Jonathan Wheatley, the FT’s Brazil correspondent, interviewed Dilma Rousseff, chief minister to President Luiz Inácio Lula da Silva of Brazil on September 2. Ms Rousseff is a former mines and energy minister and remains chairman of the board of Petrobras, the government-owned but publicly-traded oil company. She is one of the architects of the government’s proposed new regulatory regime for the oil industry that will govern operations in the pre-salt fields, Brazil’s potentially enormous off-shore oil deposits discovered over the past two years.
FT: First, why is this the best model for Brazil and the pre-salt?
DR: Why what?
FT: Why choose this model?
DR: Because this model is right for the amount of oil we have, for the low level of exploratory risk, and because of the high levels of returns. We want to keep a bigger part of the oil revenues.
FT: Were you inspired by other models around the world?
DR: We studied all the models in existence. Each country has chosen the model that is right for its own history in the oil industry and best suits its needs. We are a country with characteristics very much our own. From the beginning of our history in the oil industry there was a big question mark over whether we had any oil. People often said we didn’t have any and that our [geological] conditions meant that we couldn’t have. At our own cost and risk we began to look for oil on land. And indeed it was a very difficult process. We moved off land and underwent a long journey, to shallow water, then to deep water, and now to ultra deep water.
There was no transfer of technology in the way that other countries have had. We created the circumstances for us to get to where we are now, with the pre-salt. By producing oil we created a great oil company with its own technology. At the same time we are a country with a diversified industrial base and a large consumer market.
Now we have a double opportunity. We can transform natural wealth into social wealth, to advance the fight against poverty. We were going to end poverty in Brazil anyway, but the pre-salt will bring that forward by years because we will have more resources to do it. We will have high quality education, we will invest in science and technology. And at the same time we have the chance to create a supplies and services industry and add value to our oil.
So the big question is, what should we do to appropriate a greater share of the oil revenues? When you bring oil out of the ground you create revenues, because the cost of producing oil is much less than its final price. So once you have recovered the costs, and delivered an adequate return on the capital invested, there are still revenues left over. The question is who should have this extra. We chose the shared production model as a way of appropriating this extra revenue. At the same time we are very clear about the geopolitical aspects of oil.
FT: What does that mean?
DR: What does that mean? That producing countries and consuming countries have different interests. And that today 77 per cent of reserves are in the hands of national oil companies, state oil companies. It is in our interest to ensure that whatever partnerships the country might enter into are of great importance.
FT: Partnerships with?
DR: With other countries, to supply oil. To sell oil.
FT: There are some things that…
DR: To supply the international oil market. We are a country with stable institutions, with clear rules, that doesn’t break contracts, that is in the west, and is therefore a reliable supplier. I don’t believe that anybody won’t want to have a relationship with us. We are not in an area of turbulence, we don’t have ethnic conflicts, we don’t have religious conflicts and we respect contracts. So we think we are extremely attractive.
FT: What will be the role of other companies in the oil industry?
DR: They will have an important role. Why? Because this is a partnership that is of interest to us, but it is of interest to us on our terms. We have no reason to think that the revenue has to be entirely transferred to international oil companies or to national oil companies in other countries in order to attract them to Brazil. We know that international oil companies know the rules of the game change when you move to a situation with low exploratory risk and high profitability. Take the two biggest blocks we have found, Tupi and Iara. In Tupi we have between 5bn barrels and 8bn barrels; in Iara we have between 2bn barrels and 4bn barrels. So, I ask you, why would it not be attractive for an international oil company to take part in the pre-salt process if the strategic question of access to the reserves is guaranteed by us? If you have 10 per cent of a block of 8bn barrels you have 800m barrels. When you consider that a block is considered large from 500m to 600m barrels, I don’t see what the problem is.
FT: One problem that has been put to me is that foreign operating companies won’t actually be operators, they are going to be invited to be little more than capital investors.
DR: No. No. They will be invited to take part in the operating blocks. Today, for example, in the pre-salt, why would an international oil company want to be a partner with Petrobras?
FT: To participate in the risk and reward?
