Oliver L Campbell : Brazil loses
attraction for foreign oil companies
Chevron acquired Texaco in 2001 and with it a lawsuit alleging the latter had caused pollution in the Ecuadorean rainforest some 20 years ago. .An appeals court in Ecuador has confirmed damages of $18 billion against the company. Chevron states the damages have been trumped up fraudulently and has appealed against them.
Chevron now finds itself in trouble in Brazil as the result of a small oil spill of less than 3,000 barrels. A public prosecutor has fined the company the preposterous sum of $11 billion for a spill that did not reach the coast nor did any notable damage. Chevron is appealing the decision.
Both cases show the risks foreign companies take and how the cards are stacked against them when it comes to judicial proceedings in the local courts. The publicity given to the incident in Brazil will certainly discourage investment by oil and other companies. I have said before that just because Petrobras has outside shareholders and is quoted on a stock exchange does not change the fact it is a state company, As such, it will do the will of its political masters even if this is detrimental to its shareholders or partners in joint ventures..
It surprised me there was such a rush by the oil companies to invest in Brazil's offshore oil. Reaching the pre-salt reservoirs, some 20,000 feet below the ocean surface and located more than 150 miles out to sea, had to be a costly operation. The average production cost may be as low as $40 a barrel or as high as $60 a barrel depending on whom you believe. Petrobras believe it will be at the lower end but independent analysts say the cost may well be higher.
It took some time for the companies to realise this and now they have formed joint ventures to spread the risk. Others decided to offload acreage--Devon Energy sold its acreage to BP, Repsol sold a 40% share of its E&P subsidiary to Sinopec, and Shell sold two exploration blocks to Barra Energia. Anadarko Petroleum was hoping to sell its Brazilian assets in order to focus on its investment in the Gulf of Mexico and Africa, but could not find a buyer at the required price.
Why a company should rush to invest in complicated offshore operations with a cost, before taxes, of $60 a barrel is difficult to comprehend. It may provide a return with prices at $100 per barrel but what if prices fall? The companies must have options which produce better returns. Anadarko and Shell seem to think so with their investment in the Caesar-Tonga field in the Gulf of Mexico which has recently come on stream. As the technology for fracking and horizontal drilling improves, the cost of producing shale oil will go down and should be an attractive alternative.
Petrobras made a loss in the first quarter of 2012. Most of this was due to factors that do not affect the private oil companies e.g. importing gasoline and selling it at subsidised prices in the local market. However, Petrobras is not the most efficient of companies to have as a partner--the Abreu y Lima refinery, at present under construction, was originally estimated to cost $2 billion but is now estimated at a staggering $12 billion. For a capacity of 230,000 barrels per day, this must be the world's most expensive refinery.
What is my message? Though doubtless Brazil has plenty of offshore oil, the cost per barrel of extracting it is probably the world's highest. Combine this with a government that is not particularly friendly and lets prosecutors harry the private companies over minor incidents, and companies will think carefully before investing in Brazil for offshore oil. It will be a great shame if Brazil goes the way of Argentina, Ecuador and Venezuela in the way it treats foreign oil companies.
Oliver L Campbell
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Oliver L Campbell MBA, DipM, FCCA, ACMA, CGMA, MCIM was born in 1931 in El Callao, Venezuela where his father worked in the gold mining industry. He spent the WWII years in England, then in 1953 returned to Venezuela and worked with Compañía Shell de Venezuela (CSV). He spent 15 years in the oilfields and ended up as Company Financial Controller. Upon nationalisation of the oil industry, he went to Petróleos de Venezuela (PDVSA) as its Head of Finance. In 1982 he returned to England and was the Finance Manager of the British National Oil Corporation prior to its privatisation. He then worked as an oil consultant and retired in 2002 after fifty years in the oil industry. Petroleumworld does not necessarily share these views.
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Petroleumworld News 08/20/2012
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