November 6, 2013 6:02 pm
After Eike Batista – once the richest man in Brazil – filed for bankruptcy, investors braced themselves for a tropical storm on the Bovespa stock market. Yet, so far, Latin America’s largest ever corporate default has gone down as smoothly as a caipirinha in Copacabana. Markets had begun to price in the $6bn insolvency ever since OGX, Mr Batista’s oil company, revealed in July that its only two producing wells had flopped.
It would nonetheless be wrong to conclude that Brazil has nothing to learn from Mr Batista’s spectacular collapse. The sinking of OGX has brought into focus the multitude of problems plaguing Brazil’s oil industry. In 2007, the discovery of an offshore reservoir containing as much oil as the North Sea was hailed as a “gift from God” by the then president Luiz Inacio Lula da Silva. Today, OGX is not the only oil company struggling with high debt and sliding revenues.
Exhibit A is Petrobras, the state-owned giant that stunned the world in 2010 with the biggest ever equity offering. Three years on, its shares have lost 30 per cent of their value. Petrobras’s debt has reached an extraordinary $185bn.
The government has itself to blame for clipping the wings of a once-booming industry. The natural resources sector is in fact a broader symbol of the reform slowdown that has hampered Brazil since Dilma Rousseff became president in 2011.
Not a single oil auction was held between 2008 and 2013. When one was finally conducted this year, Byzantine rules requiring Petrobras to operate any field in the new basin deterred many foreign companies from taking part. Not that Petrobras gains much from this preferential treatment. It is required to sell refined oil below commercial prices to help curb Brazil’s galloping inflation. The losses for the company are huge.
The government is right to demand a share of the treasures hidden beneath its seabed. But rather than micromanaging the industry, it should let oil corporations – domestic and foreign – thrive, then tax them to seize a portion of their profits.
At a time of flagging growth, Brazil cannot afford to lose its status as Latin America’s oil Eldorado. Yet, as Mexico embarks on an ambitious shake-up of its energy sector, Brazil’s supremacy looks increasingly at risk. It is not too late to change course, but the government must show it has learnt its lessons from Mr Batista’s downfall. He is not the only man in Brazil to suffer from occasional hubris.
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