DR: No. No. Because they gain from technology transfer from Petrobras. What is the difference between Petrobras and any other big international oil company? Petrobras does 22 per cent of the world’s exploration in deep waters. The other two nearest who are private international companies have 14 per cent [each]. So Petrobras is on a level with big international oil companies in terms of knowledge of deep waters. But here in Brazil what is its big differential? Do you know what it is?
FT: What?
DR: That it knows the Brazilian sedimentary fields in deep waters. It knows them. And this knowledge, do you know what it produces? Reduced risk. If you reduce the risk, do you know what you produce? Higher profitability. Why do we argue that Petrobras should be the operator? Because being the operator means having access to technology, setting the rate of production, and at the same time, adopting the specific technology most appropriate for that area. We don’t see any obstacle to the international oil companies that will participate with us. They will have an active role in the operational committee, the op com. Why will they have this fundamental role? Because, how does the operational committee work? Everyone sits down – right? – and discusses the best… the operator goes in and presents its operational project. And the others, who have knowledge, without a doubt, they discuss if it should be like this or like that. Petrobras obviously will contract service companies like any other international company. The traditional service companies, like Halliburton and the others.
FT: One comment I’ve heard is that in the US Gulf of Mexico there are more than 100 companies operating and they have worked out how best to operate while actually doing it. They develop technology in partnerships on the job, and there is a concern that since these companies will be minorities in any operating committee that they will be less willing to share technology.
DR: Can I say something? I don’t think that the technologies in existence and available are technological secrets. What makes the difference between one company and another is the knowledge that it has over that field, that region. We don’t exactly have a low technology company in Petrobras. If it was like that there would be no explanation for the number of prizes that Petrobras has won from the OTC [Offshore Technology Conference], in fact I went to an OTC in Houston to receive one of them, as chairman of the board. So I don’t believe there’s any question of Petrobras being excluded from access to technology. It’s very unlikely, if you are a company that has a field and what is at stake is the income from 600m barrels, that you won’t invest in the best practices. It’s very unlikely, nobody shoots themselves in the foot in this area, nobody. On the other hand I’m sure that in these partnerships, today, people are minimising the role that all these international oil service companies play. They are underestimating it. Because none of these companies operate without them, not that I know of.
FT: OK. Another doubt that people have is over the capacity of Petrobras to invest. Where will the money come from? And I’d like to understand this question of…
DR: Where does the money come from for any international oil company? Where do you think?
FT: From its shareholders, its profits…
DR: Uh uh, na na na. From the size of its reserves. If you are a bank, which company do you lend to? The one with the reserves. What do you think is the reason people lend to Petrobras? Today. Why do you think that we, in the middle of the crisis, have had access to money? That argument has no basis. The idea that oil companies won’t invest… I don’t believe that for a minute. Do you believe it?
FT: Well, I don’t have any opinion, but people have expressed doubts.
DR: But I’m asking you if it’s plausible. That’s what I’m asking. Will Petrobras have access to finance? I think it will. And I think the international oil companies will take part in the investment.
FT: Explain to me how the capitalisation of Petrobras will work. It’s 5bn barrels…
DR: Let me go back to the question of funding. We’re not taking the international oil companies out of the investment. That’s why I asked you if it’s plausible. We’re saying look, come and participate with us because you will have access to enormous reserves. Petrobras will be the operator, which reduces the risk because of its knowledge of the fields, and you will get an adequate return because the reserves are large and you, the international oil company, will be able to put onto your books those reserves you gain access to in the auction. Let’s suppose the company gets 600m barrels, it will be able to register them and it will be able to leverage itself in the same way Petrobras will. So we don’t think the funding will come only from Petrobras, nor only from the international oil companies, nor only from the banks. It will come from the best possible combination between them. That’s why I say I don’t believe that it’s plausible to suppose that if the arrangement is this one or that one it reduces the amount of access to capital. What guarantees access to capital for an oil company and allows it to finance itself is precisely the amount of reserves that it has.
FT: But the doubt is…
DR: So it’s a virtuous circle.
