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The failure to allow Petrobras to raise domestic gasoline and diesel prices in line with world prices prompted its first loss in 13 years in the second quarter of 2012, and added more than $8-billion in 2012 losses at its refining unit. (SERGIO MORAES/REUTERS)
The failure to allow Petrobras to raise domestic gasoline and diesel prices in line with world prices prompted its first loss in 13 years in the second quarter of 2012, and added more than $8-billion in 2012 losses at its refining unit. (SERGIO MORAES/REUTERS)

ANALYSIS

How ‘hubris’ put a damper on Brazil’s energy spark Add to ...

It raised requirements for minimum Brazilian content in oil field development and required that Petrobras increase its already dominant share of exploration and production.

It also wanted to ensure the royalties were used for long-term purposes such as education, and avoid “Dutch disease” – an overvaluation of the local currency as a result of oil and other commodities exports that devastates local manufacturing industries.

In practice, the uncertainty generated by the law has halted, since 2008, what had previously been annual oil-rights auctions. Leases sold through such auctions helped more than double Brazilian output from 1997 to 2008.

“The government took a law that worked, that was responsible for our oil industry’s success, and changed it anyway,” said Adriano Pires, head of the Brazilian Infrastructure Institute, a Rio de Janeiro energy research group. “The result is a mess.”

The law’s changes in royalty rules touched off a dispute between oil-producing states and the rest of Brazil that could block auctions planned for this year.

The law also gave Petrobras the exclusive right to run all future exploration and output in the most promising areas of Brazil’s Campos and Santos Basins, home to nearly 90 per cent of Brazil’s output.

Companies that had considered long-term commitments to Brazil such as Devon Energy Corp. and Exxon Mobil Corp. have since scaled back Brazilian plans or left. In the case of Devon, easier- and cheaper-to-produce shale gas and oil in the United Sates seemed a better bet than Brazil’s complex offshore options.

MISSING TARGETS

This has placed more responsibility on Petrobras and it is already unable to meet its production and expansion goals under a $237-billion (U.S.) five-year plan, the world’s largest corporate-spending program.

Petrobras output has dropped for eight straight months. That has crimped cash flow just as the government is pushing it harder to build hundreds of ships, dozens of drill rigs and production platforms, and five new refineries needed to develop its new reserves.

Arguably the most damaging action, though, has been the government’s fuel-pricing policies. The failure to allow Petrobras to raise domestic gasoline and diesel prices in line with world prices prompted its first loss in 13 years in the second quarter of 2012, and added more than $8-billion in 2012 losses at its refining unit.

The government has kept fuel prices low in an effort to control inflation in the wider economy. Inflation is already running above 5.7 per cent on an annual basis, near the top of the central bank’s target range, as a tight labour market and historically low interest rates push prices higher.

While saying fuel prices are likely to rise this year, Finance Minister Guido Mantega – who is also Petrobras’s board chairman – has not set a date.

The impact on Petrobras shares has been significant. They now trade for less than they did before Petrobras made its first giant oil discoveries in 2007.

In 2008, Petrobras’s discoveries helped make it, along with General Electric Co., Exxon Mobil and Microsoft Corp., one of the world’s 10 biggest companies by market value.

Today, despite the discovery of billions of barrels of reserves and a $78-billion share sale in 2010 – the largest sale of new stock in history – Petrobras’s valuation on the stock market is about the same as Companhia de Bebidas das Americas SA (Ambev), a Brazilian brewer.

Artificially cheap gasoline has had another major, unintended side effect: It has hurt ethanol by making it uncompetitive. Sugar cane farmers responded by cutting production, and ethanol prices soared.

Ethanol demand peaked in 2009. Since then, prices have more than doubled, even as sales plunged 41 per cent.

Ethanol, which once made up more than a fifth of all Brazilian fuel sales and was more widely used than gasoline, was competitive on average in only two of Brazil’s 27 states in each of the 12 months through November, Brazil’s fuels distributors’ association said.

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