Brazil, privatising its energy sector?

An ill-timed article,given the price of oil, suggests that failing Brazil can use its deep water oil reserves to salvage itself, “Brazil is wracked by the Zika virus, rising inflation, a deep recession, massive political and corporate scandals, and worries that athletes at the 2016 Summer Olympics will have to compete in dangerously polluted waters. Yet, despite it all, Brazil might have cause for celebration — if politics don’t get in the way. That’s because Brasília is finally taking steps to open up its oil and gas sector and make it more attractive to foreign investors, reforms that are as controversial as they are necessary to help the country tap the energy resources it has long eyed but only partially developed”.

He writes “Brazil unveiled new rules meant to kick-start investment in oil and gas production, part of a suite of measures that Energy Minister Eduardo Braga thinks can lure billions of dollars of new investment from foreign firms, including some in the United States and Europe. Even bigger changes are afoot: Brazil’s lower house of congress is wrestling with legislation that, if passed, would throw open the door for foreign oil and gas firms to develop the country’s massive offshore oil deposits without needing to go hand in hand with the debt-ridden and scandal-plagued Brazilian national oil company. That could finally make it possible for Brazil to realize the promises of its potential offshore oil wealth, first discovered almost a decade ago. Those offshore deposits, estimated to hold more than 60 billion barrels of oil — as much as the North Sea fields that fueled decades of British and Norwegian oil exploration — were expected to turn Brazil into one of the world’s big oil producers. As recently as 2013, the International Energy Agency said that Brazil, next to Iraq, would be the world’s biggest source of new oil production for the next two decades”.

He goes on to mention that “The initial promise floundered. Brazil, expecting oil companies to beat a path to its door to tap what could be world-class oil resources, failed to offer enticing terms for investors. Restrictive laws, like strict rules about using locally made oil-field equipment, made it hard for international oil companies to develop the fields. And state-owned Petróleo Brasileiro, known as Petrobras, was forced by law to take the lead in developing all of the offshore fields. But Petrobras today is staggered by a massive corruption scandal and a mountain of debt; it simply doesn’t have the financial or technical muscle to turn the offshore promise into reality. Petrobras has slashed its own investment budget four times just since last summer, and it has repeatedly cut its estimates of future oil production. For a country facing back-to-back years of economic contraction, getting the energy industry back on track is crucial”.

The writer goes on to make the point “The measures are part and parcel of a wholesale reassessment of “resource nationalism” taking place across Latin America, from Mexico to Argentina. For decades, governments in the region have sought to control mineral wealth like huge offshore oil fields and ensure that most of the benefits from those resources go to their people, rather than foreign companies. That formula can work when oil prices are high, and companies are desperate to get their hands on any promising resources, whatever the terms. But when oil prices are low, and there is fierce competition for an ever-shrinking pool of energy investment, those nationalist policies can backfire”.

He notes that in response to low prices Mexico and a host of other nations are reverting to privatisation, “Argentina, under new President Mauricio Macri, is moving quickly to regain the trust of international investors, reaching a deal with creditors and courting foreign players for the country’s potentially vast reserves of shale oil and gas. Now Brazil, prodded by opposition politicians and business groups increasingly frustrated with 14 years of rule by the same party, is on the verge of rewriting its own restrictive laws. That could move the country one step closer to fulfilling its promise as one of the biggest sources of new oil production in the world”.

Crucially he writes that “the Energy Ministry announced a series of changes to the oil and gas investment framework meant to entice the kind of international capital that could turn things around. That includes steps like extending concessions given to foreign firms years ago, giving companies the option to expand their holdings if they see promising potential nearby, and compelling companies sitting on nonproductive leases to drill or get off the pot. At a time when low oil prices make investment decisions tougher for everyone, the ministry said that “new investments in the oil industry require stable and effective rules” that will offer long-term certainty for oil companies struggling with the worst capital-investment climate in decades. But much bigger changes are potentially on the way. Last month, the Brazilian senate passed legislation that would essentially dismantle the administration’s signature approach to resource development, which was to give Petrobras a leading stake in every oil field project. Given Petrobras’s woes — a battered balance sheet and a far-reaching corruption investigation — that has proved a recipe for stagnation, not for quick development of those fields. With Petrobras unable to take on big, challenging new projects, Brazil under the current law can’t auction off any offshore blocks for development. Taken together, the energy minister said, the changes could attract as much as $120 billion in new investment”.

He ends “The political scandals, and public dismay at the state of the economy, have reached such a level that even much-needed reforms like the oil-sector changes could take a back seat to a settling of political accounts: Opposition politicians are increasingly calling for Rousseff’s impeachment. Until Brazil sorts out its political mess, it will be hard to make progress on the energy-sector overhaul”.

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