FT: But the doubt is over where the capital comes from to bring these wells into production. For example, Tupi has 5bn to 8bn barrels. If the cost of extraction is $10 per barrel, that’s $50bn to $80bn in one field, which is a lot of money.
DR: Over a period of 35 years. Nobody takes all this out in a year.
FT: No indeed, but there is….
DR: That would be physically impossible. Let me explain.
FT: But there is one company taking between 30 per cent and 100 per cent of every block…
DR: Let me explain. Tupi and Iara are already under concession. OK? To Petrobras, Tupi and Iara are under concession. So they are not part of this new regulatory model.
FT: Yes…
DR: In its part of Tupi and Iara, Petrobras is investing $174bn up to 2013. Right?
FT: No, that’s the total in everything…
DR: $174bn, without the pre-salt. This is before the pre-salt. Do you know how much Petrobras raised during this year of crisis? $31bn.
Do you know how it raised $31bn? It sold 10bn in advance to China. OK? $12.5bn we put in. $12.5bn. The rest, it raised in the market. It raised $31bn. Nobody else in the world raised $31bn. Between internal funds, advance sales and access to finance, and I’m not talking about the pre-salt, which is a process that will take decades, this is pre-pre-salt.
FT: But the pre-salt itself will require hundreds of billions.
DR: It will. Part of it, we are capitalising. We are giving Petrobras 5bn barrels. Of the 5bn barrels Petrobras will have, part of this will be its own income. Another part, it will show any international bank that it has 5bn barrels extra as guarantee. And it has good access to Brazil’s reserves. Its rating will be good.
FT: And…
DR: And I’ll tell you something else. There is no country in the world that we have talked to recently where…. the big question is, how can I take part in the pre-salt?
FT: I’ve been reading the bill you sent to Congress and there’s this paragraph saying the Union [the Republic of Brazil] through a fund created by law may take part in the investments and activities of production. What fund is this and how will it work?
DR: Are you familiar with the Norwegian mechanism?
FT: Yes
DR: When they still had a lot of reserves, Statoil was obliged to take 50 per cent. In some cases the Union put in money and in some cases they didn’t. In our model, in principle, we won’t advance any money. But in case, in case, we decide to take part, we can do so. That’s what this is about. So let me explain the fund. All the money that we extract from the pre-salt will go to a fund. This fund will spend its income on various activities. Fighting poverty, education, science and technology. But at the same time it will invest.
FT: So it’s the same fund.
DR: This same fund has to create income, it has to make its money work. So you can invest in shares, in various international bonds, you can make direct investments. And when this fund has reached a large volume, it could be that the most attractive investment available in Brazil is in the oil sector. Why not? So in principle the Union doesn’t put in any money but if in the future it wants to put money in, it can.
FT: And it puts in via Petro-Sal, via Petrobras?
DR: No, it puts it in directly, it’s the fund that invests, in the consortia. Let’s suppose the Union takes a 60 per cent share in a consortium. It puts its money in. The fund joins the consortium.
FT: There’s another doubt about this comparison with the Norwegian model, where…
DR: No, it’s different.
FT: No, exactly, it’s different. In Norway there is a very strong separation between the government, the regulator and StatoilHydro. Here the government is capitalising Petrobras and it can come in as an investor, so it’s coming in on both sides…
DR: I’m sorry but I don’t think this is the difference. In Norway, they don’t do auctions. There, the criteria for choice of partnerships are more subjective. Who makes the choice is the ministry, it’s not a manner, let’s say, in which there is no subjectivity. Because for us, the winner is the one that offers the biggest share [of oil to the government]. In Norway, no. There’s no tendering and no auction. This is a substantial difference.
The second substantial difference is that in Norway, the reserves are in decline, so they can’t be compared with us because we are in the phase of rising reserves. The North Sea can no longer be compared with the pre-salt. But in Norway, Statoil used to be guaranteed 50 per cent. We are giving 30 per cent [to Petrobras] of the investment and less [than that] of the profit. In Norway Statoil had 50 per cent of the investment. There are various other differences I could list.
