All eyes on Brazil’s oil

RIO DE JANEIRO, Brazil — Brazil’s rapid rise from developing country to global energy power is shaking up the international oil industry.

Oil corporations and suppliers have rushed to capitalize on Brazil’s enormous deepwater reservoirs, the Americas’ largest oil find in three decades. But sentiments are shifting as Brazil has started to wield its newfound power. Foreign companies are grappling with public skepticism and the nation’s stiff regulations.

“It is very powerful. They are going to be a major player in the world,” said Scotland-based energy industry consultant Ian Williams. “But you spend a lot of time trying to dissuade companies from going there. It is unbelievably complicated. You don’t get your money out.”

Energy giants from Shell to Chevron are preparing to ramp up activity in Brazil, where lucrative oil deposits were discovered 150 miles offshore five years ago. Rigs and drillships now dock for maintenance up the coastline from Rio de Janeiro's iconic beaches.

Brazil’s “pre-salt” petroleum — lying beneath three miles of water, salt and rock under the ocean floor — has the potential to make the country one of the largest oil producers in the world.

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National oil production has nearly tripled over the past 15 years, according to data from the US Energy Information Administration. In 2010, Brazil produced about 2.7 million barrels of crude and other liquid energy per day. Leaders hope to more than double that again by 2020 and catapult the emerging economy into the tier of global energy superpowers, ranking just below the third-largest producer — the United States.

As a result, demand for oil field services and equipment in the country has surged and foreign suppliers are clamoring to set up offices, laboratories and manufacturing facilities in the developing country, hoping their bottom lines will profit from Brazil’s boom.

“Foreign investors are throwing a lot of money at Brazil right now,” said Mark Langevin, director of Maryland-based Brazilworks consultancy. “It’s a game changer. For the first time in their history, Brazilians look at themselves as a major player in the global energy markets.”

The attitude change has come with regulations designed to build up the domestic businesses that supply oil and gas industry. But it’s also threatening to hamper the flow of foreign dollars, industry insiders say.

Under new “local content” rules, as much as 80 percent of the costs of major oil field project must funnel to Brazilian suppliers. And companies wanting to develop Brazil’s pre-salt oil must partner with the national oil company, Petrobras.

Yet, the nascent state of Brazil’s petroleum workforce and infrastructure has made it difficult for oil companies to meet the local content requirements.

“They effectively have a gun held to their head saying, ‘You’ve got to do this locally or you will be priced out of the market,’” Williams said of Brazil’s approach to foreign investors. “They are sucking in everything they need to get to a world-class status, and gradually, they’ll squeeze [the foreigners] out.”

Brazil has attracted business and fanfare from the Gulf of Mexico, the longtime king of offshore drilling in the Western Hemisphere.Leaders of Brazil’s oil industry are keenly aware of their growing power.

Houston, Texas hosts the global industry’s annual Offshore Technology Conference, a mega-event that draws 80,000 people. The spring conference is a don’t-miss for the heaviest hitters in offshore drilling.  

But Petrobras CEO Maria das Gracas Silva Foster snubbed the conference this year, her first at the company’s helm. It was Foster’s second slight to the world’s energy capital since she took the reins.

In March, Houston Mayor Annise Parker traveled to Brazil with a delegation of oil executives. Foster canceled their meeting with less than 24 hours notice.

A representative of the company said Foster was “new and busy.”

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In November, the nationalistic tone toward oil development intensified when a well operated by California-based Chevron spilled. Chevron claimed the spill amounted to 3,000 barrels worth. The spill seemed negligible to some, especially compared to the nearly 5 million barrels that gushed into the water during BP’s Gulf of Mexico disaster. But Brazilian officials hit Chevron with legal action, fines and suspension of its drilling rights, a response that industry followers widely viewed as excessive.

Regulators insist that the country isn’t rejecting foreign interest in its oil wealth. Brazil is working to reach lofty oil production goals while avoiding environmental disasters that would curb its aspirations, said Magda Chambriard, head of the Brazilian regulatory agency ANP.

“Brazilian society realizes that we have good experiences exploring for oil and gas in deeper and deeper water,” Chambriard said during a US speech in April. “But our people expect a lot in terms of safety.”

While some companies are shrinking their Brazilian presence — US oil producers ExxonMobil and Anadarko have recently announced plans to pull out of certain projects there for financial reasons — many are growing their investments.

Shell Brazil President Andre Araujo has criticized the penalties behind the local content regulations, but says he supports the effort to build Brazil’s domestic industry.

“We cannot deny the challenges,” Araujo said. “But we understand that the government wants to keep international oil companies investing in Brazil. And we are willing to do that.”

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Regulatory chief Chambriard says Brazil needs to absorb $400 billion into its oil and gas industry to meet its production goals by 2020, a level that requires a large amount of foreign investment.

Public skepticism of foreign oil companies will have to come to terms with that fact, noted consultant Mark Langevin. Brazilians’ thirst for economic growth will overcome those concerns, he said.

“Once they find out that these companies bring the investment and technology that is required to make the most of the oil resource, I think the nationalism will recede and there will be greater interest in working with foreign companies,” he said.