Petrobras, the Brazilian national oil company, is preparing to raise nearly $32.0 billion from minority shareholders. Combined with the $42.5 billion worth of shares issued to the Brazilian government in exchange for five billion barrels of proved oil reserves, this is the biggest share offering in history. However, Petrobras' future is dependent on its relationship with the Brazilian government.
For Petrobras, the objective of such aggressive share issuance is to help fund the development program of offshore oil fields, mainly within the pre-salt layer, as part of the company's $224 billion capital expenditure plan to double its oil output by 2014. For potential share buyers and the market, the key concern centers on Petrobras' future relationship with the Brazilian government, which already owns one third of the company and the majority of votes.
Petrobras was founded in 1953 as part of former president Getulio Vargas' efforts to nationalize the country's oil industry. In 1997 the government privatized Petrobras and opened its oil market to competition; since then the company has achieved significant results, becoming a pioneer in deepwater oil exploration and achieving an output of more than two million barrels a day.
Petrobras is now considered an industry champion with a market capitalization of nearly $200 billion in late 2009, one of the highest in the New York Stock Exchange. The only oil companies to surpass Petrobras in terms of market capitalization in 2009 were PetroChina and ExxonMobil.
Part of this success, it is believed, is due to the fact that, unlike other Latin American oil giants such as Mexico's Pemex or Venezuela's PDVSA, Petrobras operates with comparatively little government intervention. Such room for maneuver and relative insulation from daily politics has pushed the company to adopt an independent market strategy, to increase efficiency and invest in aggressive research and development programs. As a result, the company is regarded to be what is known in the industry as a 'modern national oil company.'
However, given the interest of the incumbent Brazilian government in utilizing the company as a tool for national development, the autonomy of Petrobras could be in jeopardy. Indeed, the fact that early attempts in 2010 to raise capital were labeled as politically biased demonstrates that the relationship between Petrobras and the government is likely to change. In addition, the general opinion is that the nominal price of $8.51 per barrel for the five billion barrel reserve is too high. These factors indicate the possibility of increased government intervention in Petrobras' strategic decisions and destabilization in Brazil's ongoing oil industry reforms.
If investors' concerns and similar cases in Latin America, Africa and the Middle East, where state intervention did not yield entirely successful results, are any indication, the Brazilian government needs to maneuver itself carefully. It should resist the urge to increase state control over the company's operations and must maintain its free market reforms; over-zealous intervention may risk undoing the great progress the national oil company has achieved so far.