Slowly but surely, barriers to international capital are coming down in Latin America.
Brazil appears set to renew its welcome to international capital for upstream oil and gas work. For several months, its Congress has debated constitutional changes that would end the longstanding monopoly of Petroleo Brasileiro SA (Petrobras), the state oil company. What this means is not clear. The Petrobras monopoly began in 1953. The lockout of foreign upstream capital started with adoption of the current constitution in 1988. In the interim, the government granted upstream service contracts to foreigners, some of which remain in force.
Congress is reported to be considering some form of licensing of exploration and development rights or reinstatement of service contracts. Also under discussion is wholesale removal of petroleum from constitutional control, which would seem to revoke the 1988 prohibition of foreign upstream capital. Petrobras, meanwhile, is looking for private joint venture partners for 271 projects worth an estimated $40 billion.
Change seems imminent in Brazil. Key questions are how much and when.
SAPPED DRY
Petrobras has gone the sad way of all state oil companies: sapped dry by its owner. With oil reserves concentrated in the offshore Campos basin, it has become a world leader in deepwater drilling and production technology. But it functions as the oil producing and processing agency of an entity that by nature consumes rather than creates capital. Inevitably, it now faces conflicting mandates: It must raise oil production to 1 million b/d by 1995 from 700,000 b/d at yearend 1993, which of course means more tax revenues, but also cut spending by half this year. It's a familiar story.
Congress apparently has awakened to the desperate capital deficiency not just of Petrobras but of the whole Brazilian economy.
Suddenly, the government's nationalistic embrace of oil and gas reserves doesn't feel so cozy. That officials now look outside of Brazil for capital reflects no great gush of political insight. Economic imperatives forced the decision. But that should not stop the international oil and gas industry from encouraging the move, which could have implications far beyond Brazil's borders.
Much depends upon the extent to which Brazil privatizes its upstream petroleum industry - if, indeed, privatization is at hand.
DIFFERING APPROACHES
Congress can look to neighbors for guidance. Argentina took the wholesale approach with Yacimientos Petroliferos Fiscales, and both oil and gas activity and the now - private YPF are flourishing. Venezuela took the piecemeal approach, not privatizing Petroleos de Venezuela SA but making selected ventures available under contract to foreigners. Success has been, well, piecemeal.
Whatever its plans for Petrobras, Brazil's Congress at least should open upstream ventures - all of them - to international equity participation. The country must renounce its constitutional hostility toward foreign capital. It possesses an abundance of natural resources and energetic people. Yet it is broke. The need for change in governance, beginning with xenophobic features of the constitution, cannot be clearer.
A Brazilian welcome to exploration and development investment would be no small event in the international competition for upstream capital - even in an oil price lull that is forcing companies to shorten their prospect lists. If it followed the Argentinian pattern of wholesale privatization, it could pressure hesitant Venezuela to get serious. And it would leave Mexico as Latin America's last major oil producer sacrificing prosperity on the altar of nationalism.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
