Brazil’s Oil Euphoria Hits Reality Hard

RIO DE JANEIRO, Brazil — When fields said to hold billions of barrels of oil were discovered off the coast here, exuberant government officials said the deep-sea prize would turn Brazil into a major energy player.

Six years later, the outlook for Brazil's oil industry, much like the Brazilian economy itself, is more sobering. Oil production is stagnant, the state-controlled oil company, Petrobras, is hobbled by debt and foreign oil companies are wary of investing here.

"It's funny, a few years ago, everybody loved Brazil," said Roger Tissot, a veteran consultant on Latin America energy. "And now it seems the love is gone."

Brazil once saw itself as an up-and-coming oil power that would help meet the world's demand, but it now faces a hard reality and might have to scale back its pretensions, former energy officials, oil executives and advisers say.

The country's deep-sea bonanza has suddenly become less alluring to big, rich oil companies that had been excited about Brazil. Other promising prospects around the world have emerged instead, from fields in Africa to the shale deposits unlocked by hydraulic fracking in the United States to the tar sands of Canada.

"These companies have the financial muscle and engineering capacity and technologies to move around the world," said Ramon Espinasa, an oil specialist at the Inter-American Development Bank in Washington. "They are able to pick and choose. And that explains why they are not in Brazil."

Some oil experts even say Brazilian energy planners, who spoke of unproven reserves that could rival those of some of the biggest oil powers, may have vastly oversold the deep-sea bounties, which are called the pre-salt because the oil is under a shifting cap of salt.

"There were a lot of government authorities saying the reserves of Brazil were 50 billion barrels, 100 billion barrels, even 240 billion barrels, more than Saudi Arabia," said Wagner Freire, an oil geologist who served 35 years at Petrobras, where he oversaw exploration and production. "Lots of wells have been drilled in the pre-salt area, and the well comes up dry."

After the discoveries in 2007, then-President Luiz Inacio Lula da Silva famously said God had given Brazil bounties that would propel the country's modernization. Petrobras was among the world's 10 biggest companies, admired by investors such as George Soros, and a Wall Street darling.

"Brazil drew a winning lottery ticket," an overjoyed Lula said.

Petrobras officials envisioned a plan that would give Brazil elite status among the world's energy producers, with production rising from 2 million barrels a day to 5.3 million in 2020, said the president of the company at the time, Jose Sergio Gabrielli.

The projections are more limited today but still ambitious: 4.7 million barrels a day within a decade, according to Energy Minister Edison Lobão.

"Considering that at that time our consumption will be close to 3.1 million barrels per day," Lobão said, "we will be exporting something [like] 1.6 million barrels of oil per day."

That is the total amount of crude exported by Venezuela, a founding member of OPEC.

Heavy burdens

But some oil experts say that forecast is unrealistically optimistic.

"Forget about that data," said a high-ranking official with an international financial institution who has discussed the issue with Brazilian energy officials and advised oil companies.

The official, who spoke on the condition of anonymity because of the delicate nature of relations with energy officials here, said Brazil has found no new basins since 2008 and faces the overwhelming challenge of developing the pre-salt at a cost $237 billion.

"People are telling us Petrobras won't be able to handle this," the official said of what is considered the world's most expensive corporate investment project.

Petrobras is saddled with mandates and heavy government interference that analysts say have overburdened the company.

To revive the shipbuilding industry, for example, Petrobras and its partners must use oil platforms and other heavy equipment built in Brazil — which has led to huge cost overruns and equipment shortages.

Petrobras is required to be the lead operator and is required to have a minimum 30 percent stake in any new pre-salt fields, which has encumbered the company with huge financial responsibilities while driving potential foreign partners away.

Petrobras is also forced to import and sell gasoline at below-market prices, a policy designed to control inflation. But that has cost the company $20 billion since 2008.

"That loss in revenues that the government imposes on Petrobras only obligates Petrobras to take on more debt," said Adriano Pires, a former adviser to the government's oil regulator, the National Petroleum Agency. "The government uses Petrobras for its economic and electoral objectives."

The company has responded by selling off assets in Peru, Colombia, Africa and the Gulf of Mexico. Petrobras is also putting off developing other potentially lucrative oil fields here, such as the 1 billion barrel Sergipe deposit in the northeast.

Petrobras chief executive Maria das Graça Silva Foster said the company's short-term financial situation "is comfortable," with $58 billion in cash on hand. She also said the Petrobras board, which is chaired by Finance Minister Guido Mantega, "is keeping a close eye on the debt level and is working to make the cash generation more predictable and reduce the company's leverage."

But the financial markets increasingly see an overextended company. Petrobras stock has recently tumbled, part of two-year trend that has seen the company lose a third of its value.

"They didn't lose the investment grade, but there are some doubts about the capacity of Petrobras paying its debt and having enough money to invest," said David Zylbersztajn, an expert on the economics of oil companies who formerly directed the National Petroleum Agency.

Successes and setbacks

The pre-salt is producing 300,000 barrels of oil a day, but that is far less than had been forecast. And nationwide, production remains flat.

In one stark episode that shook confidence in the oil sector, the country's second most important oil company, OGX, which recorded Brazil's biggest initial public offering in 2008, declared bankruptcy in October. It turned out that most of its wells had come up dry.

Despite the setbacks, Foster said Petrobras will soon have new platforms operating in the pre-salt area, significantly increasing production next year and generating revenue to finance investments. In a lecture in Rio in October, she said that 144 exploratory wells have been drilled in the pre-salt and 82 percent found oil.

"Our exploratory success is impressive," she said.

That same month, the government auctioned off its Libra field, the first auction since 2008. A consortium of companies that included Royal Dutch Shell, France's Total and two Chinese giants won the license to partner with Petrobras to develop Libra, which is thought to hold up to 12 billion barrels of crude.

"It is difficult to imagine a bigger success than this," Magda Chambriard, director of the National Petroleum Agency, told reporters afterward.

But Chambriard earlier had said she expected more than 40 companies to participate. Only 11 did, and not even half of those opted to bid.

Perhaps most startling to energy experts here were the companies that didn't participate: Exxon Mobil, Chevron and BP, multinationals with capital to develop complex oil basins.

David Mares, an energy scholar who is writing a book about resource nationalism in Latin America, said Brazil may have to rewrite terms to attract more investors at the next auction.

"The government has to get this oil flowing sooner rather than later," Mares said.

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