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Risks and rewards still abound in Brazil

Optimists see creative destruction at work in Brazil and believe that positive developments are rising from the ashes.

Pessimists fear a growing quagmire with a third of the ruling Senate now under investigation over the Car Wash scandal.

A recent court ruling blocking a Statoil deal with Petrobras certainly could undermine a new drive for foreign investors.

And industry remains frustrated by insensitive lawmaking such as the 18% value-added tax on crude production by the state of Rio de Janeiro.

Things have not been easy. The 2014 collapse of the oil price caused immense economic harm to Brazil while political instability led to the impeachment of then-president, Dilma Rousseff.

Not long ago, Brazil was seen as one of the most promising economies in the world, as well as being one of the most prolific hydrocarbon provinces.

So why is there any room for optimism now?

The decision last week by Supreme Court Justice Edson Fachin to extend the Car Wash probe to a third of the national Senate, 10% of the Chamber of Deputies and four former presidents has blown apart any pretense that potential wrongdoing was located in any one party rather than being endemic across the whole political establishment.

The new investigation follows claims that offshore engineering giant Odebrecht had been paying off officials from pretty much all 26 parties.

Even current president, Michel Temer, is among the long list of politicians alleged to have benefited from Odebrecht's generosity. He is currently shielded from investigation by executive privilege stemming from his high office.

Some analysts argue the upheaval has opened the way for a new breed of unaligned politicians.

However, in the meantime it has encouraged Temer to take more political risks, not least in the oil sector where sacred cows have been slaughtered.

State-controlled Petrobras has lost its rights to be sole operator in the choice pre-salt deep-water acreage and has been forced to sell some existing assets, a strategy its new management welcomes. In addition, offshore service contracts have been opened up to foreign contractors.

Brazilian energy officials are rushing out a series of licensing rounds over the next three years with four offerings in 2017 alone, starting from next month.

They believe almost $8 billion could be raised by the end of 2019 and claim there is a clamour of foreign interest.

Meanwhile the Brazilian Petroleum Institute is taking action on behalf of the wider oil industry to try to eradicate Rio’s punitive VAT regime.

Statoil and Petrobras can be expected to challenge the federal courts that have for the moment halted the $2.5 billion Carcara field deal over claims the Norwegian player won the acreage at a knock-down price.

There had already been warnings from Brazil’s federal accounts tribunal that Petrobras needed to be more transparent about the way it disposed of its assets. That is fair enough.

There had already been warnings... that Petrobras needed to be more transparent.

And in recent months there are signs the economy is responding positively to Temer’s initiatives. Credit agencies have upgraded Brazil’s sovereign debt rating, inflation has fallen and retail sales climbed.

There are still significant political risks doing oil business with Brazil, but commercial opportunities abound.