Petrobras Defends State Deal

SAO PAULO and NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Sept. 10, 2009

Petroleo Brasileiro SA has embarked on a global campaign to assure investors and oil-industry partners that they won't get stiffed in a Brazilian government plan to funnel more revenue from the nation's massive deep-water oil finds into government coffers.

Chief Executive Sergio Gabrielli said he plans to soothe U.S. and European investors and executives during a week of meetings that begin in New York on Monday. His top priority: persuading executives at major oil companies that they will have an important role in developing the fields.

"We have many important industry partners who will be able to share in the reserves," Mr. Gabrielli said in an interview Wednesday. All of the nation's existing contracts will remain in force, he said.

It's an important distinction in an era of resource nationalism. As oil prices rose in recent years, Russia, Venezuela and Ecuador rewrote oil-industry rules in favor of the state and altered pre-existing contracts, hurting relationships with international oil companies. By distinguishing itself from such actions, Brazil is seeking to ensure access to the corporate know-how necessary to exploit hard-to-reach oil deposits.

Petrobras shares tumbled last week after the government announced plans to acquire additional shares in Petrobras and pay for them with rights to five billion barrels of oil in an unspecified oil field, instead of with cash. The announcement provoked concern about how the rights would be valued, especially since the oil discovery lies deep beneath the seabed under a layer of shifting salt. While the Brazilian government is Petrobras's controlling shareholder, a substantial number of shares trade in Sao Paulo and New York.

Comments by Brazilian politicians made matters worse. A Brazilian senator last week told reporters that the oil rights will be worth around $10 a barrel. Morgan Stanley estimates fair value at closer to $5.80.

"The timing of this, the valuation, there is a lot of uncertainty," said Conrad Saldanha, manager of the Neuberger Berman Emerging Markets Equity Fund, 3.5% of which was in Petrobras shares as of July 31. "But the fact that this is one of the largest oil finds we've seen is positive news."

Mr. Gabrielli, a bearded 59-year-old academic who holds an economics doctorate from Boston University, said his firm will pay "fair value" for the development rights. He said he plans to hire established appraisal firms to help make sure that happens. The oil industry relies on a small group of oil appraisal firms to certify reserves and provide information in oil-rights auctions. Hiring one or more of these firms may help boost investor confidence, analysts said.

Investors this week bid Petrobras shares back to nearly where they traded before rumors of the government's plan began circulating. "The question is how much will be paid for the five billion barrels. But over time, the company has done right by its shareholders, and the government has been very pragmatic," said Craig Shaw, co-manager of the Harding Loevner Emerging Markets Fund, which holds Petrobras shares.

Mr. Gabrielli's trip may begin on a high note. Petrobras said late Tuesday that tests showed that its Guara deep-water field holds as many as two billion barrels of oil.

Mr. Gabrielli said Petrobras's free-market ethos will remain intact, even as the government increases its stake. Brazilian law prohibits Petrobras from undertaking unprofitable ventures, which will prevent the federal government from using its increased authority over the oil industry from winnowing away Petrobras earnings, he said.

After making the biggest oil discovery in more than three decades, Brazil is seeking a bigger share of oil revenue in order to fund an ambitious social agenda. Under the proposed rule changes, Petrobras is guaranteed a 30% stake in the development of the new fields. The federal government will also take direct stakes in the fields' production and launch a fund to pay for education, social welfare and other programs.  

Copyright (c) 2009 Dow Jones & Company, Inc.


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