At the turn of the century, Brazil was amongtheworld`shottest prospects for petroleum sector investment.
In the span of only 4 years, the country`s petroleum sector was to be transformed from one marked by the monopolist bounds, fuels subsidies, and state oil company dominance to one distinguished by open markets, competition, and deregulation.
After a constitutional amendment paved the way in 1997, the Brazilian government approved Legislative Act 9,478, which ended the 43-year monopoly of state petroleum company Petroleo Brasileiro SA (Petrobras) and discarded the old energy regulatory structure. The law also created an agency to oversee the petroleum sector, the Agência Nacional do Petróleo (ANP). By the end of 1998, Legislative Act 2,705 was passed, creating a mechanism for concession contracts and a fiscal regime for the oil and gas industry. This, in turn, paved the way for a major offering of exploratory acreage spread across Brazil`s 29 sedimentary basins encompassing 6.4 million sq km. All of the available acreage in those basins was divided into areas that ANP would offer under an international tender and areas that would be set aside for Petrobras (particularly where it already was producing or had found oil and gas). Petrobras then started efforts to solicit participation by foreign partners in acreage that had been set aside for it-for joint ventures in both risked exploration and in development and production.
Suchinitiatives,combinedwith Brazil`s highly prospective untapped hydrocarbon potential, led UK consultant Robertson Research International Ltd. to place the country at the top of its annual rankings of most attractive targets for exploration and production investment.
But the tantalizing new opportunities in Brazil were not limited to exploration and production. Other opportunities emerged as regulatory barriers fell: in pipelines, gas processing, electric power, refining, marketing, and petrochemicals.
Such prospectiveness led ANP Director David Zylberstajn in early 1999 to predict that foreign companies would invest about $15 billion in Brazil`s petroleum sector during 2000-03. The ANP later estimated that the petroleum industry overall would invest $40 billion in Brazil during 2000-04.
As for the state petroleum company, Petrobras-long a leader in pioneering deepwater E&P technology-was not content to roll over for the demonopolization-deregulationjuggernaut,ashad some of its brethren elsewhere in Latin America. In Bolivia and Peru, for example, the state oil companies had been effectively neutered or fully privatized and were turning into E&P licensing or regulatory agencies; a similar effort was beginning in Colombia.
Instead, Petrobras took an aggressive tack in embracing the market opening and sought to position itself as a global energy company on a par with the leading multinational majors. While it expected to broaden its international portfolio, Petrobras also expected to continue being a major-if not the dominant-player in Brazil`s energy scene for decades to come.
While the two had butted heads on occasion, ANP and Petrobras worked together to promote an international road show for Brazil`s exploration rounds, the first of which was concluded successfully in 1999. After some early grumbling over fiscal terms under the initial license round, ANP sweetened terms and sought to broaden industry participation by offering special incentives to smaller firms. And Petrobras realized that, if its ambitious operating and financial goals were to be realized, it needed to aggressively pursue creative project-financing schemes. While the firm`s technical skills were beyond question, the fragile state of Brazil`s economy in 1999 rendered capital scarce in the country.
With the Brazilian petroleum industry`s transition to a free market expected to be completed by the end of 2001, the foreign investment boom was likely to be in full swing by then. And with the two major players eagerly embracing the market reforms and new competitive climate, they similarly were taking steps to ensure that Brazil`s petroleum sector could compete with those of other nations for investment capital.
As Donaldson, Lufkin & Jenrette put it, "The opening of Brazil`s oil sector is a rare boon for foreign companies, not only because of the tremendous opportunity here, but because, unlike many other so-called `oil rushes,` there is actual money to be made in Brazilian upstream projects."
E&P
It was unfortunate timing that ANP rolled out its first exploration licensing round in December 1998, just when oil prices were beginning to crater en route to 30-year lows, in real terms.
Just prior to the announcement of the first round, ANP and Petrobras hammered out a plan for how the state oil company could participate in the country`s future acreage offerings while still maintaining a level playing field for foreign entrants.
