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There’s No Business Like Oil Business – in Brazil Anyway

Brazil's Petrobras Oil has seldom been far from the headlines in Brazil since the state-owned petroleum giant, Petrobras, announced at the end of last year that it had discovered large new offshore reserves of oil and gas. Should these reserves be recoverable then Brazil is set to become not only an oil exporter but one of the world’s biggest producers.

The news was hailed by investors and share prices in Petrobras rose sharply. However, a comment by the head of the National Petroleum Agency (ANP), Haroldo Lima, on April 14 suggesting that there were further deposits of oil which could be five times greater raised the stakes even higher and pushed up the share price of Petrobras and other associated companies not only in Brazil but all over the world.

You might think this would be good news for Brazil but it was not, since Lima not only jumped the gun but may have given inaccurate information and, at the same time, he completely mishandled the way major news involving publicly-traded companies should be communicated.

This was a perfect example of the iniquity of the Brazilian political system, which allows people to assume positions of great authority for which they are not remotely qualified. A glance at Lima’s biography on the ANP site shows that although he qualified as an electrical engineer, he has devoted most of his life to politics as a Communist.

The site gives a glowing description of him as someone who spent 10 years hiding from the military “organizing resistance to the regime.” He was captured when a meeting of the Central Committee of the Communist Party was “brutally attacked by the repression” according to the site and three party members were shot dead and five arrested, including Lima who spent three years in prison.

This is all good stuff if you are nostalgic leftist but hardly the type of corporate CV one expects of someone who is in charge of one of the most important agencies in the country. Some technical qualifications, experience as an executive and a MBA from a decent business school would be more appropriate albeit less exciting.

Lima became head of the ANP simply because the Communist Party, which has miniscule popular support, is a member of the alliance which supports President Luiz Inácio Lula da Silva’s government. He is just one example of incompetent politicians who have been given positions in which they can spend budgets worth billions of reais not only in regulatory agencies but state-controlled companies like Petrobras itself, electrical energy utilities and others.

The pitiful way the air regulator, ANAC, handled the chaos which hit Brazil’s air travel last year was another example of an inefficient body led by political placemen with little hands-on experience of the sector. Who will ever forget the sight of the ANAC head, Denise Abreu, smoking a cigar at a wedding on the day of Brazil’s worst air disaster last year in which 199 people died?

Her previous experience had included a spell as an adviser to the chief of staff’s office in Brasília from 2003 to 2005 under José Dirceu who was later expelled from Congress on allegations that he had orchestrated the “bribes for votes” scandal known as the mensalão.

In the typically arrogant fashion of the Brazilian politician, Lima denied he had done anything wrong in making the comment in the middle of a seminar in Rio de Janeiro. He claimed that the information had been public knowledge and had appeared in an American oil magazine last year.

He also disclaimed any responsibility for the sudden jump in the share price following his comments. “I’m not subordinate to the CVM (the Brazilian Securities and Exchange Commission). I’m a member of the government,” he said.

It is difficult to believe that anyone in such a position could say something as amateurish as this. First of all, Lima should know that any information of this nature should have been checked with Petrobras. If it was correct it should then have been announced openly and formally after trading on the stock exchange had ended so that all shareholders and investors would have equal access to it.

By making his comments in so casual a manner, at a meeting attended by the media and during stock market trading hours, Lima broke all the rules. A lot of people must have made a lot of money when this news broke.

The Petrobras chairman, Sergio Gabrielli, and the exploration director, Guilherme Estrella, basically denied Lima’s comments in television interviews. The company also issued a “Clarification” on its site which contains a rebuke to Lima. “More conclusive data on the discovery’s potential will only be known after the other phases involved in the assessment process have been completed and they will be announced to the market in a timely way,” it said.

Those people who have bought shares at the higher price must now be wondering whether they did the right thing. Since Lima was leader of the Communist Party in the Senate before becoming head of the ANP he is unlikely to feel sympathy for shareholders even though the state is still the majority shareholder and the Petrobras workers’ pension fund is also a major shareholder.

Secondly, despite his boast, Lima is not in fact a member of the government. His position is a technical one and, even though he was nominated by Lula, his responsibility is not to the administration of the day but to the nation as a whole and to future generations.

Naturally there was no sign that Lima might behave honorably and apologize or even resign. Nor was there any pressure from his political pals of any hue to stand down. The energy minister, Edson Lobão, who incidentally admitted on taking office recently that he knew practically nothing about the sector, also ruled out taking any action against Lima.

This episode does not seem to have caused any immediate dent to Brazil’s image among domestic and foreign investors and the Petrobras share has continued to rise. The market may have shrugged it off for the moment but it could be a very different story in six months’ time if Lima’s comments are not substantiated.

John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site www.brazilpoliticalcomment.com.br. He can be contacted at jf@celt.com.br.

© John Fitzpatrick 2008

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