Home Business Brazil, one of the best world’s foremost oil and gas provinces

Brazil, one of the best world’s foremost oil and gas provinces



Five years ago, the International Energy Agency dubbed Brazil one of the world’s “foremost oil and gas provinces,” attributing both its progress and potential to the longevity of market-oriented reforms. Public opinion’s desire for a shake-up of Brazil’s political institutions makes for fertile ground for populist policies. But protectionist or nationalist policies for energy would again risk delaying progress toward the lofty expectations that global energy markets have for Brazil.

Advances could be stalled through tighter local content requirements for industry projects or measures that use Petrobras as an extension of state policy. Similar to how Brazil opened its upstream oil sector, the country is undergoing a national plan to create a competitive natural gas market that depends in large part on Petrobras’ divestment of state-backed assets.

Latin America’s historic dependence on energy and commodities for state revenues has swung the pendulum of resource nationalism a number of times through the years. Governments across the region repeatedly nationalized and privatized energy assets in response to commodity price cycles and other political factors. Until 2013, Mexico was an outlier, guarding its energy assets under the monopoly of state-owned Pemex. But legislation that year that stripped Pemex of its monopoly and allowed private investment into Mexico’s energy sector transformed its market and the opportunities for international investors.

The full fruits of an energy sector reform require years, decades even, to materialize. Both Mexico and Brazil have put themselves on course to realize those gains. Reforms that optimize their state companies through competition and productive use of capital should be given the time to take hold.

If the pendulum in Mexico does swing back towards nationalistic energy policies, a likely and immediate beneficiary for foreign investment would be Brazil. The country has proven and prolific oil and gas assets in its offshore pre-salt fields attracting a critical mass of international investments.

Brazil is roughly 15 years ahead of Mexico with its energy sector opening. Reforms in 1997 stripped state-owned Petrobras of its monopoly and opened the industry to foreign competition. Since then, Brazil paused or delayed the pace of its liberalization several times, as new energy riches were discovered. But the trend line has generally been toward a greater opening, with the results to show.

Barely a decade into the first pre-salt discoveries, production from the vast fields now account for more than half of Brazil’s 3.3 million barrels per day of total oil output. The productivity of the pre-salt fields put them in high demand for investors.

Two bid rounds last year for pre-salt blocks drew $1.8 billion of signing bonuses and are expected to generate over $59 billion of total government revenues. A common frustration from within Brazil’s oil industry is that these results could have come sooner, if not for delays in opening the sector.