Under their accord, Petrobras was allowed to apply for blocks where it had conducted exploration and had shown the ability to be able to test prospects within 3 years. After talks covering the areas to be included, ANP and Petrobras signed agreements covering 397 E&P blocks. Petrobras was given the right to carry out work programs and establish the blocks` commercial potential until August 2001 or relinquish them; if the latter, the blocks would be returned to the pool for later licensing.
The first license round made available about 2% of Brazil`s sedimentary basins, covering 23 offshore and 4 onshore blocks. Conducted in June 1999, the round attracted 21 bids by 14 companies for 12 blocks. Initial bids totaled $180 million for E&P work, although subsequent work commitments boosted that total to about $286 million. ANP declared itself pleased with the result and estimated that ultimate investment emanating from the round would total about $1.2 billion.
The second round opened in September 1999 and covered 13 offshore and 10 onshore blocks. This time around, ANP incorporated new incentives in response to comments from prospective investors during the first round, including special provisions for independents, easing of mandatory drilling requirements, and relief for royalty and import duty regimes. The offering included some of the original set-aside acreage relinquished by Petrobras.
Apart from the exploration rounds, foreign multinationals had scrambled to forge E&P deals with Petrobras, covering everything from rank wildcats in underexplored onshore basins to multibillion-dollar deepwater developments leveraged by novel financing schemes. Among the companies joining with Petrobras in such efforts were Exxon Mobil Corp., Texaco Inc., Royal Dutch/Shell, BP Amoco PLC, Elf Aquitaine SA, Enterprise Oil PLC, Unocal Corp., Repsol-YPF SA, Coastal Corp., PennzEnergy Co., Amerada Hess Corp., Kerr-McGee Corp., Tecpetrol SA, Sipetrol SA, Nissho Iwai Corp., and Marubeni Corp. Petrobras also offered partnership contracts for a number of marginal oil and gas fields targeted for reactivation or production boosts via improved or enhanced recovery techniques and infill drilling.
All of this deal-making and deal-chasing spawned a genuine boom in seismic data gathering in Brazil, especially offshore. In late 1999, at least 15 seismic vessels were working off Brazil, conducting exclusiveandspeculativesurveys. Requests for offshore 2D seismic surveys totaled more than 2.5 million line-km at that time. The Brazilian Geophysical Society in mid-1999 estimated that companies would invest more than $400 million for geophysical studies in Brazil during the following few years.
There remained ample opportunity for further exploration in Brazil. The country in 1999 to date had seen only half as many exploration and development wells drilled as had Argentina and Venezuela-only 17,000 in all.
Pipelines to power
The race to feed a chronically undernourished power sector in Brazil, meanwhile, spawned a boom of another sort: integrated energy projects in which the players sought to import gas developed abroad and deliver it to grassroots thermal power plants.
Historically, natural gas had never held a market share in Brazil`s energy mix of more than 3%. With start-up of the first phase of the long-awaited Bolivia-Brazil gas export pipeline leading the way, the prospect of significant natural gas import capacity was at hand for Brazil.
At the same time, Brazil continued to suffer from regular power shortages, with brown-outs a frequent occurrence in the heavily populated and industrialized areas of southern Brazil, notably the Sâo Paulo region.
The country`s electricity demand was expected to increase at a rate of 5%/year through 2010, and officials had determined that hydropower would be unable to fill the gap. The demand increment and air quality concerns created an opportunity for natural gas.
Expectations were that natural gas would boost its share of the country`s energy mix to almost 8% by 2000 and more than 14% by 2010 from the 1999 level of only 2% (Fig. 1). In southern and midwestern Brazil alone, gas consumption would rise to more than 80 million cu m/day in 2010 from 10.6 million cu m/day in 1999 (Fig. 2).
While the power sector would absorb much of that incremental demand, the industrial sector-especially in and around Sâo Paulo-was also expected to account for much of those added volumes. There was no significant scope for residential gas demand growth, as no infrastructure existed for this sector.
