March 2016 /// Vol 237 No. 3

Columns

Oil and gas in the capitals

Despite scandals and debt, Brazil is still attractive

Peter Howard Wertheim and Dayse Abrantes, Contributing Editor, Brazil

Brazilians have a saying, when the rich and powerful are arrested: “It always ends with a pizza party.” The words, invariably uttered with disgust and resignation, are meant to suggest that the justice system is rigged in favor of the elites.

The accused are said to avoid prison and then celebrate by ordering pizza, a reference to dozens of powerful executives of construction companies, as well as former Petrobras directors, allegedly involved in multi-billion-dollar kickback schemes, reported correctly by The New York Times.

If any good has come from the Petrobras debacle, it is the sense that this time could be different. A lot of the reason is the work of Federal Judge Sérgio Moro, who is overseeing the investigation, officially known as Operation Carwash (Operação Lava-Jato). In Brazil, judges have wide latitude to define both the direction and scope of criminal inquiries, and Judge Moro’s willingness to pursue even the powerful has made him a folk hero. When Moro goes to a public place, he is received like a pop star by a population sick and tired of endemic corruption.

Moro is inspired by Italy’s “Operation Clean Hands,” which dealt a severe blow to the Mafia and the U.S. judicial system. So, Moro’s work (and he is risking his life doing it) is resulting in a blow to impunity, and the rule of law is prevailing.

Royal Dutch Shell upbeat about Brazil. Royal Dutch Shell expects to make robust investments in Brazil’s offshore resources, hoping to quadruple oil and gas output there by the end of the decade, said its CEO, Ben van Beurden, recently. In late January, Shell’s $52-billion takeover of BG Group Plc, took effect. Shell’s executive met with Brazilian President Dilma Roussef and top Brazilian oil and gas officials.

“We believe in the strong fundamentals of Brazil and of its geology,” van Beurden told reporters in Rio de Janeiro. He said a substantial part of Shell’s production will come from Brazil. By adding BG’s large Brazilian offshore assets, Shell Brasil Petroleo Ltda.’s output rose six-fold, to about 240,000 boed, making Brazil one of Shell’s three largest oil-producing regions. Last December, Shell and BG, combined, accounted for 7.6% of Brazil’s total output of just over 3.0 MMboed.

The BG takeover also makes Shell the world’s largest trader of LNG. While it sells LNG to Petrobras for the Brazilian market, van Beurden declined to say whether Shell wants to buy Petrobras’ natural gas assets, some of which are for sale. Brazil’s importance to Shell is expected to increase, as the company moves ahead with giant pre-salt projects, such as Libra field, which it is developing with Petrobras, France’s Total SA, and China’s CNOOC and CNPC.

The Shell executive added that pre-salt areas should be able to break even at oil prices forecast for this year, without saying what those prices might be. He said that the difficulties facing the country’s oil industry might be eased with more flexible rules for Petrobras’ statutory role in the development of new pre-salt projects.

The law requires Petrobras to own and finance 30% of any new pre-salt project. It also requires that Petrobras manage all new developments as operator. Petrobras’ debt, however, has forced it to cut back the development of new pre-salt projects. At $101 billion, Petrobras has the largest net debt level in the energy sector. “Brazil might benefit from being a bit more flexible …,” van Beurden said, adding that opening up the pre-salt area to more companies could attract capital and create jobs.

At present, the Brazilian Congress is discussing a proposed bill that scraps Petrobras’ mandatory 30% holding and role as an operator in the pre-salt. Obviously, IOCs are eagerly watching the results of these discussions. Van Beurden also said that Shell would be open to exploring opportunities from a multi-billion-dollar divestment program underway at Petrobras, aimed at reducing the Brazilian group’s borrowings. Brazil’s pre-salt fields were recognized in 2007 as one of the greatest offshore discoveries since the North Sea, but excitement has cooled, partly because of the Petrobras scandal.

Shell’s significant presence. Shell Brasil, a subsidiary of Royal Dutch Shell Plc, is now the biggest operator in Brazil after state-run Petrobras. Shell began operating in Brazil in 1913, and it has spent more than $7 billion on E&P there since 1998. The Rio de Janeiro-based company’s upstream operations include natural gas and energy generation; oil and gas exploration and production; lubricants; and marine, which supplies over 15,000 ships.

Its downstream services range from aviation, supply and distribution, to retail, with 2,700 points-of-sale. In addition, Shell Brasil operates various onshore and offshore extraction blocks in the Santos, Espírito Santo and São Francisco basins. In 2015, Shell sold its 80% stake in Bijupirá and Salema fields in the Campos basin. Shell announced recently that it would be cancelling the sale of $150 million in Brazilian oil assets. No reason was provided for the cancellation of the deal, which 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, to try and influence the government to take action. Maybe Shell believes a favorable decision is coming soon, which would allow the firm to take a larger stake in Brazil’s oil fields without the cooperation of Petrobras. Analysts are speculating, but there is no doubt that Shell has committed itself seriously to Brazil.

Adriano Pires, a prominent Brazilian energy analyst, and others are calling for the privatization of state controlled Petrobras. The ruling Workers Party (PT) is highly unpopular, and the next Presidential election is in 2018. wo-box_blue.gif

The Authors ///

Peter Howard Wertheim and Dayse Abrantes are veteran energy writers, who have covered the Latin American market for many years. They can be reached at: peterhw@frionline.com.br

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