FT: And what is happening with the ANP [Brazil’s independent oil industry regulator]?
DR: The ANP has a central role.
FT: But there are some functions that the new law gives to the CNPE [the national council on energy policy, a government body] that used to be the ANP’s. The choice of the blocks…
DR: No, no. We never gave that to the ANP. For example when the pre-salt was taken out of the last auction round, it was done by the CNPE.
FT: The management of the auctions…
DR: No. Look. What is the role of the ANP? Who does the auctions? The ANP. The auction process is handled by the ANP and the ANP does the contracts. The contracts are signed by the ministry of mines and energy, because they are signed in name of the Union. How does this model work? It’s a system of checks and balances. Petro-Sal, which represents the Union in the management of the blocks, enters the consortium in the name of the Union to oversee the cost of the oil and investment decisions. Because the cost of the oil is a strategic variable. Right?
FT: Right.
DR: And inside the consortium, in the operating committee, an operating plan is approved. Then the ANP has to approve this plan just as it approved them before. The ANP looks at Petro-Sal like any other agent. So there are checks and balances because Petro-Sal does one thing, but the ANP above it is the regulator. OK? So, it’s a very good question because it could seem that we were doing away with the role of the ANP, but it’s the contrary.
On the other hand, the rate of production isn’t decided by the ANP. The ANP doesn’t make policy. It regulates. The interests of the Union are defined by the CNPE which is an organ linked to the Presidency of the Republic. And it defines at what rate we will produce oil and the amount of local content that we want in the supply of goods and services. And that isn’t a role for the ANP because it’s a political role.
FT: Understood. Now, explain the capitalisation of Petrobras, which is something I don’t understand. Petrobras will be able to sell these exploration rights at a certain price, and the higher the price, the more money the government puts into Petrobras, correct? And what happens to the minority shareholders? If the price is high, they have to pay a higher price as shareholders and also pay to take part in the capitalisation or else be diluted?
DR: Let me explain. There are various separate stages. That’s why it’s a good question. First, we authorise the transfer of 5bn barrels of oil equivalent to Petrobras, and to do this transfer we will do a contract under which Petrobras will pay us for the 5bn, OK? And we will use this money to capitalise Petrobras, OK? There are two parallel operations.
I’ll explain how. What will we do? We will contract an independent evaluator to set the price per barrel. That price will have to be certified by the ANP. Then, Petrobras and the government will have up to 24 months – the first evaluation is a simpler one – Petrobras and the government will have 24 months to contract out a definitive valuation.
FT: OK…
DR: If the definitive evaluation is bigger than the first one, Petrobras will pay the Union. If it’s smaller, the Union will pay Petrobras. We know that the price of oil under the ground is one thing, and the price of oil above ground is another. Why will there be these two stages? Because we will discount here, at the second stage, the operating costs.
In any event, when you increase the company’s capital, minority shareholders have the right, because Petrobras is a public company, to exercise their option in full or in part in proportion to their shareholding. This is company law anywhere in the world. At every increase in capital, the minority shareholders have to be called to take part. Either they pay more or they are diluted. This is under any hypothesis, whether its done with oil or money or government bonds.
FT: So Petrobras and the government will decide together…
DR: No, no, we will contract out an independent evaluation and the ANP will certify the contract. When the ANP certifies it, the operation with Petrobras is completed. Petrobras takes government bonds, or money, it can pay any way it likes and we, once we have received this, will deliver it back to Petrobras.
FT: So the minority shareholders…
DR: They will have to be called, that’s an obligation, or you would be damaging their rights.
FT: And the higher the price, the more the minorities will be called on to pay…
DR: That’s life, isn’t it? The more money we put in, the more the minorities will be asked to contribute. And the less we put in, the less they will be invited to contribute.
FT: What is the logic of the Union capitalising Petrobras as an operator, to increase its ability to operate, instead of having the new fund put money in so that the cost of operation is less?
DR: Good question. First, the fund doesn’t have any money.
