Amid high hopes, Brazil's oil industry faces setbacks

McClatchy NewspapersMarch 8, 2012 

SAO PAULO, Brazil — Visiting Brazil last year, President Barack Obama expressed high hopes for the country's massive offshore oil reserves, offering technical support and pledging that "when you are ready to start selling, we want to be one of your best customers."

Yet despite high expectations, Brazil's promise as a long-term energy provider has run into significant problems that threaten the country's continued economic growth and U.S. hopes that Brazil could become an alternative energy source to the volatile Middle East.

Over the past year, Brazil's state-run oil giant Petrobras' financials have deteriorated and production setbacks have forced South America's largest economy to increase its oil imports. Recent offshore spills have raised questions about whether Brazil has implemented adequate safety measures for the deep-sea oil exploration that's supposed to make Brazil the world's fifth largest oil producer by 2020.

Petrobras announced last month that its profits during the fourth quarter of 2011 fell by 52 percent compared with the same period a year earlier. The company's total 2011 profit also decreased compared with 2010 — due mainly to production problems coupled with an unexpected rise in demand.

Last month, a leading Brazilian bank, Banco Bradesco, lowered its rating on Petrobras, citing short-term production problems.

As it is, Petrobras has limited refinery capacity, even exporting its crude oil to as far away as Asia only to import it back as gasoline. Additionally, a boom in auto sales last year — combined with a drop in production in Brazil's much-touted ethanol industry, which has been available at the pump since the 1980s as a fuel alternative — raised the demand for gasoline.

Government pressure not to raise gasoline prices also limits Petrobras' revenues, particularly amid the current high international crude prices. But when it imports oil, as it has done in recent months, Petrobras pays those international prices.

Deutsche Bank cited weak production and this pressure to keep prices steady for Petrobras' disappointing performance, predicting that "production trends are likely to remain lackluster in 2012, following two years of weak growth."

Petrobras and Brazil's energy sector have been fundamental to the country's rise.

In the United States, the prospect of a friendly democratic nation as an oil supplier has attracted attention from some lawmakers on Capitol Hill. U.S. firms such as General Electric, Baker Hughes and Halliburton all have large research efforts here and maintain partnerships with Petrobras.

House Natural Resources Committee Chairman Doc Hastings, R-Wash., recently visited Brazil with House Speaker John Boehner and afterward wrote a paean to the country for The Hill newspaper, praising the "Brazilian approach to energy policy," which he said had created jobs and strengthened its national security.

Petrobras has become a respected player in deep-sea oil exploration. Last week Petrobras said that it had installed the first floating production storage offloading vessel platform in the Gulf of Mexico, where it commenced production late last month in the Deepwater Cascade field about 155 miles off the coast of Louisiana.

In Brazil, Petrobras has committed $225 billion, made several technological advances and found oil within three years in the first deep-sea field that it explored — considered impressive within the industry.

But Brazilian law requires that Petrobras operate and own at least 30 percent of each "pre-salt" block — so called because the deep-sea oilfields lie below salt layers that are thousands of feet thick, requiring huge resources and technical precision to extract oil from.

The law has drawn criticism from some experts who question whether the practice is anti-competitive — and whether Petrobras has enough resources, such as oil rigs and technical know-how, to adequately develop the deep-sea fields.

In a paper last year, Norman Gall, a longtime Brazil observer and executive director of the Fernand Braudel Institute of World Economics, wrote that the requirement "would strain Petrobras's already stretched manpower, financial and technical capabilities."

Some also are concerned about accountability, particularly if something goes wrong. Gall wrote that Petrobras' preferred status "fortifies a politically protected state capitalism with broad discretionary powers and little transparency."

This year alone Petrobras has had at least three oil spills, including one in the pre-salt area, although all are considered minor. Brazil is still grappling with the fallout from a Chevron oil spill in November in a deep-sea field called Frade, 230 miles off the coast of Rio de Janeiro.

Brazil's National Petroleum Agency, the country's regulatory agency, estimated that between 2,700 and 3,000 barrels of oil spilled into the ocean. The agency has suspended all Chevron drilling in Brazil.

The U.S. oil giant — along with rig operator Transocean, which also operated the rig in the 2010 Deepwater Horizon spill off the Gulf of Mexico — face a lawsuit brought by a federal prosecutor seeking $11 billion in damages.

While observers believe that Chevron bungled its response, Brazil's reaction also revealed important deficiencies within the country including a lack of self-regulation within the oil industry and a national regulatory agency that's under-resourced and not sufficiently independent from Petrobras to investigate accidents, according to Claudio Araujo Pinho, a Brazilian attorney and oil expert.

For example, Petrobras owns 30 percent of the Frade oilfield but has yet to explain its role in the Chevron spill — nor has it faced the same penalties.

The country also has yet to determine a new way to equitably distribute oil royalties among all states, which has delayed the awarding of new concessions.

Whether Brazil can overcome these challenges now falls on the shoulders of Maria das Gracas Foster, 58, who last month became the new president of Petrobras and the first woman to head any oil major company.

Foster, who rose from a childhood in a tough Rio de Janeiro shanty town, has more than 30 years of experience with the company. Right after she was nominated Petrobras stock surged, and Deutsche Bank said in a research note that the market "welcomed an appointment based on technical credentials rather than politics."

(Sreeharsha is a McClatchy special correspondent.)

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