Michael T. Slocum
Upstream Technology Editor
Comparing it to a can't-look-away train wreck, Reuter's financial columnist James Saft, in a June 2 article, viewed the recent issue of 100-year bonds by Petroleo Brasiliero SA (Petrobras) with unmasked disdain. His position is defensible.
Brazil's state oil company is still reeling from a corruption scandal. In February, Moody's cut the company's credit rating to junk. And no oil company-national or otherwise-can guarantee that hydrocarbons will be a sought-after source of energy a century from now. Buyer beware.
Brazil, however, has a long history of doing things differently. What set the country apart from its continental compatriots in the past just may see it through in the future.
One-sided treaty
The Treaty of Tordesillas is grammar school subject matter for South Americans. In 1494, the treaty famously set the line of demarcation between the western Spanish New World and the eastern Portuguese.
The Spaniards got the gold of Mexico; the Portuguese the ember-colored (Latin: brasso) dye from the brasilwood tree that gives the country its name. For about 450 years that deal was as raw as it sounds.
One-sided as it might have been, it set Brazil apart in both language and culture. Until the mid-1800s, Portugal and its colony were close. According to a 2000 article from the Council on Foreign Relations (CFR), Brazil was part of a transatlantic "United Kingdom" that peaked in 1815 with the relocation of the Portuguese royal court to Brazil, on the run from Napoleon's forces in the European Peninsular War.
While the royal sojourn would last only until 1821, the modern European banking and financial infrastructure that accompanied the court laid a foundation of stability that would outlast the monarchy and fund Brazil's independence in 1824.
Once again, this set Brazil apart from its neighbors, according to Kenneth Maxwell of the CFR.
The oil is ours
Perhaps proving that the long-game is a national heritage, Brazil discovered oil in 1930, and the treaty of 1494 suddenly didn't seem so lopsided.
In 1953, Petrobras was founded on the national slogan, "the oil is ours," and began onshore production a year later at about 2,500 b/d, according to the company's web site.
An American geologist working for Petrobras questioned the rationality of further exploration both onshore and offshore. Too expensive and technically impossible, his report said.
Petrobras stubbornly persisted. In 1961 the company found oil on the continental shelf and was able to operate at a profit for the first time.
The oil shock of 1973 gave way to the "Brazilian Miracle," a time of unprecedented national economic growth fueled by foreign investment and underpinned by the stability of oil profits, according to a 1983 article in the New York Times.
Petrobras has continued to grow even in the often turbulent economic and political environment of Brazil. In late 2014, the company surpassed ExxonMobil Corp. as the largest producer among publicly traded oil companies at 2.2 million b/d (OGJ Online, Jan. 1, 2015).
Another miracle?
So is the issuance of 100-year bonds a desperate hope for another miracle?
On its face, Operation Car Wash-as Petrobras calls the endeavor in its US Securities and Exchange Commission registration document-is an attempt to fund near-term expansion projects including deepwater opportunities off Brazil. Whether it will wash away the lingering grime of corruption remains to be seen.
More subtly, it is a thumb in the eye of conventional wisdom. As Saft notes, a 100-year bond is extremely sensitive to interest rate moves, even for blue-chip investments.
But Brazil has been doing things differently for a long time.
Brazil's Energy Minister Eduardo Braga recently gave his country's full support for the beleaguered national oil company (OGJ Online, May 5, 2015). Emboldened, Petrobras's bonds may be a statement in response to cynical market analysts: Petrobras, like Brazil, will do things its way.
Will it work? Ask me in a hundred years.
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