FT: But the government does…
DR: In the future. Second, Petro-Sal idem, it doesn’t have any money. The government has, but it hasn’t got so much money that it can go out capitalising Petrobras in that way. As it is highly advantageous for Petrobras to be paid in barrels, it’s much better for the government to capitalise it in barrels. There’s no disadvantage to Petrobras.
FT: But the question is about the relation between a company that is basically government-owned but has most of its capital in the hands of minorities…
DR: Of course, if it was a private company, if we were putting 5bn barrels into the hands of a private company, it would like that a lot. So we are neither damaging the rights of Petrobras nor of the minorities.
FT: But I want to understand the logic. The government will put in money to reduce the cost of production and it could put it in via Petro-Sal to reduce the cost for all operators, Petrobras and the rest.
DR: But we don’t have any money at all in Petro-Sal. We don’t want to transform Petro-Sal into an operating company.
FT: OK, but I mean either via the fund or directly, since you’re putting public money into Petrobras…
DR: But why would we put in public money?
FT: To lower the cost of production and get more oil flowing more quickly.
DR: Only if we gave subsidised money. What for? Why would we take Brazilian money and give subsidised funding to Petrobras or any other oil company, Brazilian or not?
FT: In the way you described that the fund can come in as an investor.
DR: Be we won’t be subsidising anything.
FT: No, I don’t mean as a subsidy, I mean as a way of reducing the overall cost for the operators.
DR: But look, this will happen at different stages. In the first stage, there is no money in the fund. And we won’t give any money to Petrobras. We will give it funding the form of barrels of oil. Petrobras can convert this into money. We can’t but Petrobras can, it’s an oil company. And I’ll tell you, I think this is very creative. I’m taking wealth that exists, that everybody knows is there, I’m taking this wealth and capitalising Petrobras. I’m doing a contract to transfer rights to Petrobras. And Petrobras has to pay me. At what price will it pay me? At a price related to the profit from the production of these 5bn barrels. I’ll hire an evaluation and I’ll say, look, the price per barrel down there under the sea is one thing, I’ll pay a certain amount, let’s say it’s 1. So I’m paying you 1. Then this price is certified. At the current stage of our knowledge, it’s 1. This will help Petrobras to raise finance, improve its international standing, its balance sheet will get better, when the banks look at it’s accounts they’ll say, ah, they’re much better. Fine. Based on this I drill several wells, one here, one there, one over there, and I say, ah, I have 5bn barrels here. My seismic says this, my exploration study says this, I have all this knowledge about this field, and this value isn’t 1. It’s 12. OK? So my contract, with this clause about the adjustment, goes to 12. So it’s not 5bn, its 5bn times this and Petrobras owes me X. It does a capital call and pays me with shares. I call the minority shareholders and they put in money. Great for me, because money has come in, it’s primary income, excellent. If the minorities don’t come in I have shares in Petrobras that are worth X amount on the international market. If the minority shareholders don’t come in of course their share will be diluted. It’s like that anywhere in the world.
Now, there’s one thing that I didn’t answer. Why don’t we do it with money? Because, as I was saying, at stage one in the capitalisation process: investments are always made in advance. It takes years before you arrive at the point of bringing up oil. So at the beginning we don’t have money in the fund, we don’t have any resources from the pre-salt. Nothing. What do we have? We have the reserves that Brazil has accumulated. But it makes no sense for the government to do this now if it can hand over 5bn barrels and with that put Petrobras in a better situation, ensure that it can raise funding on international markets, given that it has this access.
FT: So who will pay for the first years of investment?
DR: We will. With the 5bn barrels of oil.
FT: But who will lend the money?
DR: Today, if you look at this year, coming out of the crisis, there are $12.5bn that we guaranteed. $10bn from the contract with China, in which we supply oil and China advances the money. So that’s $22.5bn. So to get to $31 leaves $8.5, OK? And we got that on the international market. So there are various ways to capitalise Petrobras. Without a shadow of a doubt, Petrobras will become because of the pre-salt, a large and interesting player to do partnerships with, to do investments and loans. With the return to economic growth in the developed countries and the performance of the emerging countries we are certain that Petrobras will offer extremely attractive greenfield investments. We have no doubt of that, from the traditional international financiers, the banks, especially if their situation improves, and form other international partners that will appear. But we are certain of one thing. This stress test that the Brazilian government and Petrobras have gone through, which is that after the fall of Lehman Brothers and the absolute closure of international credit lines, we survived. So if we have survived the worst scenario of recent times I don’t have the slightest doubt that Petrobras will have every possibility of raising finance on international markets. If you look at the performance of the oil industry, only Petrobras and one other company reported profits.