Accordingly, much new gas processing capacity was expected to come on stream in Brazil, with NGLs produced in those plants serving as feedstock for Brazil`s burgeoning petrochemicals sector.
Downstream
With a rebounding economy, growing population, and burgeoning middle class, Brazilian demand for the consumer goods that are the lifeblood of the petrochemicals industry surged.
Ethylene production capacity at Brazil`s three main petrochemical complexes-Copene, in Bahia state; PQU, in Sâo Paulo state; and Copesul, in Rio Grande do Sul state-jumped to about 2.3 million tonnes/year in 1999 from 1.5 million tonnes/year in 1980. By 2002, as much as 1.55 million tonnes/year of additional ethylene capacity could be added with an expansion at Copesul and a new grassroots complex in Rio de Janeiro state.
The shift in Brazil`s petrochemical sector involved more than a capacity expansion, however. Greater emphasis was being placed on expansion into intermediate and further downstream petrochemicals.
Petrobras Quimica SA (Petroquisa) planned to develop another grassroots complex near the Petrobras Paulinia (Replan) refinery. From the Replan refinery FCC propylene feedstock, Petroquisa was toproduce250,000tonnes/yearof polypropylene. A second stage to the project, in conjunction with private Brazilian industrial giant Odebrecht Ltda., called for a plant to produce 1 million tonnes/year of ethylene in two 500,000-tonne/year trains.
On the refining side, Petrobras planned to increase its refining capacity to 1.8 million b/d by 2005 from 1.5 million b/d in 1999. There was seemingly little scope for foreign investment in a refining sector in which one company held 90% of the country`s capacity. However, that did not prevent a group led by Germany`s Thyssen AG from proposing a $1.7 billion, 100,000 b/d grassroots refinery in northern Brazil. It was likely that foreign investors would have better luck in marketing and distribution, where Petrobras held a market-leading 34% share.
Petrobras
State companies had three typical responses to the trend of privatization, deregulation, and demonopolization that marked Latin America`s energy sector during the 1990s: resistance (Petroleos Mexicanos), disappearance as an operating company (YPFB, Petroperu), and accommodation in a way that might be a path to privatization (YPF).
Petrobras took the last route and was positioning itself to be a global player on the energy scene, with plans to expand its oil and gas production and refining capacity abroad while it ventured deeper into gas distribution and electric power.
The "btu convergence" trend that marked the latter two sectors were linchpins of the Petrobras strategy to increase shareholder value by bolstering its return on capital employed. The company-held 14.77% by the private sector with the balance held by the government-lagged behind most of its competitors in a comparison of a number of shareholder value performance metrics (Fig. 3).
While Petrobras insisted it would never be fully privatized, it saw as inevitable the government`s plan to sell 34% of its voting stock on the open market. And ANP continued to lobby for the sale of some of Petrobras`s refineries and pipelines.
But regardless of how much of the company was held by the private sector, the company intended to compete in the same arena as the nonstate companies and had undertaken a number of steps-among them an adoption of US generally acceptedaccountingprocedures-to ensure that it was judged accordingly.
Politicalstabilityandeconomic reforms made it likely that Brazil and its state oil company would remain stars of the petroleum industry in the first decade of the new century.
 |
The P-34 floating production, storage, and offloading vessel handles oil and gas production in the pilot phase of development of deepwater Barracuda and Caratinga fields in the Campos basin off Brazil. Deepwater oil giants such as these were critical to Brazil`s plans to boost production to 1.5 million bo/d in 2000 from 1.2 million b/d in 1998. Photo courtesy of Petroleo Brasileiro SA.
 |
 |
The Petroquimica Uniâo (PQU) complex is one of Brazil`s three main petrochemical complexes targeted for expansion and downstream diversification. A resurgent economy and growing middle class were driving demand for petrochemicals in Brazil. Photo by Eliana Fernandes, courtesy of Petroleo Brasileiro SA.
 |
