Senate Approves Petrobras Share Deal

By Sibel Tinar, Contributing Reporter

RIO DE JANEIRO – The Brazilian Senate has approved the bill on the new capitalization plan for Petrobras, marking the beginning of an overhaul in Brazil’s oil industry regulations. Under the new plan, state-controlled energy giant Petrobras will issue new shares to pay for the oil rights through a total offer expected to be valued at between fifty and seventy-five billion dollars.

In order to be able to fund the development of the pre-salt fields discovered in recent years in the Santos Basin off the coast of Southeastern Brazil, Petrobras is relying on the vast cash reserves set to be generated by the share offer. These fields are estimated to hold tens of billions of high-quality crude oil that lies below a thick layer of salt, some five-to-seven kilometers (three to four miles) below the surface of the ocean.

The discovery of these pre-salt fields signaled the beginning of a new era for the Brazilian oil industry, while also posing huge technical and logistical challenges for the industry due to the difficulty of operating in an entirely new frontier. Petrobras has been expecting the development of the fields to be costly and complicated, and plans are afoot to invest over $200 billion in the next four years.

The exploration of pre-salt oil is expected to push Brazil to the top of Latin American oil output, placing the country ahead of Mexico and Venezuela.

The new capitalization plan that has been approved by the Lower House before the Senate, and is expected to be signed by President Lula shortly, will allow Petrobras to start the enormous investment and development process.

Though an integral part of Lula’s plan to overhaul Brazil’s oil laws, the voting on the bill was repeatedly delayed, frustrating Petrobras officials and causing a remarkable decline in the company’s preferred shares which were down nearly 17.8 percent on the São Paulo Stock Exchange. However, bills relating to royalties and production-sharing agreements are still yet to be approved.

While going ahead and approving the capitalization plan due to its time-sensitivity, the Senate postponed voting on the creation of Petro-sal, destined to the new state-owned company that will manage pre-salt oil production and allocation of drilling rights, citing the need for more detailed consideration of this crucial aspect of the process, as well as, remarkably enough, the World Cup that has taken the front seat in the country, as reasons for the delay.

Around one-third of the new shares that Petrobras will issue under the new plan are to be swapped for government-held oil rights. A shareholders meeting that is scheduled for June 22nd will allow investors to vote to approve an increase in the company’s capital by R$150 billion ($81 billion) via the sale of new common and preferred shares.

Petrobras has been planning the massive share offer for late-July, according to its CFO Almir Barbassa, who emphasized the importance of timing for such a big undertaking. Delaying the process any further would cause the share offer to coincide with summer holidays in the Northern Hemisphere in August, or with a domestic political environment dominated by Brazil’s upcoming presidential election in September and October.

“We’ll need to have the strategic plan completed before the share offer, because we’ll need to take it to the market,” Barbassa told the press, adding that they also expect to have the final details on their four-year strategic investment plan before the capitalization moves forward.