Now comes the hard bit

“A HUGE success” was how Brazil’s finance minister, Guido Mantega, described it; and he was not exaggerating. Despite months of doubts among investors about Petrobras’s mammoth share offer, the company said on September 24th that stock worth around $70 billion had been taken up—a world record, and more than three times the size of Agricultural Bank of China’s giant share offer two months ago. Of that total, almost $43 billion-worth of the shares will be taken up by the government in return for giving Petrobras the right to develop 5 billion barrels of reserves.

The share issue is an important element in Brazil’s plan to exploit the sizeable oilfields it discovered off its coasts in 2007. These “pre-salt” fields (so called because they are under a thick layer of salt, deep below the seabed) are thought to contain enough oil to make Brazil a significant energy exporter, albeit not quite on the scale of Saudi Arabia. Petrobras is planning to double its output to 5.4m barrels a day by 2020. If so, the government—which owns a controlling stake in Petrobras—will enjoy a gusher of revenues. President Luiz Inácio Lula da Silva wants to spend this money to transform Brazil into a developed country, through projects to boost education, welfare and infrastructure. This grand scheme has also been a key part of his campaign to get his chosen successor, Dilma Rousseff, elected next month (Lula is constitutionally barred from standing again).

Although $70 billion is a sizeable sum, it is only a fraction of the $224 billion that Petrobras intends to spend over its current five-year plan, which runs to 2014. The company will still have a fairly high debt load after the share issue, and investors will still have some doubts about the scale of the challenge it is taking on—and about Brazil’s future energy policy. Such worries have contributed to a fall of about a quarter in Petrobras’s share price since the start of the year.

Because of the election campaign Lula and his candidate (who was energy minister until recently) felt obliged to drive a hard bargain with Petrobras, to avoid any suggestion that its outside shareholders were getting a generous deal at the Brazilian taxpayer’s expense. The government has swapped its 5 billion barrels of reserves for shares at an effective price of $8.51 a barrel—which is about two dollars more than industry analysts think would be fair. Of course, it will cost a lot more than this to produce the oil, given the difficulties of drilling in deep waters-just ask BP. Petrobras thinks it can exploit the pre-salt oil profitably as long as the world oil price is above $45 a barrel, (it is currently trading at about $30 more than this). This seems optimistic, to say the least. At a recent conference in Rio for foreigners considering investing in Brazilian infrastructure, a figure of $65 or so was generally thought to be nearer the mark.

Changing the rules

The government is convinced that there is much more oil still waiting to be discovered off Brazil’s coasts, so it intends to change the way it licenses exploitation, to maximise its take from the new fields. Until now, oil firms have bid for concessions under which they pay taxes and royalties but keep the oil they produce. In future the oil will belong to a newly created state firm and Petrobras will be the sole operator (although it will be allowed to bring in other oil firms as partners).

Finding enough qualified people for such a big expansion will be difficult enough for Petrobras. The government is making things harder still by insisting that 65% of future contracts for drills, ships, platforms and so on must go to Brazilian firms. The country’s shipbuilding and oil-services businesses are growing fast, but they too may struggle to rise to the challenge.

A bigger fear is that this is just the start of a revival in wholesale government meddling in industry. Such worries will hardly be eased by the news that, since other state firms and federal agencies have taken part in Petrobras’s share issue, the government’s total stake in the firm will rise from 40% to about 48% (it already has a majority of the voting shares). Ms Rousseff, who looks likely to win the presidential poll, remains an unknown quantity. A former revolutionary who fought the country’s 1964-85 military dictatorship, she has sounded rather keener on a strong state than Lula, though she may turn out to be a pragmatist, as he did after first getting elected in 2002. Although some countries have kept a tight grip on their national oil companies and done well out of it, Brazil need look no further than Venezuela and Mexico—two countries with ample oil reserves but feeble, politicised state oil firms and a notable lack of progress towards first-world status—to see the risks it may be running.

From The Economist:

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