Will Brazil Spur Foreign Oil Companies In Favor Of Government Expansion?

Western oil companies may soon find themselves cut off from the development and production of oil from Brazil’s sizeable underwater reserves, as the South American nation attempts to funnel more of its potential energy revenue into government coffers. But by spurring Big Oil’s power players, Brazil could be putting its output at risk.

The Brazilian government yesterday (Tuesday) said it wanted its national oil company Petroleo Brasileiro SA (NYSE:PBR), commonly known as Petrobras, to control all future development of the deep sea fields discovered in 2007, The New York Times reported. International geologists estimate these fields could hold tens of billions of barrels of recoverable oil.

However, by shutting out better equipped and more experienced companies such as Exxon Mobil Corp. (NYSE:XOM) or Royal Dutch Shell PLC (RDS-A) Brazil risks impeding the development of its new crude bounty.

Large portions of the reserves lie beneath about 20,000 feet of water, shifting sand and a thick layer of salt. This “pre-salt” region stretches hundreds of miles along the Brazilian coast and is the biggest reserve being developed in the world today. Drilling in depths like those found in Brazil’s Tupi oil field are expected to be among the most complicated sets of projects in the history of the oil industry, The Times said.

Additionally, other countries that have taken their oil production in “house” to help fund social programs - such as Venezuela, Bolivia and Ecuador - have seen that production stagnate or decline.

“The timing and scale of the development of the pre-salt will be one of the most significant factors for the global oil balance in the next decade, even more so after 2020,” Daniel Yergin, chairman of HIS Cambridge Energy Research Associates told The Times. “If it doesn’t happen it will be a big setback for Brazil in terms of revenue, and a significant loss for the world in terms of new oil supplies.”

Brazil’s President Luiz Inácio Lula da Silva’s plan to gain greater control over the oil will face stiff opposition in Congress, where opposition leaders say they will push to delay the plan. This would deny da Silva a victory that could politically boost Dilma Rousseff, his chief of staff and chosen candidate to succeed him in next year’s election.

Incidentally, Rousseff is also chairwoman of Petrobras’ board of directors.

“The government is going to use every ideological, nationalist and emotional argument to try to get this approved before next year’s election, but it is going to be very difficult for it to pass,” Tasso Jereissati, a senator from the Brazilian Social Democratic Party who opposes the government’s proposal.

That’s part of the reason Money Morning Contributing Editor and Emerging Market Specialist Horacio Marquez, who in April recommended buying Petrobras shares “would not bet the farm” on major participation from international oil companies.

“Once these discoveries start producing, it will put Petrobras in a position to become a major oil exporter,” Marquez said. “And it will change the balance of power in Latin America away from Venezuela and in favor of Brazil.”

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