Replies to post #121 on The Rising Influence of Rising Affluence

[DewDiligence]

PBR – Neither I nor the foundation I advise owns the common or the preferred stock because I’m skittish about being a minority shareholder and I’m even more skittish about being a minority shareholder when the controlling shareholder is the government.

Whether the above is a valid reason for avoiding a company whose E&P prospects are as exciting as PBR’s is debatable. However, I think that owning such stocks as HES and APC confers enough exposure to offshore Brazil that one does not need to own PBR in order to participate.

p.s. The fact that the oil from Tupi is light and sweet may be less consequential than it seems. Refineries around the world are being upgraded to handle thicker, sourer crude, and hence the price premium for Brazil’s oil relative to, say, Venezuela’s will likely be small.

[DewDiligence]

Brazilian Oil Well Isn't Entirely Dry

[They’re speaking figuratively, not literally.]

http://online.wsj.com/article/SB124568373381137393.html

›JUNE 22, 2009, 12:02 P.M. ET
By RUSSELL GOLD

The stock market's love affair with Brazilian offshore oil exploration is going through a rocky patch. But the market may be overreacting.

The romance began in late 2007, when Petroleo Brasileiro SA announced the Tupi discovery, the largest oil find in a decade. Enthusiasm for companies with nearby offshore leases -- BG Group PLC, Hess Corp., Royal Dutch Shell PLC and Exxon Mobil Corp. -- grew as investors hoped they, too, would find oil.

Then came the Guarani well, in which Exxon and Hess both claim a 40% stake. The well was drilled to 17,800 feet -- plenty deep to find oil -- but Exxon didn't report finding any evidence of oil or gas.

Exxon still isn't declaring the well a dry hole; it's cutting out a core sample of the rock to study it better [#msg-38360380]. But investors already are convinced it's a duster. Hess saw its share price plunge 11% on one day earlier this month. Since then, it has fallen another 12%.

Investors shouldn't get too down on Hess, Exxon and other Brazilian hopefuls just yet. Neil McMahon, an oil analyst at Sanford Bernstein, points out the companies are gaining valuable knowledge that will be critical to further exploration efforts in the Brazilian offshore and elsewhere. The same geologic activity that deposited oil off of Rio de Janeiro has led to some major discoveries in Angola.

The potentially huge profits in the Brazilian-West African offshore play is the best thing going for publicly traded oil companies. Having the information to avoid overpaying for leases or bidding in the wrong place is critical. So while the Guarani well is a disappointment, it could yet yield some real benefits.‹

[DewDiligence]

John et al re PBR: This write-up from last week illustrates the
kinds of games the government of Brazil can play with PBR’s
minority shareholders. In effect, the government can transfer
wealth from PBR to a new government agency.

http://www.ft.com/cms/s/0/c86245de-5620-11de-ab7e-00144feabdc0.html

›Brazil Readies Oil Reserves Law

By Jonathan Wheatley in São Paulo
June 11, 2009

The Brazilian government is preparing legislation that will set new regulations for the country's enormous off-shore “pre-salt” oil reserves, discovered in 2007.

International oil companies have been anxiously awaiting the regulations as they cover some of the world's few big unexploited oil reserves, which industry leaders say will be as significant as the North Sea discoveries of the 1970s.

But the proposed legislation has caused alarm among many in the industry, who fear it may be open to political interference and give unfair advantage to Petrobras, Brazil’s government-controlled but publicly traded oil company.

In a recent interview with the Financial Times, Edson Lobão, mines and energy minister, said international oil companies should “prepare their treasury reserves” as the government would introduce regulations in time to auction new concessions in the pre-salt fields next year.

The statement surprised many in the industry, who had expected the process to take longer.

The ministry confirmed on Wednesday local press reports, saying three bills were being prepared to go before Congress. They would create a new, 100% state-controlled oil company to take ownership of the fields and award concessions; production sharing agreements in the fields, in which oil companies would give part of the oil they produced to the government, replacing the existing concession system in which companies take ownership of whatever oil they discover; and a fund to channel proceeds from the fields to social spending.

Several concessions in the fields were sold before their potential became clear. Almost all are controlled by Petrobras, in partnership with foreign companies.

