Brazil energy sector poised for post-crisis boom
Published: 17 November 2008
Promise and potential awaits oil industry
Despite the dramatic recent drop in the price of oil, resulting in global production slowdowns, Brazil's oil and gas sector is well positioned to contribute significantly to long-term energy needs.
With financial services provided by HSBC, Petrobras, Brazil's largest oil firm, and newcomer OGX Petròleo, are positioned for continued growth in the post-economic-slowdown global oil industry.
Landmark finds
In November 2007, Brazil made world headlines when it announced the discovery of an offshore field with huge oil and gas reserves. Located off the coast of Rio de Janeiro, in the Santos Basin, the Tupi oil field has an estimated five to eight billion barrels of recoverable light crude oil, according to Brazil's national oil company, Petraleo Brasileiro SA, (Petrobras). Analysts have described Tupi as possibly the greatest oil find in the western hemisphere in over three decades.
Overnight, international interest in Brazilian offshore oil soared, prompting Brazilian President Luiz Inacio Lula da Silva to proclaim "God is Brazilian".
All this is good news for Brazil, which is now positioning itself as an oil exporter, after being a net importer for most of its economic history. Until the 1970s, Brazil produced only a fraction of its domestic requirements.
With the first global oil shock of 1973, the government stepped up exploration efforts to find fuel resources within Brazil's borders. Onshore reserves looked less promising than offshore, and exploration was focused in territorial waters. These efforts were rewarded when large offshore blocks were identified as potentially rich in oil and gas and by mid-2006 Brazil was self-sufficient in crude oil production.
Currently, production growth at state-owned Petrobras is outpacing domestic demand, allowing the firm to export crude. Petrobras' exploration and production sector represents the largest segment of the company's operations and the most profitable. As Brazil's dominant oil company, and the most experienced in deepwater oil exploration, Petrobras held a monopoly on the country's oil activities until 1997 when the government opened the sector to competition and released oil prices from state control.
Sources: Petrobras, HSBC
In January 2008, Petrobras sold USD750 million worth of bonds maturing in 2018. HSBC acted as a joint bookrunner in the transaction, helping the oil supplier raise long-term funding at a record low yield.
Operating in a difficult market, HSBC helped Petrobras stand out among its regional rivals, highlighting the company's credit quality, scarcity value and market recognition. This enabled competitive pricing, achieving the lowest ever issuance yield for an unsecured Brazilian/USD bond deal.
"This was the first USD benchmark for Petrobras executed by HSBC, and it propelled HSBC to the top of the Brazilian international issuance league," said Alexei Remizov, Senior Vice President for Latin America, Global Capital Markets, and member of the HSBC Petrobras deal team."Petrobras is the top-tier Brazilian issuer, and we faced the stiffest competition from investment banks to gain a mandate from this issuer."
The Petrobras transaction was the first Brazilian bond deal of 2008, and the tightest ever yield on a US dollar bond from Brazil, illustrating HSBC's competitive standing in Latin American debt capital markets, and the Group's ability to manage international bond deals in challenging conditions.
Petrobras is the world's sixth-largest oil producer among listed companies. The company expects to join the top five by 2020.
Petrobras is the top-tier Brazilian issuer, and it attracted the stiffest competition from investment banks to gain a mandate from this issuer
Notable IPO
In June 2008, HSBC also helped raise USD4.1 billion for OGX Petróleo e Gas Participacoes SA on the Bolsa de Valores de Sào Paulo (Bovespa) stock exchange in Brazil's largest-ever initial public offering (IPO).
Founded just two years ago by Brazilian investment firm EBX Group, OGX has become a key player in oil and gas exploration and production. It boasts a portfolio of high-potential exploration blocks comprising 6.4 thousand sq km.
David Noble, HSBC's head of Equity Capital Markets, Americas, said: "The fact that this was Brazil's biggest ever IPO naturally attracted international investor interest to the country's oil and gas industry." Through this IPO, HSBC helped raise Brazil's profile as a significant emerging markets player. The transaction also boosted HSBC's equity capital markets and investment banking credentials in Brazil, making it a key player in Brazil's capital markets.
