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Brazil Watch: As Petrobras Drills, Investor Worries Mount and Oil Start-Ups Surge


Investors concerned that state meddling will force Petrobras into less profitable activities are turning to start-ups like OGX Petroleo, HRT Participacoes and QGEP.

After last week's reported record-high profits of $6.72 billion in the first quarter, up 42% from the same period last year (see Brazil Watch: Petrobras Profits Hit Record High on Higher International Oil Prices), Brazil's state-run oil company Petrobras has begun drilling in deep water in the country's Santos Basin, home to the Americas' biggest oil discovery in more than 30 years. One of the sites there -- Franco -- is thought to contain 3.1 billion barrels of crude oil.

Franco is just one of seven sites targeted in the company's five-year investment plan. The rig in the latest drilling has been hired from Norwegian firm Sevan. Norway's Crown Prince Haakon opened the Peregrino oil field, not far from Rio de Janeiro earlier this week leading the Financial Times to draw parallels between the two nations, feeling that Brazil had a lot to learn from the Scandinavian oil producer.

With inflation in Brazil delicately high, the government can look to Norway, which is looking at 2011 core inflation of 1.3%. It is Norway's sovereign wealth fund that has played a major part in this, the London paper says. Set up in 1996 to help preserve oil wealth for future generations, the fund also pulls dollars out of Norway's economy.

"Lacking the capacity to absorb this money, Norway would face the prospect of runaway inflation if it brought all of it onshore," writes Joe Leahy. So the sovereign wealth fund was set up to keep that money abroad. There are problems with it, however, and Leahy admits comparisons can only be made to a certain point.

However, he continues: "If Brazil could do the same, it could avoid the inflationary effects of massive inflows of dollars once its new oil fields in the so-called presalt discoveries off the coast of southeastern Brazil come onstream this decade."

Before looking so far forward, however, Petrobras is being hit by criticism thanks to mounting political interference in its running. This has led to a surge in interest in start-ups looking to tap into Brazil's reserves.

OGX Petroleo, HRT Participacoes and QGEP are just some of the younger companies looking to explore Brazil's oil fields. Petrobras is concerned primarily with ultra-deep gas exploration, and has made significant discoveries. However, this has left a vacuum in other areas which start-ups are beginning to fill.

Brazil Backs Candidate From France to Lead IMF

Brazil has stepped out among the world's emerging markets by suggesting that it is happy to back a European candidate to lead the International Monetary Fund, out of line with many other emerging nations who are keen for one of their own.

Brazil, Russia, India, China and South Africa jointly stated that the practice of automatic selection of a European managing director was obsolete. However, they are all pulling in different directions.

"There could be good emerging-market candidate, or a good candidate from an advanced country," said Brazilian finance minister Guido Mantega. "There should be no vetting based on nationality."

Somewhat surprisingly then, Brazil has opted to support France's finance minister Christine Lagarde, according to a government official.

Bloomberg reports that the official said that the backing of Lagarde is more down to the fact that she will have enough votes to win, whereas Mexico's central bank governor Agustin Castens is unlikely to. The support, according to the source, is not official.

Foxconn Considers Apple-Product Production in Brazil

Foxconn is still talking of entering Brazil to produce some of Apple's (AAPL) hugely successful electronics products. The rumors, according to Reuters, are forcing government officials in Brazil to rethink industrial policy. They aim to nurture high-tech industry, cutting costs on imports from countries such as China. This would lower Brazil's trade deficit with the Asian giant.

The deficit is thanks to Chinese demand for iron ore, soy and other raw materials. This has boosted Brazil's economy, however, its manufacturers have suffered severely.

Foxconn CEO Terry Gou discussed the investment with Brazilian president Dilma Rousseff during her trip to China last month. However, in an interview with the Wall Street Journal last year, Gou was not too complimentary about the Brazilians. "As soon as they hear 'soccer,' they stop working," he said. "And there's all the dancing. It's crazy… So Brazil is okay [as a place to manufacture] for the local market. Brazil has great minerals. And it's got the great Amazon river, so it has good hydropower. But if you want to ship things to the US, it takes more time and more money to ship from Brazil than from China." He made similar criticisms of India and Russia.

Brazil, Argentina Duel Over Auto Imports

Brazil and Argentina are still at loggerheads over automobile imports. Brazil is keen to sustain import licenses for foreign-made vehicles, leaving one Argentine lobby group to accuse the country of behaving like an "imperialist." Eduardo Bianchi, Argentine secretary of industry, met his Brazilian counterpart, Alessandro Texeira on Tuesday in Buenos Aires.

"The two sides advanced in the negotiations designed to gradually liberate the pending licenses," said a curt joint statement. Argentina is thought to play a junior role in discussions, though is nervous as 85% of its auto industry's exports head into Brazil.
No positions in stocks mentioned.

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