Those concessions will not be affected by the new rules and are likely to keep Petrobras and its partners busy for several years.

But because about 60 per cent of Petrobras’s capital is held by private investors, the government has been keen to create a new company to secure ownership of the remaining pre-salt fields for the Brazilian state. Government officials estimate that pre-salt concessions already granted could contain more than 50bn barrels of oil; the remaining area is likely to be much larger.

The proposed new structure is based on that in Norway, where Petoro, entirely controlled by the state, oversees the industry in which StatoilHydro, controlled by the state but with private investors, plays a dominant role.

Brazil’s ministry said the new regulations would follow the Norwegian model, including measures that allow the new state company to grant concessions without putting them out to tender – a move widely seen as protecting Petrobras from being squeezed out by wealthier foreign competitors.

“This is worrying,” said Eric Smith of the Tulane Energy Institute in New Orleans. “There is likely to be a lot less transparency in Brazil than there is in Norway. This could allow for political interference and favours.”‹

[DewDiligence]

Here’s an update on Brazil’s plans to hog deepwater E&P.
Until this is sorted out, I would not recommend being long
either the common or the preferred shares of Petrobras.
(See #msg-38956800 for a related article from June.)

http://online.wsj.com/article/SB124952371016709829.html

›Brazil to Control Big Oil Find

AUGUST 6, 2009
By ANTONIO REGALADO

A Brazilian government proposal for exploiting recent deep-water oil discoveries calls for direct state control and is expected to give a key role to oil company Petroleo Brasileiro SA.

The new plan follows the discovery off Brazil's coast of giant pools of oil. They are among the largest petroleum finds in recent years, and could make Brazil into a significant energy exporter.

Brazil's government plans to greatly increase its role in managing huge deep-water oil finds off the coast. Details leaked in recent weeks indicate that Brazil will adopt a strategy common in the Middle East and other major oil-producing regions, in which companies sign production-sharing deals that give most of the barrels to the host government.

The plan appears to favor state-controlled Petrobras over foreign oil companies, but analysts say that could be a mixed blessing for the company.

An expert committee presented recommendations to President Luiz Inácio Lula da Silva on Wednesday. Following the meeting, however, officials said significant disagreements continued.

The plan has proved controversial because it marks a shift from Brazil's system of competitive bidding for oil-exploration concessions, a model followed by the U.S. Such concessions have increased Brazil's oil output.

Auctions of exploration rights in the promising deep-water fields were halted in 2007, freezing out new bidders. "There is an effort to bring the petroleum sector under state control," says Adriano Pires, director of the Brazilian Infrastructure Center, a consulting firm in Rio de Janeiro.

Brazil's governing Workers' Party is counting on the discoveries to increase its chances of holding on to the presidency in elections next year. Mr. da Silva has said the expected windfall could be used to attack poverty and improve education.

Edison Lobão, minister of mines and energy, said last week that the new regulations "aren't designed to hurt anyone, but to benefit Brazil."

Shaping the plan is the belief that drilling in the new deep-water areas, while costly, is essentially a no-risk proposition because of the quantity of oil there. [HES and XOM would probably disagree with this!] That has triggered calls among Mr. da Silva's political base to reduce the role of foreign firms and increase the government's take.

But some believe the plan underestimates the difficulties of discovering oil [no kidding]. Exxon Mobil Corp. said last month that it had failed to find any commercial quantities of oil or gas at its Guarani well off Brazil [which caused HES’ share price to tank temporarily (#msg-39351839)]. Exxon is operator of a promising deep-water field there under a concession it won in a prior round of bidding.

The plan presented to Mr. da Silva calls for a new state enterprise that would control the oil fields, then contract with companies to pump the oil out. The government's portion would pay for social projects.

Brazil needs the new state company because Petrobras, though controlled by the government, also has shares that trade in New York and São Paulo. That has prevented Mr. da Silva from turning the deep-water fields directly over to the company.

Some government ministers have proposed a major role for Petrobras, including assigning the company to operate all of the new deep-water fields, keeping foreign companies as passive investors.

If that proposal makes it into the final rule, it isn't expected to sit well with big oil companies. Brazil's oil fields are among the most attractive in the world, and oil companies would be hesitant to give up control over investment schedules and technical details.‹