Angola & Brazil deepen ties

Readers Comment  on STRATFOR Reports
Stratfor notices trend first reported on here previously before.

With the announcement of an additional $1 billion line of credit, Brazil has advanced the lead it holds as the largest foreign investor in rebuilding Angola’s civil war-ravaged infrastructure. But from Brazil’s perspective, there is more to it than simply gaining construction contracts in Angola. The biggest motivation is likely linked to Brazil’s desire for Petroleo Brasileiro to increase its foothold in the oil deposits waiting to be tapped off Angolan shores.

Analysis

Angolan President Eduardo dos Santos made a state visit to Brazil June 22-24, meeting with Brazilian President Luiz Inacio Lula da Silva and coming away with an additional $1 billion line of credit from Brasilia, which is the leading foreign founder of reconstruction projects in Angola. The money will likely be used to hire Brazilian firms to carry out reconstruction projects in Angola. It could also allow Brazil’s state-controlled oil company Petroleo Brasileiro (Petrobras) to strengthen its foothold in Angola’s offshore oil industry and gain valuable experience for developing Brazil’s massive pre-salt offshore reserves.

Reconstruction is a major industry in Angola, a country only seven years removed from a 27-year civil war that left much of its infrastructure in tatters. Luanda, Angola’s capital, finances these projects predominantly with oil revenues, but it also taps some external sources of financing. With the announcement of the additional $1 billion credit line, Brazil has advanced the lead it holds as the largest foreign investor in Angolan reconstruction. Even before dos Santos’ visit, Brazil had already committed a total of $1.6 billion to projects currently under way, recently completed or already planned. (Most of these projects are being built in and around Luanda.) Only China, a country that has shown no hesitancy to throw money at any African country with significant amounts of natural resources, comes even close to Brazil in this category.

Brazilian credit for Angola benefits both countries because of the unspoken understanding that the Angolan government will hire Brazilian companies to do the actual work on any given project. But from Brazil’s perspective, there is more to it than simply gaining construction contracts in Angola. The biggest motivation for being willing to invest a total of $2.6 billion in Angolan construction projects is likely linked to increasing Petrobras’ foothold in the oil deposits offshore. To this end, offering an extra $1 billion credit line is seen as a down payment toward obtaining new offshore concessions. And $1 billion itself is not an extraordinary amount; the Chinese are rumored to have paid $1.4 billion in signature bonuses in Angola’s 2006 licensing round.

Petrobras is no stranger to the Angolan oil industry, having obtained its first stake in 1979. The company currently maintains stakes in six Angolan offshore blocks and is the operator of half of them. None of the blocks operated by Petrobras, however, are actually producing any oil at the moment. In fact, of all the blocks in which Petrobras is a partner, five are in the exploration phase and only one is producing anything at all (a paltry 6,200 barrels per day at that).

Nevertheless, Petrobras sees the geological formations off Angola’s shores as being extremely similar to Brazil’s pre-salt deposits, which are on the verge of making the country a rising oil power. Indeed, Petrobras officials regularly express their interest in playing a larger role in developing offshore fields the Angolans are incapable of operating, and have recently stated that the company plans to invest more than $3 billion in the Angolan oil sector through 2012.

STRATFOR sources in Angola say that the Angolan government could offer an oil-licensing round at the end of 2010. It all depends on when Angola calculates it is most advantageous to hold a licensing round. Whenever that day comes, the Chinese are expected to make a major push to win fresh blocks. Not wanting to lose out, Brazil likely sees its new credit line as a way to line the pockets of decision makers in the ruling Popular Movement for the Liberation of Angola, led by dos Santos, in hopes that it will spur Luanda to call for another oil-block licensing auction that will give the Brazilians (and not the Chinese) a leg up.

This is simply a continuation of Brazilian investment in Africa not just for strategic reasons but also long term return of investments that pay off.

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