Hot on the heels of their $52-billion takeover of BG Group going into effect last month, Shell appears poised to make big moves in Brazil.
Already the second largest oil and gas producer in Brazil, Shell has set its sights even higher. The only thing that stands in its way is state-owned Petrobras.
Ben van Beurden, CEO of Royal Dutch Shell, made his feelings on the matter very clear this week when he said that Petrobras should cede some of its drilling rights to private firms. Related: Is Venezuela Trying To Hide Oil Assets With This Bizarre Move?
At first glance, this sentiment could be seen as mere sabre-rattling and lobbying by a major private producer that would stand to gain a lot if Petrobras were to, in fact, cede some of their drilling rights, but a closer look into Petrobras sheds some light on why this course of action could also be in the best interest of Brazil.
Currently, Brazilian regulations state that at least 50 percent of all off-shore oil drilling rights must be owned by Petrobras. The problem is that Petrobras is in a full-blown tailspin. The company is currently embroiled in a scandal that includes top executives, politicians, and the country’s biggest construction firms. Petrobras is also dealing with massive debt that was growing virtually unhindered for years.
And with oil prices as low as they are now, it appears things could get worse for Petrobras before they get better. Related: Oil Price Volatility Off The Charts
With Petrobras barely staying afloat, its plans to develop offshore wells have completely stalled. That means that Brazil is unable to earn royalties from oil produced offshore. This is where Petrobras’ problem becomes Brazil’s problem. In a country dealing with rapid currency devaluation, rising unemployment, and a sputtering economy; people simply cannot sit around and wait for Petrobras.
On top of all of the above, Shell announced this week that it would be cancelling the sale of $150 million in Brazilian oil assets. No reason was provided for the cancellation of the deal that was set to take effect after being negotiated in January 2015.
Perhaps this is an example of Shell showing how committed the company is to the Brazilian market in order to try and influence the government to take action. Maybe Shell believes a favorable decision is coming soon that would allow them to take a larger stake in Brazil’s oil fields without the cooperation of Petrobras. We can only speculate at this point, but one thing is for certain; Shell has made a major commitment to Brazil. Related: Utilities Just Declared War On Solar
The people of Brazil are understandably frustrated with the corruption and mismanagement surrounding Petrobras. The situation has reached a point where the inability of Petrobras to develop its offshore oil fields is preventing the government from collecting much-needed royalties. Opening up drilling rights to private firms would be a huge boon to the Brazilian economy, and Shell has made it clear that is ready and willing to invest even further in Brazil--but nothing can happen until the government takes the first step.
By Dex Dunford for Oilprice.com
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