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Brazil’s Oil Profits to Fund Education, Healthcare

Brazil’s decision to earmark 100% of profits from sub-salt production to education and healthcare is a major step toward assuaging public hostility stemming from perceived injustice on the part of the Brazilian government and foreign businesses operating in Brazil, but it may not be enough to quell protests.

At issue is the 100 billion barrels of fossil fuels under a thick layer of sub-sea salt in the Atlantic Ocean.

But investors—state-run Petrobras oil company and the Brazilian federal government--have conflicting ideas about how to parcel out the cash they expect to flow from the oil and gas. They are, however, united in their desire to get those ultra-deep wells pumping.

Petrobras is the largest deep-water operator in the world, with 22%+ of its activity in the deep. Petrobras is the first company in the world to find and produce gas under a layer of salt on the continental shelf. Its pre-salt discoveries have the potential to position Brazil as one of the world’s largest oil reserves.

Related article: Drilling for Oil in 2013 – Where are the Hotspots

Petrobras has proven reserves of about 16 billion barrels of oil, which is forecast to double over the next 3-4 years with new discoveries, and is currently producing almost 350,000 barrels per day of oil equivalent in the pre-salt layer of the Santos and Campos Basins—beyond their expectations. By 2016, the company’s pre-salt production should reach 750,000 bpd, and the forecast for 2020 is nearly 2 million bpd.

Meanwhile, antipathy towards foreign business in Brazil is rising, though the massive crowds who continue to protest in some cities blame the state and federal governments as much or more than private businesses for what they claim is a failure to distribute profits fairly.

The influence of those protests was palpable on 14 August, when Brazil’s Congress considered a number of changes to the royalty framework.

The legislators ultimately rejected an increase in Brazil’s share of profits but allocated 100% of its profits under new contracts to education and healthcare.

This is no small amount as Brazil stands to earn between $800 million and $1 billion in royalty revenue over the next 12 months.

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Under the new guidelines, 75% of the money Brazil receives will fund education, with the remaining 25% to be used to improve health care.

The National Petroleum Agency already told investors that bids for the Libra field in October must include an agreement to give Brazil 41.5% of profits. Raising that floor to 60%, as proposed, could have endangered Brazil’s attractiveness to investors.

That moderation is a sign that Brazil is willing to concede some control in order to hold the interest of major companies, who need incentives to sink billions of dollars into exploration and initial production.

At the same time, the success of the World Cup (which includes many foreign sponsors) in the eyes of the Brazilian public could impact their receptivity to foreign investors in the oil sector.

By. Southern Pulse for Oilprice.com


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