel Temer. With Rousseff out, the Congress removed a major hurdle to privatizing Brazil’s oil assets. On October 5, the Brazilian Congress voted to approve legislation scrapping the requirement that Petrobras serve as operator on all pre-salt oil projects. Bloomberg dubbed it “the most investor-friendly change in regulation since the 1997 oil law that ended the state company’s monopoly in Brazil.”

Under the legislation Petrobras will be allowed to claim some assets for itself, but will not be required to bid on all auctions. Foreign companies will be allowed to be operators on pre-salt projects. “It’s a very important sign that the government is in control of this process to open up the industry,” Milton Costa, the secretary-general for the oil lobby Brazilian Petroleum Institute, told Bloomberg. “There’s no way Petrobras can handle the pre-salt requirements by itself.”

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The leadership of Petrobras supports the liberalization, but the move is highly controversial in Brazil. “We are handing over on a platter control of an area that we discovered and over which we have jurisdiction to multinationals,” Jandira Feghali, from the Communist Party of Brazil, told Bloomberg. “This is a step toward dismantling the state,” Valmir Prascidelli, a lawmaker from the Workers’ Party, said in an interview with The Wall Street Journal. “It gives the pre-salt to the multinationals.”

Proponents of higher oil production feel that liberalizing the pre-salt is an obvious choice. “I think this will bring opportunity for growth where Petrobras, in this moment, doesn’t have even the resources to develop all the opportunities…that we have in Brazil,” Demien Fiocca, managing partner Mare Investimentos, a Brazilian private-equity firm, told the WSJ. “This is a way of speeding things up.”

Leftists in Brazil opposes giving away public assets, but having lost ground in the Congress, there is little it can do. The Congress just moved to grant Shell and other international companies who have been eyeing Brazil’s outer continental shelf the right to tap the pre-salt. And with that, they hope that foreign companies can help Brazil achieve its goal of dramatically lifting oil production.

By Nick Cunningham of Oilprice.com

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  • Jim Decker on October 09 2016 said:
    I just went back and re-read some 2009 articles where libs tried o defend Obama's $2 bil "loan" to Petrobras- wonder how much "commission" the Clinton Crime Family Foundation got on that deal. Forbes claimed that Glen Beck was a conspiracy theory nut on that issue. Nut maybe, but not on this issue.

    Brazil is corrupt to the bone. Stay away!!!

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