By Will Connors
Rio de Janeiro--International oil companies operating in Brazil
are cautiously optimistic that no matter who wins this Sunday's
presidential election, the new administration will take steps to
restart investments in the nation's once-booming oil sector.
Falling petroleum prices, a weak economy and slumping profits at
state-owned Petroleo Brasileiro SA have increased the urgency for
the government to woo foreign capital back to help develop the
nation's massive reserves, analysts said.
President Dilma Rousseff has promised to simplify taxes for
outside investors and hold more frequent lease auctions, if
elected. Her challenger Aécio Neves, who is trailing the incumbent
in most polls, says he will consider make production-sharing
agreements more favorable to foreigners.
"I think there is a realization on both sides that changes need
to be made if the potential of Brazil's upstream [oil] sector is to
be fully realized," said Ruaraidh Montgomery, an analyst at oil
consulting firm Wood Mackenzie.
Just a few years ago Brazil's oil industry was among the world's
most promising.
In 2007 Petrobras discovered massive deep-water oil reserves off
the Atlantic coast, and the government announced a more than
$200-billion spending plan that would make Brazil one of the
world's top five oil producers. Investors including George Soros
bought up shares in the company. Foreign companies not already
active in Brazil rushed to set up offices here and bid for access
to the new fields.
But Ms. Rousseff's government made a number of changes to the
oil industry in an attempt to give Petrobras home-field advantage
and harness newfound oil revenue for social programs. A new law
required Petrobras to hold at least a 30% stake and be the sole
operator of some of the most sought-after oil fields. Foreign
companies were required to use more local materials and companies
for projects, which drove up costs. Oil field auctions became less
predictable.
Those changes soured foreign companies and investors, who soon
spotted new, more lucrative opportunities elsewhere as the U.S.
shale boom gathered steam and Mexico signaled it would open its oil
sector. Several smaller oil companies left Brazil, while bigger
companies paused or slowed down their investment plans.
Meanwhile, Petrobras has faced its own headwinds. In a bid to
curb inflation, the government forced the company to sell fuel at a
loss to Brazilian consumers, hurting its profitability. The oil
giant has also been rocked by corruption scandals allegedly
involving Brazil's main political parties. Petrobras shares have
fallen more than 80% from their May 2008 peak. Moody's this week
downgraded the company's debt to Baa 2 from Baa 1.
"Brazil is falling off the world oil map," Milton Costa Filho,
the executive secretary of the Brazilian oil, gas and biofuels
institute, an industry advocacy body, said at a conference here
last month. "Investors have other options now."
In debates and in stump speeches, both presidential candidates
have sought to assure oil companies that things would be better
going forward.
Ms. Rousseff's government recently announced that bidding rounds
for oil fields will happen more often, starting with an auction in
early 2015. The previous auction, held last year, the first in five
years, attracted just one bid. And officials in her ruling Workers'
Party have said they would look to simplify the country's complex
tax laws.
That is welcome news to Pal Eitrheim, the Brazil country
director for Norway's Statoil, which has a majority stake in one
producing oil field and holds seven exploration licenses in
Brazil.
"Countries that can offer predictable competitive terms will
attract international investment," he said. "That's a challenge
Brazil needs to be dealing with going forward."
Still, investors had been pinning their hopes on a change in
administration. The candidates had been locked in a technical tie
down the stretch, but two polls on Thursday showed Ms. Rousseff
opening a lead over Mr. Neves. Petrobras shares fell 5.6%.
Mr. Neves, of the conservative Brazilian Social Democracy Party,
has promised to end government fuel subsidies that have siphoned
profits from Petrobras. And he told The Wall Street Journal in a
recent interview that he would consider loosening
production-sharing rules implemented under Ms. Rousseff that have
curbed foreign investment. Currently outsiders must grant Petrobras
at least a 30% stake in all projects in Brazil's so-called pre-salt
offshore fields.
"I want to discuss the pre-salt exploration model, respecting
the current contracts," Mr. Neves said.
Despite the barriers to doing business in Brazil, the nation's
vast offshore deposits remain attractive to major oil companies.
Brazil has 13.2 billion barrels of proven oil reserves, 16th in the
world, according to the U.S. Energy Information Administration,
though some industry officials think the number could be much
higher.
"Companies always look at options around the world, and there
are options," said Guillermo Quintero, BP's regional president for
Brazil, Uruguay, Venezuela and Colombia. "But that doesn't mean BP
is discarding Brazil, at all. The money will go where the best
opportunities are."
Luciana Magalhaes contributed to this article.
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