By Carl Delfeld of Chartwell ETF & ETFfolio
Brazil’s (EWZ) newly discovered reserves, both huge and hard to reach, are expected to propel Brazil up the table of oil producing nations according to Joe Carrol of Bloomberg. British Petroleum CEO Tony Hayward says the new finds are “as significant as the North Sea” – which in the 1970s was one of the new frontiers that helped pull the world out of its last big oil shock.
But many in the center-leftwing government seem determined to avoid sharing the coming bonanza. The future shape of the industry may be decided by short-term political maneuvering leading up to presidential elections in 2010.
Petrobras, the top holding in the iShares MSCI Brazil (EWZ) ETF, a world leader in deep-sea exploration, is a natural leader for the difficult task of tapping what are some of the most inaccessible oilfields on earth. But the government may have other ideas. On September 19, an inter-ministerial commission is due to present its recommendations on the future structure of Brazil’s oil sector.
The likely outcome is a proposal to create a new national oil company, backed by Mr Lula da Silva, under 100% government control, to take ownership of the new reserves and develop them in partnership with Petrobras and others.
While Petrobras is controlled by the Brazilian state through a majority of its voting stock, most of its capital is in non-voting shares. Some 60% of total capital is held by minority shareholders, a group of mostly foreign investors that would miss the opportunity to benefit from exploiting the offshore discoveries.
This a type of insiduous political risk not usually appreciated by investors in emerging markets. Chartwell ETF and ETFfolio pay as much attention to political risk as valuations and momentum in selecting country ETFs.
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