Latin America’s prospects, and post-corruption Petrobras

Alvaro Teixeira

Alvaro Teixeira is a civil engineer and geologist who worked 36 years for Petrobras on E&P projects in Brazil and abroad. He was E&P director of Braspetro, the former Petrobras international arm, responsible for several joint venture projects in Latin America, the North Sea and Africa, plus the Near and Far East.

Teixeira was general secretary of the Association of Latin American Oil Companies (Arpel), with headquarters in Montevideo, Uruguay. From 1994 to 2012, he was general secretary of the Brazilian Petroleum, Gas and Biofuels Institute (IBP), a private-sector association of companies and professionals dedicated to the technical and regulatory development of Brazil’s petroleum industry. 

Now heading his own oil consultancy in Rio de Janeiro, Teixeira spoke to World Oil about how Latin American countries are dealing with the new low-price reality, and about the changing relationship between the Brazilian government and Petrobras, in light of the recent corruption scandal.

World Oil: If you were an investor, which Latin American countries would you consider more attractive now, and why?

Teixeira: If I controlled a small- or medium-sized petroleum company, I would look for opportunities in the onshore basins of Colombia, Peru, Argentina or Brazil (Cretaceous coastal basins). Despite the fact that many of them are already in a mature exploratory stage, they are located in countries with stable and reliable regulations. They have developed infrastructure, as well as areas with good possibilities for discovering small- and medium-sized oil and gas accumulations. As far as looking for production opportunities in unconventional reservoirs (shale oil), I would wait for an oil price improvement before analyzing investment possibilities in Argentina or Colombia. 

In the case of a major company, I would bet on opportunities offshore Brazil (including the equatorial margin), and would study blocks being offered for tender on the Mexican side of the Gulf of Mexico. 

WO: How are the countries that you just mentioned affected by low oil prices?

Teixeira: In the short term, all these countries are, or will be, badly impacted by slumping prices. The margin between the market price of oil and the production costs in these countries also dropped drastically (to less than $20/bbl). In these cases, profitability will depend upon a sharp cost reduction, and mainly the productivity rate of the wells. It is important to mention Brazil’s pre-salt, whose producing wells have happily shown a high rate of production, on average more than 20,000 bbl/well. 

WO: What is your opinion about merging Petrobras’ International Department with E&P?

Teixeira: Petrobras is focusing its investments on increasing domestic production, especially in developing the large pre-salt discoveries. At the same time, Petrobras began to divest E&P assets abroad, such as what happened with 50% of its interest in Africa and, more recently, with 100% of the assets in Peru. According to information we have, to resolve its cash flow problems, the divestment movement will be expanded, as Petrobras revises its business plans up to 2018. 

WO: Given the requirements that Petrobras be the operator and have a minimum 30% stake in all new, pre-salt oil concessions, how does this affect foreign investments?

Teixeira: The contract for production sharing, as it was approved by Brazil’s Congress, has two specific aspects that were added to the model in place internationally. I am speaking about the questions of the single operator and the right of PPSA, the state company that represents the government, to have 50% of the votes and veto power in the decisions of the operations committee, responsible for operations and contracted investments. These regulations are not favorable, either for Petrobras, because it limits its freedom in directing pre-salt investments, or for private Brazilian or foreign companies, because the rules create a  quasi-monopoly in operations, as in the utilization of new technologies and the purchases of goods and services.

Recently, some important political developments took place in relation to the production-sharing model. The PMDB Party has proposed a bill in the lower house to cancel the production-sharing model and return to the concession framework for future tenders and contracts in pre-salt E&P. Mines and Energy Minister Eduardo Braga, also of the PMDB, said in a Senate hearing that Petrobras should have the option, but not the obligation, to participate in pre-salt exploration, and that Brazil should “revisit” the production-sharing model. PMBD is part of President Dilma Rousseff’s ruling coalition and the second-largest party in Congress.

The opposition PSDB Party, through Senator Jose Serra, proposed a bill to scrap the mandatory regulation that Petrobras be the only pre-salt operator and participate with a minimum 30% in pre-salt contracts. A separate bill in a Senate committee would remove the article from the 2010 law that makes Petrobras’ participation in the pre-salt a requirement. 

WO: What is your opinion about the regulation mandating local content for goods and services?

Teixeira: This is common practice in the majority of producing countries, but it must be improved continuously, so as to reach a balance between supply and demand, observing the local technological capacity, delivery deadlines and the goods and services prices. Local content in Brazil’s present regulatory framework, and for competition in tenders, raises the possibility of heavy fines, an important, additional risk for investors.

WO: With your long-term, broad experience in the petroleum sector, what policies would you suggest to minimize corruption? To completely end corruption would be utopian, since it is international and historical. Do you think that the jailing of some former Petrobras directors, and the legal probing of contracts with private companies for allegedly engaging in bribery and kickback  schemes at Petrobras, along with the investigation of some top politicians, are reducing impunity?

Teixeira: I am an optimist. There is nothing like a very serious crisis to encourage drastic and constructive decisions by the people in power. I hope that rigorous punishment of corrupt officials and workers will result in a new relationship between the Brazilian government, Petrobras and the private sector. I believe that Petrobras will become a bit smaller in terms of investments, but will bolster its core activities, with less political and ideological interference in a much stricter, more ethical  company administration.

WO: Do you believe that Petrobras’ corruption scandals can change the company’s technological innovation capacity that has enabled it to continue to set production records? Production from the pre-salt started in 2008 and had surged to 824,000 boed, as of last January, almost a third of the country’s total output. 

Teixeira: No. Petrobras’ crisis is not technical, it is administrative. The company has technical and professional personnel of the highest quality. This year, for the third time, Petrobras won an OTC award, in recognition of its excellence in offshore operations.