Brazil Oil & Gas after the Perfect Storm

A couple of days ago I was in Tarija, land of the massive deposits of natural gas in Bolivia. I was invited to speak at the IX International Forum on Gas and Energy (FIGAS) on the opportunities for business in the O&G sector in Brazil. It was a very well organized event that gathered in one venue the private sector, authorities and subject matter experts from several countries.

The essence of my message follows. Twenty-years after the reform of the oil & gas sector in Brazil, the country today is sailing away from the unforeseen perfect storm that was caused by three interrelated forces.

On the one hand, after the confirmation (discovery?) in 2006 of the huge pre-salt depositS in the Brazilian offshore, the Lula’s administration took a series of measures that later proved to be disastrous. Among others, the suspension of the bid rounds, the other was to force Petrobras into a compulsory operatorship of any block in the pre-salt province, with a minimum of 30% share in any consortium. Both proven to be detrimental to the development of the sector. Added to the list, one that badly eroded Petrobras’ cash-flow, was insisting in keeping artificially low motor fuel prices, while Petrobras was importing more than 20% of the country’s demand. Forcing the construction of two mega refineries, apparently without proper feasibility studies, was also another populist measure that ended to be a wrong decision. In any rate, a series of miscalculated steps that today are having a big toll on the sector.

Three forces that caused the perfect storm for the Brazilian O&G sector: 1) political miscalculations; 2) low crude oil price; 3)Petrobras corruption investigations

The second big force is the low for long prices of the barrel of crude oil. Needless to say, operating in a low price environment has been detrimental to all players worldwide, especially true in Brazil where the impacts are felt along the whole supply chain. A large number of service providers collapsed; unemployment in the sector went to numbers unseen before. Not to mention the unrelated OGX’s Eike Batista implosion.

The third force compounding the perfect storm is the ongoing corruption investigation of Petrobras is going through for the last several years. When the investigation erupted the company lost over US$200 in market value! That, in an environment of low commodity prices, dramatically eroded the company’s financial health. Being Petrobras the center of gravity of the industry—responsible for over 85% of the all the oil and gas that is produced—it was evident that diminishing its OPEX and CAPEX capabilities was very detrimental to the whole industry.

Steering the country away from the storm (yes, the storm is still alive), the Government of Brasilia and the National Petroleum Agency (ANP), along with the private sector, are doing everything in their capacity to enhance the attractiveness of the country as a destination for investments, technology and talent. The big aim: to monetize the natural resources before they become irrelevant!

The Government of Brasilia and the National Petroleum Agency (ANP), along with the private sector, are doing everything in their capacity to steer the sector towards calm waters.

For that, they are working on further adjusting the regulatory framework, creating new incentives and launching initiatives, such as REATE, Gas para Crescer, Renovabio, and Combustivel Brasil, that should create a more diverse and competitive oil, gas and biofuels landscape. Extending the REPETRO fiscal regime, approving a 3-year calendar for 9 bid rounds, lowering the local content requirements for the 14th bid round, exempting Petrobras from a compulsory operatorship on the forthcoming pre-salt auctions, are among the adjustments authorities are making to boost the sector. The successful 14th auction conducted on September 27th is a testament as to how the industry is positively reacting to these measures.

Brazilian authorities are also assertively addressing the challenges faced by the industry in the process of securing environmental licenses to operate. The aim is to eliminate what appears to be a dichotomy between the ANP and the IBAMA (the environmental agency) when it comes to stimulating growth in the oil & gas sector of the economy.

Brazil is going through the most profound transformation of its oil and gas sector ever.

Parallel to all this is Petrobras’ divestment and partnerships program, seeking to secure some US$19.5 billion by the end of 2018. The initiative, which includes assets from the upstream to the downstream and petrochemicals, if successful, will definitively change the competitive landscape in the country by bringing more agents to the market, thus creating more diversity and reducing the country’s dependency on the exaggerated concentration Petrobras has in the marketplace. The repositioning of Petrobras, in my opinion, can only be good to the country!

In sum, my central message is: Brazil is going through the most profound transformation of its oil and gas sector ever. Will end up with a more competitive, diverse and agile market. Opportunities are all over the place and everyone might participate on them. It is about time to jump into the wagon!