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Oil Industry On Edge As Political Turmoil In Brazil Rages On

Oil Industry On Edge As Political Turmoil In Brazil Rages On

Brazilian President Dilma Rousseff looks more vulnerable than ever, and her exit from power no longer looks unlikely.

More than 3 million people protested in the streets of major cities across Brazil on March 13, numbers that may have exceeded even the massive rallies that took place at the end of the country’s military dictatorship in the mid-1980s. The population is fed up with corruption, fed up with the ruling party, and are seeking the ouster of President Dilma Rousseff.

The list of problems facing President Rousseff runs long. The scandal plaguing the state-owned oil company Petrobras continues to spread. Brazil is facing the worst economic recession in about a century, in large part due to the crash in prices for oil and other commodities. GDP shrank by 3.8 percent in 2015 and could contract by almost as much this year. And President Rousseff herself is facing impeachment proceedings for cooking the budgetary books.

She isn’t the only one to blame. The Petrobras scandal and the ongoing investigation, known as Lava Jato, have implicated politicians from several political parties, not just her own. Also, the impeachment proceedings are being led by an opponent of President, Eduardo Cunha, who himself is under investigation for corruption as part of the Petrobras scandal. Still, the pressure on Rousseff is growing by the day. One of her major coalition partners, the PMDB party, could abandon her in the coming weeks. Related: Dear President Trump or President Clinton, Here is Your Energy Agenda

In a bizarre turn of events, former President Luiz Inacio Lula da Silva was charged with money laundering last week, but as of March 16, agreed to become President Rousseff’s Chief of Staff. (At the time of this writing, it appears that a Brazilian court suspended the appointment, so his admittance into the cabinet is unclear).

The move offers him some legal protections against the corruption investigation – ministers of government can only be tried by the Supreme Court, so investigators will now have a tougher time going after him. Lula has been ensnared in the Petrobras kickback scandal, a scheme in which Petrobras was overcharged by contractors whom then turned around and kicked back billions in payments to high level figures in both the oil company and the ruling party. Much of the graft apparently took place during Lula’s presidency.

The fact that Rousseff would turn to Lula – a once popular figure who is now much diminished – illustrates the extent of her predicament.

In fact, analysts are now debating when she might be forced from office, not if. The Eurasia Group, a political risk outfit, put odds on Rousseff not finishing her term at 65 percent. “The climate in Congress has changed,” said Ricardo Caldas, a Brasilia-based political scientist, according to The Wall Street Journal. “If they don’t vote for impeachment, it will be hard to explain to voters.” Related: The Rationale Behind Russia’s Withdrawal From Syria

This is a complicated political backdrop that the oil industry must navigate. One of the major international oil companies operating in Brazil is Royal Dutch Shell, who announced on March 14 that it had started oil production at the third and final phase of its Parque das Conchas project, an offshore field in Brazil’s Campos Basin. The latest development will add 20,000 barrels of oil equivalent per day at peak production. The project includes a subsea production system and ties back to a floating production, storage and offloading (FPSO) vessel.

Shell also recently completed the takeover of BG Group, which granted the oil major significant offshore positions in Brazil.

Meanwhile, the Brazilian Congress is weighing legislation that could liberalize the country’s offshore “pre-salt” deposits, vast oil fields located in deep water underneath a thick layer of salt. Petrobras is legally required to operate Brazil’s pre-salt fields, and take a substantial stake in any project. Shell’s CEO has advocated for a removal of such requirements, arguing that oil companies such as his could move forward with development much faster. Related: Oil Won’t Stage A Serious Rebound Until This Happens

Speaking on the possibility that the Brazilian Congress might ease Petrobras’ control, Shell’s CEO Ben van Beurden said the move was only logical. “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. “I don’t see how this is not beneficial for Brazil,” he added.

There are a lot of moving pieces. Former President Lula is reportedly going to be tasked with getting the economy back on track. The Brazilian stock market and the country’s currency have reacted negatively, expecting growth policies that could worsen the fiscal outlook.

From the oil industry’s perspective, opening up the offshore sector to private companies, some assert, would help attract much needed foreign investment. As a result, privatizing pre-salt assets could be pushed forward in part because of the political turmoil, and it is a testament to Brazil’s current problems that such a massive piece of legislation would probably be a mere sideshow to the political upheaval taking place in the country right now.

By Nick Cunningham of Oilprice.com

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