Based on HSBC's strong-standing in the Middle East, HSBC was awarded 'bookrunner' responsibilities for Qatar and Kuwait.
"Something that is not typical is that we were given the entire Middle East region to host the management roadshow," said Mr Noble.
He added that rising oil prices and the global credit crisis only added to the complexity of the task.
"I think it made it more challenging, and it is precisely the reason we took the roadshow to the Middle East, and to some alternative areas, seeking demand. Although the deal happened at the beginning of the year, the impact of the crisis was already here, so much that the investors had become very selective," he said.
"OGX is a start-up company engaged in the exploration and production of oil and gas. They have the largest reserves of any independent oil and gas company. They do not produce at the moment - not yet. The main risk for the company is that oil prices are falling below a level that is economically viable."
Falling oil prices
The sharp fall in oil prices, attributed to market reaction to the slowdown, is a risk that OGX has thought of in advance. In its 3Q 2008 results announcement, OGX reports a profit and states that its finances are sufficient for sustaining the implementation of the exploratory campaign, up to the initial outlay needed for developing production capability.
More important, the fact that OGX can participate in this industry is evidence of OGX's resilience in these times. It is a testament to the progressive development of Brazil's oil sector, and an affirmation of its commitment to open its economy to private sector participation, whether local or foreign. This is why Brazil, a favourite investment destination in better times, is still well on its way towards becoming a major oil player in the post-crisis economy.
Brazil’s oil and gas industry milestones with evolution of Petrobras
1892: First oil field discovered in Brazil.
1940: Onshore production begins in Bahia State.
1953: Structural changes made in Brazil’s oil and gas industry. State-controlled company Petrobras (Petróleo Brasileiro SA) established.
1960s: Large onshore oil discoveries at Carmopolis, Miranga, and Aracas.
1967: Petrobras begins offshore exploration.
1968: Petrobras’ first fully offshore oil find, Guaricema, begins production.
1970s: Major discoveries in the Campos basin offshore (Namorado, Pampo, Enchova, Bonito). Campos becomes the key oil basin in Brazil.
1973: First global oil crisis.
1973: Petrobras begins investing in offshore exploration.
1979: Second global oil crisis.
1980s: Restructuring of oil and gas sectors in Argentina, Peru and Bolivia.
1988: Petrobras recovers exclusive rights to oil exploration and production in Brazil under risk contracts.
1970-1988: Private companies enjoy exploration and production rights.
1994: AP-18, the largest floating platform in the world, starts production in Brazil.
1997: Brazil oil and gas sector liberalised with the passing of a new Petroleum Law. The granting of concession contracts for oil and gas exploration, development and production in Brazil is opened to private domestic and foreign companies.
1998: Crude oil price liberalised. Petrobras granted concession for 115 exploration blocks in Brazil.
1999: Petrobras corporate restructuring. ANP (National Petroleum Agency) conducts first public auction for oil exploration concessions.
2000: Government unifies gas price, eliminating distinction for different consumers.
2007: Large oil field, Tupi, found off coast of Brazil, in the Santos Basin.
Meeting China's thirst for oil
Emerging China has been bolstering petrochemical refining facilities to meet growing demand for oil and oil products.
Read how HSBC advised Fujian Refining in its March 2007, USD4 billion petrochemical deal with Saudi Aramco and Exxon Mobil.
Emerging markets research
Emerging markets research is a key area of focus for Global Research and brings together all aspects of research across Asia, Latin America, Eastern Europe, the Middle East and Africa. Learn more about our emerging markets research.
Articles
Brazil
Chile
China
Egypt
Czech Republic
India
Indonesia
Mexico
Peru
Philippines
Poland
Russia
Taiwan
Thailand
Turkey
UAE
Vietnam
