BRAZIL ENTREPRENEUR LAUNCHES CHALLENGER TO OIL GIANT

UNCLAS SECTION 01 OF 02 RIO DE JANEIRO 000159 SIPDIS SENSITIVE STATE FOR WHA/BSC, WHA/EPSC AND GREG MANUEL EB/ESC BRIAN DUGGAN USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D USDOE FOR CAROLYN GAY AND RHEA DAVIS E.O. 12958: N/A TAGS: ENRG EPET EIND EINV BR SUBJECT: BRAZIL ENTREPRENEUR LAUNCHES CHALLENGER TO OIL GIANT PETROBRAS REF: A) RIO DE JANEIRO 138, B) RIO DE JANEIRO 91, C) RIO DE JANEIRO 35, D) 07 SAO PAULO 0953, E) 07 Sao Paulo 899 Sensitive but unclassified, please protect accordingly. ¶1. (U) Summary. A Brazilian oil company that has yet to drill a single well raised US$4.16 billion in an initial stock offering in mid-June, Brazil's largest public offering to date. The huge success of the IPO for OGX Petroleo e Gas Participoes SA reflects a tide of optimism generated by the recent, potentially huge discovery of pre-salt oil reserves in Brazil's Santos Basin. Domestic oil giant Petrobras views OGX's success as a direct threat. Further friction between the two companies is likely as they compete for exploration opportunities and production resources. End Summary. OGX ENTERS THE OIL GAME, TARGETS PETROBRAS ¶2. (U) Rio de Janeiro-based oil company OGX was created less than a year ago, but it is already creating quite a buzz in the industry for its bold moves in challenging Brazilian oil giant Petrobras for a share of the market. OGX is run by 51-year old Brazilian entrepreneur Eike Batista. Though Batista has little knowledge of the oil business, he is an incredibly successful entrepreneur and investors are betting that he will find success in the oil game as well. In mid-June, OGX raised US$4.16 billion in an initial public offering (IPO),Brazil's largest IPO to date (REF E). ¶3. (U) In putting together his OGX team last year, Batista targeted the "best of the best" and spared no expense. He hired Francisco Gros, former Petrobras President under the Cardoso administration, to be CEO. He lured more key executives away from their positions at Petrobras in exchange for equity in Batista's companies, making them instant millionaires. ¶4. (U) In October 2007, just one month before Brazil's "Ninth Bid Round" lease sale for new offshore exploration blocks, OGX delivered an especially damaging blow to Petrobras' interests. Petrobras' Manager for Exploration and Production Paulo Mendonca and Contracts Manager Luis Reis defected to OGX, bringing with them intimate knowledge of Petrobras' bidding strategy in the upcoming auction such as which blocks Petrobras wanted and how much it was willing to bid. ¶5. (U) OGX performed remarkably at the Bid Round, attracting attention for routinely out-bidding Petrobras. It paid around US$800 million for exploration rights in high-potential blocks with estimated reserves of 4.8 billion barrels. For the most part, OGX's blocks are located in shallow offshore locations that already have been produced and returned to the government. However, these blocks may prove valuable given the price of oil and industry speculation that decent reserves remain in them. Indeed, these were blocks that Petrobras had already identified for itself using a wealth of geological data research. OGX plans to start drilling wells by the end of 2008 and hopes to announce oil discoveries as soon as 2009 with some production activity about two years later, announced company executives in late-June. ¶6. (U) OGX also has its eyes on Brazil's newly discovered pre-salt reserves, as does the rest of the industry (REFS A and B). It was prepared to bid strongly on pre-salt blocks in the Ninth Bid Round, but those blocks were withdrawn by the government prior to the auction (REF C). In recent press statements, company executives have said that they have already earmarked US $1.1 billion to acquire new pre-salt exploration prospects if they are offered later this year. EIKE BATISTA'S PURSUIT OF WEALTH ¶7. (U) OGX's success in entering the domestic oil market is due, in large part, to the outstanding business record of owner Eike Batista. He is currently the richest man in Brazil with investments in mining, power, oil, real estate, logistics, entertainment and forestry valued at roughly US$17 billion. Aside from his recent success with the OGX IPO, Batista netted US$3.5 billion in April with the sale of mines to Anglo American -- his third ten-figure payoff in two years from companies he built. He stands to gain at least US$1 billion more in a planned offering of his logistics business, LLX Logistica SA. He sees tremendous opportunity in Brazil's oil sector. In a January 2008 press interview, Batista boldly claimed that he wanted to surpass Bill Gates in wealth within five years. RIO DE JAN 00000159 002 OF 002 ¶8. (U) Batista's road to wealth has been remarkable. In 2001, he lost almost his entire fortune, acquired through lucrative gold mining ventures in Brazil, when he unsuccessfully gambled on mining interests in Europe and Russia. In one case, a Greek court annulled his mining permits which resulted in a US$330 million loss. Over the following six years, Batista refocused on South America and quickly found success in the iron ore industry. By 2007, Fortune Magazine valued him at US$6.6 billion and ranked him number 142 on its List of World Billionaires. In the past year, he has nearly tripled his wealth. COMMENT ¶9. (SBU) OGX's dramatic entry into the Brazilian oil industry is significant. With the financial backing of Batista, OGX has built a formidable team. U.S. oil company contacts have privately shared how they are reveling in Petrobras' frustration with having to deal with real competition from a domestic company for the first time. Worth watching is Petrobras' further reaction as OGX gears up to drill wells. Though OGX can hire top people and win exploration blocks with money alone, it will need partners to drill for and produce oil. We are hearing that Petrobras is strongly discouraging (i.e. threatening to cut them off from Petrobras projects) its own partners from working with OGX. It remains to be seen if OGX can successfully convince potential partners to stand up to Petrobras. ¶10. (U) This message was cleared/coordinated with Embassy Brasilia. MARTINEZ