Oil Major Petrobras (Petroleo Brasileiro) Hits Pay Dirt

Posted on September 29, 2010 in Business and Economy

By Pradyut Hande:

“It wasn’t in Frankfurt, it wasn’t in New York, it was in our Sao Paolo exchange that we carried out the biggest capitalisation in the history of capitalism…”, proudly proclaimed the Brazilian President Luiz Inacio Lula de Silva minutes after Petroleo Brasileiro (Petrobras), the state controlled oil company raised a whopping 120.5 billion Reias ($70 billion) in what eventually transpired to be the world’s largest share sale a few days ago. The said amount was raised predominantly from the Brazilian government and other miscellaneous investors.

The Rio de Janeiro based oiling behemoth sold 2.4 billion common shares at 29.65 Reias per share and priced 1.87 billion preferred stock at 26.30 Reias each. Petrobras purportedly plans to invest a majority of the freshly raised capital in large-scale oil exploration and development operations, particularly in Tupi.  The Tupi oil field is located in the Santos Basin, 250 km off the coast of Rio de Janeiro and is widely regarded as the largest oil discovery in the last three decades. The Tupi field was discovered by the BG Group in 2006. Experts say that the upper estimate of 8 billion barrels of recoverable oil would be enough to meet the total global demand for crude oil for approximately three months at the current global extraction rate of around 90-95 million barrels per day. Petrobras plans to double its output to 5.40 billion barrels a day by 2020 from the present output of 2.70 billion barrels per day.

The proposed exploration and development of the oil fields over the course of the next few years ought to come as a major shot in the arm for the cash-strapped state controlled company that has struggled off late to shrug off its sluggish growth and underperformance. The glaring fact that Petrobras has slumped by as much as 28% this year is testament to its dwindling fortunes. Its recent slump bestows it with the ignominy of being the worst performing major oil stock this year, after BP that is! The following is the synopsis of the projected ramifications of the aforementioned share sale for both the major players involved – Petrobras and the Brazilian government…

Player 1: Petroleo Brasileiro (Petrobras)-

For starters, it is imperative to note that Petrobras’ recent poor performing stock and ensuing slump has been fuelled to a large extent by fears that the share sale (that did eventually take place) would result in the government furthering its interests in the company and thereby, resulting in a fall in earnings. There are worthy arguments with regards to the contentious issue of an enhanced governmental role and the consequent interference in Petrobras’ operations. However, the company required new capital in order to pursue its long term developmental objectives and opting for a share sale was perhaps the most viable solution to their financial conundrum. Increased state interference implies the company now resembles more of a Public Sector Undertaking (PSU) than a private corporate setup. As part of the share sale, Petrobras issued $42.5 billion of stock to the Brazilian government in exchange for the rights to develop 5 billion barrels of the Tupi oil reserves. The agreement additionally includes an over allotment option by underwriters to sell off 188 million shares over the span of the next 30 days.

Whatever be the case, Petrobras stands to gain in the long run if they are to further their strategic interests in the face of ever escalating competition from the likes of the BG Group and Galp Energia that operate near the Tupi region. A greater degree of state interference is a compromise Petrobras would have to make, although some quarters may believe otherwise.

Player 2: The Brazilian Government-

The Brazilian Government has made a prudent investment through Petrobras’ share sale and stands to reap rich dividends in the foreseeable future if the company judiciously exploits the vast untapped oil reserves in Tupi. Through the sale, the government increased its stake from 40% to 48% – a sizable increase that would ensure the government has a greater say. Many quarters believe that the proactive approach of the governmental think-tank with regards to its purchase in the Petrobras share sale is a clear indication of President Lula de Silva’s endeavor to ensure greater control over a rapidly burgeoning economy before the imminent election of his successor, Dilma Rouseff (who served as President Lula de Silva’s Chief of Staff until March 2010), next month. In fact, under President Lula de Silva, the Brazilian government has markedly stepped up its efforts to gain a far stronger foothold in the domestic oil industry after the discovery of the abundant Tupi oil reserves in 2006.

Although Brazil remains one of the fastest growing global economies (the world’s eighth largest economy by nominal GDP), registering an impressive 8.8% growth rate in the second quarter of 2010; 23.5% of its population is BPL. That figure has declined steadily over the past few years; however, the dividends of inclusive growth have failed to uniformly percolate down to the bottom of the pyramid. Hence, the government hopes that its vast oil reserves continue to “fuel” future growth and eventually counter the entrenched scourges of poverty and unemployment. This is a simplistic outlook given the multitudinous factors that could scupper their plans given the fickle nature of the oil industry and the associated price fluctuations. However, undeniable is the fact that the Tupi reserves hold abundant promise, with regards to vital resource exploitation and the accruing economic benefits.

President Lula de Silva once remarked that the discovery of the Tupi oil reserves could possibly usher in “Brazil’s second independence”. It remains to be seen whether the entire hullabaloo over the Tupi reserves actually holds true and whether Petrobras makes the most of those reserves. They’ve struck “black gold” and now have enough capital to draw upon…all they need to do now is translate that into tangible mutually beneficial results.

The writer is a Correspondent of Youth Ki Awaaz. He also blogs at http://pradyuthande.blogspot.com/, you can find the above post at pradyuthande.blogspot.com/2010/09/petrobras-hits-pay-dirt.html

Image courtesy: http://www.agenciapetrobrasdenoticias.com.br/default_en.asp