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Sweeping Changes in Brazil on How Oil Riches Are Spread

August 31st, 2009

petrobras-offshore-oil-rigBrazil is set to unveil today, August 31st, a sweeping reform of regulations covering the oil and natural gas industries. The regulatory framework will delineate how recently discovered offshore sub-salt oil deposits should be developed, who will develop them and who will reap the rewards.

The reform is part of Brazilian President Luiz Inácio Lula da Silva’s effort to use the newfound oil wealth to ease the country’s poverty, improve its education system and promote technological research.

Lula is expected to forward the measures to Congress on Tuesday, asking for quick approval to speed up development of the oil deposits. But with elections on the horizon next year, the political infighting has already started.

Doubts about how royalties from the promising sub salt oil deposits will be distributed have cast a pall over Monday’s grand ceremony, set to take place at a convention hall in Brasilia. The governors of Rio de Janeiro and Sao Paulo states haven’t yet confirmed their presence because of the dispute.

Currently, states closest to oil fields receive the lion’s share of royalties and special participation taxes, generating billions of Brazilian reais in revenue each year. However Lula wants the royalties from the subsalt discoveries more evenly distributed.

On Friday evening, Energy Minister Edison Lobão told reporters in Brasilia that talks with key governors Friday on the issue of royalties “were inconclusive.” However, he expressed confidence that further talks over the weekend will resolve the issue.

Earlier this week, Lobão reinforced the government’s interest in systematically developing offshore oil reserves, saying efforts will continue “based on the conviction that the sub-salt region has large concentrations of oil.”

The sub-salt discoveries lie under more than 2,000 meters of water and a further 5,000 meters of sand, rock and a shifting layer of salt. In 2007, government managed Petrobras, shocked the world with the announcement of the Tupi discovery, the Western Hemisphere’s largest oil find in more than 30 years.

The Lula da Silva administration then withdrew exploration and production blocks from planned concession auctions, a process that will likely be restarted with the new regulations albeit in a less-favorable manner to foreign oil companies.

Brazil’s government will auction off currently unlicensed E&P blocks under production-sharing agreements, with winners selected on the basis of how much oil they will grant the government. Winners will also pay a bonus upon signing the contracts, earmarked for a social investment fund that will focus on education, science, technology and the poor.

In an effort to appease Petrobras and its government allies, the company will be given operator status for all the blocks – plus a minimum stake of about 30% in each block. Petrobras also will serve as the commercial outlet for the government’s oil take, refining the crude oil at several planned refineries for sale both here and abroad.

A new state-owned company, Petrosal will be created to manage the government’s precious assets. Petrosal could eventually overshadow Petrobras, according to some analysts.

However, quick approval of the legislation is unlikely. It took more than a year for the measures to be hammered out by an internal government panel, and politicians are expected to capitalize on the national debate sparked by the new regulations.


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