FT: When will the next auction round for new blocks take place?
DR: We have to wait for this [the new regulatory framework] to be approved in Congress. Minister Lobão [mines and energy] said in a press conference that he was looking at the possibility of doing a round of concessions this year. Concessions, not production sharing, not the pre-salt. For the pre-salt we have to wait for the regulatory framework. That’s why the government is using the urgency system in Congress [which gives it 90 days to approve or reject the bills]. Now, we are confident that Congress will evaluate this quickly so that we can beginning work on the pre-salt.
FT: What will be the impact of all this on the elections next year?
DR: It’s like this. In Brazil we have a difficult situation, and I’m glad you asked the question. Life is difficult, we have a cycle of four years at the federal and state government level, and a separate four-year cycle for the municipal governments that gives us elections every two years. So you’ve either just been elected, or you’re in the municipal cycle, or you’re in the intermediate year or you’re in election year again. So it’s not possible to imagine that things can only be done in Brazil in years with no election, or else there would be very little time to get anything done. And we’re not in a situation where the people can be kept waiting. This year they’re saying that everything we are doing is electoral, and this year is an intermediate year. Imagine next year.
FT: Well, it’s next year that the bills are likely to be approved.
DR: Yes, it has to be approved next year.
FT: And your candidacy?
This candidacy, this is something, I don’t know if you’ll understand the Brazilian expression, but I always say to the Brazilian press that I won’t talk about my candidacy not even tied up.
But let me tell you one thing about the pre-salt. We looked at all the other regulatory systems in the world. Not me, we commissioned a study for the BNDES. We looked at Angola, everything about Norway, the United States, what was done in the North Sea, the Middle East. We looked at contracts, auction systems, and I’ll tell you something. In few places were there pure auction, in very few places.
FT: Do you think you’ve created a new model?
DR: We adapted various things for Brazil, but we had to adapt them, because here, for example, if you compare Brazil and Norway, there are enormous differences because of each country’s history. We began in Brazil with everybody saying there was no oil. And Petrobras has grown with each step that we’ve taken, side by side. It hasn’t made any great leaps, it has grown alongside the knowledge that we have about our reserves. And it’s Petrobras that has made the discoveries, in contrast with what happened in Norway, where part was discovered by international oil companies. And then Statoil came later and took over control of the reserves. Here the process was different. We began in great difficulties, because the oil in the Campos Basin is heavy, it has high sulphur content, and it’s hard to find. So the concession regime was right for that moment.
And it attracted medium sized companies, like Galp – Chevron came but it was the only big one. But the big ones appeared in strength on the day that we sold concessions in the pre-salt area. And the reason they were attracted was the size of the reserves and the quality of the oil. That’s what explains the presence of big oil companies in some strange parts of the world. Of course operating conditions are a factor but not to the extent that people would have you believe. Of course the companies would like us to keep the concessions system. But that’s not what attracts them. It is the quantity and quality of the oil. One oil company executive said to me the other day, what matters to us is clear and stable rules. And Brazil has clear and stable rules. And he didn’t say that to make me happy. It’s what will happen. We will deliver clear and stable rules. And it is possible in these conditions for an international oil company and a national oil company, as other national oil companies do in other countries, to enter a contract and take their profit.
Today it’s not a trivial matter to have access to reserves. We think we have created a stable and attractive market and international oil companies will want to operate under these rules, which we hope will be approved by Congress. At least this is what we have proposed. Congress can always change it.
But let me tell you: for us the pre-salt is a passport. It’s a passport out of the condition of being the most unequal country in the world.
Lula confident Brazil can ride out crisis
