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Cracks appear in Brazil

As Brazil competes for international investment it is opening up its trove of pre-salt reserves to foreign majors

For years, international oil companies have come through Brazil with a common item at the top of their wish list: more access to the country's vast deep-water pre-salt reserves.

In October, they finally got what they wanted as Brazil's new president Michel Temer pushed through several pro-investor reforms. After a long and contentious debate, Brazilian lawmakers overturned a piece of 2010 legislation that required state-controlled Petrobras to hold at least an operating 30% stake in all of the country's pre-salt oil projects.

The rule had choked off foreign investment in the country's largest oilfields as companies weren't willing to pump billions of dollars into uncertain projects they didn't control. It had also become a millstone around Petrobras, posing huge logistical and operational difficulties and forcing the company to take on unsustainable levels of debt. As Petrobras's finances have worsened, more pre-salt projects have been delayed or shelved.

The pessimistic take on the changes is that it is too little too late. When the pre-salt legislation was enacted in 2010, oil prices were around $80 a barrel and foreign investors were beating a path to Brazil's newfound oil bounty. Today, not only are prices lower, but the emergence of US shale in the intervening years has shaken up the established oil order, likely pushing Brazilian deep water up the cost curve.

But a rosier scenario is equally plausible. The Opec agreement in Algiers has most likely put a floor under oil prices somewhere in the mid-$40s, if not higher. With the worst of the downturn almost certainly behind the industry, the oil majors could be looking for new growth opportunities.

At the very least, the changes coming out of Brazil will cause oil executives to take a fresh look at the country. "Our foreign ministry representation unit in Houston, in the very following day, received seven manifestations of interest from big companies," Petrobras's new chief executive Pedro Parente claimed in an interview with Bloomberg.

Gatekeeping

For companies looking to crack into the pre-salt, Petrobras will still be the first port of call. It has a substantial portfolio of pre-salt projects that are going nowhere fast, and with a divestiture target of $18bn by 2018 it is a motivated seller. Selling off assets is a centrepiece of chief executive Parente's plan to cut Petrobras's $125bn debt load. Likely candidates include the Buzios cluster of pre-salt fields, the Libra megaproject, and others that are in the early stages of development and still need significant investment.

The rule change also allows for a pre-salt licensing round in 2017. That auction could see highly prospective acreage around the established Carcará, Gato do Mato and Sapinhoá discoveries put up for bidding. To sweeten the terms for potential investors, Brazilian rule makers are also looking to reduce the country's onerous local-content requirements and cut hundreds of other restrictions out of a notoriously bloated regulatory regime.

While the pre-salt has been slower than expected, output is on the rise and the projects in production are for the most part living up to the hype. From virtually nothing just a few years ago, Petrobras reported pre-salt crude output in September of 1.17m barrels a day and the company claims that productivity is on the rise.

That companies already established in the pre-salt as Petrobras's junior partners appear to be keenest on new opportunities confirms the attractiveness. Statoil-among the largest foreign pre-salt stakeholders-bought a controlling stake in part of the Carcará find in July for $2.5bn. Portugal's Galp Energia, which has pinned its growth hopes largely to the pre-salt, signed a strategic alliance with Petrobras to deepen its ties with the country. Shell, which became Brazil's largest foreign producer when it acquired BG, has been coy on its plans, but the company's chief executive Ben van Beurden said it plans to up its involvement in the country. Others are sure to follow.

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