beyondbrics

A couple of short interviews with Brazil’s oil & gas industry regulator published today show how tensions are building in the approach to a share issue planned next month by Petrobras, the national oil company, which analysts expect to raise at least $25bn.

Petrobras needs the money to help fund its huge capital expenditure programme, which includes starting work on the potentially enormous “pre-salt” fields discovered off Brazil’s coast in 2007. A new regulatory regime for the fields is making its way through Congress. At first sight it works strongly in Petrobras’s favour. But the national oil company is not getting everything its own way.

In Folha de S. Paulo (the article is here but open to subscribers only), Haroldo Lima, head of the National Petroleum Agency or ANP, said he expected the government to come out of the share issue with a bigger stake in Petrobras than before. The government owns about 40 per cent of the company’s total capital and a majority of voting stock.

Under the capitalisation plan, the government will sell Petrobras the rights to 5bn barrels of oil in the pre-salt fields at a price to be determined before the share issue. Lima told Folha he thought the price range considered most likely by many analysts, of $5 to $6 a barrel, was too low.

This will not please Petrobras. It wants as many minority shareholders as possible to take part in the share issue. This would push up the issue price, delivering more money to Petrobras. A high price per barrel could discourage private investors, leaving the government to take up the slack and increase its shareholding – something Brazil’s left-wing administration seems happy to do.

Estado de São Paulo has a story citing unnamed sources saying Petrobras would like to see a reduction in the 65 per cent local content rule for the pre-salt fields, designed to promote Brazil’s shipbuilding and oil & gas service industries. The rule is likely to push up Petrobras’s costs at a time when it needs to stretch scarce resources as far as possible. Lima told Estado he was against relaxing the rule, though he admitted Brazilian suppliers would find it hard to meet demand.

“There is an underlying tension between the government and Petrobras on both the valuation and local content,” Erasto Almeida of Eurasia Group told beyondbrics. “Petrobras really needs the money and it has corporate interests that don’t necessarily coincide with the government’s.”

The new pre-salt regime puts Petrobras in a prime position. It replaces the existing concession system (which will be maintained for fields outside the pre-salt region) with production sharing agreements. Petrobras will be the operating company in every PSA, keeping international oil companies out of the driving seat. It will also have a minimum stake of 30 per cent in every PSA consortium.

With its resources already stretched, Petrobras might prefer to have a choice over which fields to invest in and whether or not to share operating risks with other oil companies. Denied those choices, it is now lobbying hard to ensure its share issue is guided by commercial rather than political considerations.

Related reading:
Making sense of Petrobras’s share sale delay, beyondbrics
Petrobras postpones $25bn share issue, FT