What's Bad for Petrobras Is Bad for Brazil: Alexandre Marinis

Commentary by Alexandre Marinis

Nov. 19 (Bloomberg) -- The shares of Brazilian oil company Petroleo Brasileiro SA, or Petrobras, have tumbled 62 percent since May. Another sad chapter in the 2008 financial debacle, perhaps?

Not really. It's worse than that. To put it mildly, Petrobras is the ultimate barometer of Brazilian economic health. If Petrobras fails to generate adequate returns to its stakeholders, the largest economy in Latin America will suffer.

After oil prices plunged from a record $147 on July 14 to below $60, and after the worst credit crunch in decades rippled through world economies, it's obvious that analysts must be dreaming to suggest Petrobras will outperform the market.

Of the analysts that cover Petrobras surveyed by Bloomberg, 20 rate it “buy” while one rates it a “hold.” You have to wonder why, amid the huge bubble in commodities prices earlier in the year, no one had the brains or courage to say, “Hey, maybe this is out of line.”

After all, under current market conditions, how, where and at what cost will the company raise the $600 billion it needs to explore its newly discovered offshore oil fields? With oil prices plunging more than 60 percent, aren't those expensive oil fields becoming economically unfeasible or, at least, less attractive? And couldn't it be too risky to push such a sizeable investment through an economic crisis that has credit trickling, the cost of capital surging and global consumption collapsing?

Then there's the possibility that the crisis lasts long enough to encourage world leaders, such as U.S. President-elect Barack Obama, to embrace fuel-efficient technologies and affordable, renewable energy sources once and for all. If this happens, Brazil may be compelled to leave all its vast new oil reserves exactly where they are -- deep under the sea.

Venezuela Comparison

Regardless of global environmental policies, there is no doubt the current economic turmoil has postponed the day Brazil will start collecting billions of petrodollars from its oil fields. This affects not just Petrobras and its growth prospects but the prospects of the entire country.

Just consider what's happened to Venezuela, the Latin American country that depends most heavily on oil. Its economy slowed to a 4.6 percent growth rate in the third quarter, well below the 10 percent average rate during the past five years.

The slump in oil revenue also will figure in the plans of Brazilian President Luiz Inacio Lula da Silva, who in 2007 opened his second term in office by announcing the Program to Accelerate Growth, or PAC, a series of investment projects aimed at improving Brazil's infrastructure and boosting its economic growth rate.

Key to Economy

Of 504 billion Brazilian reais ($214 billion) in investments laid out under PAC for 2007-2010, more than a third, or 172 billion reais, is supposed to come from Petrobras.

If oil averages $80 a barrel over the next decade, Petrobras will increase its share in the Brazilian economy from 4.7 percent today to 7.2 percent by 2020. If oil prices rise and average $120 a barrel, the company's share in the Brazilian gross domestic product will more than double to 10 percent, according to calculations from the Economics Institute of the Federal University of Rio de Janeiro. The estimates don't include any impact from the exploration of the new offshore fields.

Petrobras is also central to Brazil's trade balance. Last year, the company was the single largest exporter in the country, generating more than $14 billion in export revenue, or almost 9 percent of everything Brazil sold abroad.

Largest Taxpayer

More than a key contributor to growth and trade, Petrobras is vital to the financial health of the Brazilian government.

In 2007, Petrobras paid 54.8 billion Brazilian reais ($24 billion) in taxes, making it the largest taxpayer in the country. Depending on the year, Petrobras has been responsible for between 6 percent and 9 percent of all taxes collected by Brazilian federal, state and municipal governments.

Without Petrobras, Brazil's public sector, which includes the three government levels and the companies they control, would probably face tremendous difficulties to meet its official fiscal targets.

The oil company alone is responsible for approximately 10 percent of the public-sector primary surplus -- the budget balance resulting from revenues minus non-interest expenses.

Brazil's planning minister, Paulo Bernardo, recently said the government will have to cut 8 billion reais from the 2009 federal budget due to the economic crisis. The main reason behind the shortfall is the sharp drop in oil prices, which slashed projected revenue by 7 billion reais.

Support for Culture

It's also clear that the impact of the recent plunge in Petrobras shares isn't limited to the stock exchanges or the company itself.

Without a healthy Petrobras, even Brazil's cultural life will face a dearth of funding, since the company is Brazil's largest cultural sponsor. I can't remember the last time I went to a movie, the theater, an art exhibit or concert that wasn't at least partially sponsored by Petrobras.

Famous Brazilian films such as “City of God” (2002), “Carandiru” (2003) and the Academy Award-nominated “Four Days in September” (1997) all were backed by Petrobras.

While the old U.S. saying that what's good for GM is good for America may now be open to question, there is no doubt that what's bad for Petrobras is bad for Brazil.

(Alexandre Marinis, political economist and founding partner of Mosaico Economia Politica, is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Alexandre Marinis in Sao Paulo at amarinis1@bloomberg.net