The relatively recent discovery of oilfields off the coast of Brazil has led industry experts to conclude that the region could be as important as the North Sea. Eyeing the profits that the oil could bring to the country, President Lula has been keen to ensure drilling could begin as soon as possible. The result has been an influx of international oil companies and numerous partnerships made with Brazil's largest company, state controlled Petrobras.
As a developing country Brazil's health and safety regulation is less rigorous than that of a developed nation. However, the BP oil spill has raised questions as to the preparedness of Brazil to exploits its recently discovered oil fields whilst ensuring sufficient controls are in place. In response to the disaster in the Gulf of Mexico, the Brazilian minister of environment, Izabella Teixeira, met with the secretary of state for the environment, Marilene Ramos, to discuss preventive strategies for offshore oil extraction in Brazil.
Furthermore, the national energy regulator, the ANP, announced the following: "We will be sending information requests to all concession-holders that operate in Brazilian water seeking information on well control systems for offshore drilling and we will be asking concession-holders to reevaluate their emergency plans and send documentation to the ANP about their respective response capacity."
Investors in Latin America funds may be surprised to find out just how much exposure they have to Petrobras and therefore how vulnerable their investments are to any changes in the Brazilian oil industry. Investor concerns about the oil industry have hit Petrobras’s share price and news of an increase in regulation will do nothing to help regain investor confidence.
Performance of MSCI Brazil vs FTSE World Index - Oil & Gas over 1-mth
Source: Financial Express Analytics
Petrobras is one of the largest holdings in the portfolios of many Latin American funds. These funds have, as a result of Petrobras's share price falls, taken a hit since the oil spill in the Gulf.
The funds with the greatest holdings in Petrobras all saw their fund price take a small nose-dive on 21 April, when the oil spill occurred. These falls are relatively reactionary and it will, of course, take time for the full impact to be felt.
| Fund | Holding in Petrobas |
Performance since 21 April 2010 |
| UBS Equity Latin America |
14.62 |
-7.43 |
| Aviva Latin America Equity |
12.9 |
-4.99 |
| Amundi Latin America Equity |
9.82 |
-10.49 |
| ING Latin America |
9.48 |
-8.45 |
| Morgan Stanley Latin America Equity |
9.3 |
-7.21 |
What is significant is the fact that an oil spill in the US has an immediate effect on the share price of a Brazilian oil company. It is too early to quantify the long term effects of the oil spill on Petrobras and the Brazilian oil industry will be. Greater regulation now seems certain.
From their operations in developed nations, international oil companies are well used to complying with regulations and restrictions. In contrast, the culture in which Petrobras operates is significantly freer meaning that it would be more difficult and costly for them to comply with any new regulations.
Further regulation and constrains would slow drilling and hit Petrobras profits, which in turn would impact on virtually every Latin America fund.