Brazilian Congress Completes Overhaul of Oil Laws

RIO DE JANEIRO (Dow Jones Newswires), Dec. 2, 2010

Brazil's Congress completed voting on an overhaul of the country's oil laws late Wednesday, passing the last of four bills that give the government a greater stake in recently discovered offshore oil fields.

The proposals were made last year by President Luiz Inacio Lula da Silva, who pledged that the country's newfound oil wealth would be used to ease crushing poverty, improve education and invest in technology and development.

Passage of the bills now clears the way for Brazil to ramp up development of the pre-salt oil province, an ultra-deepwater region holding oil deposits buried more than 3 miles below sand, rocks and a shifting layer of salt. The area is estimated to hold between 50 billion to 100 billion barrels of oil, enough to turn Brazil into one of the world's top five crude oil producers.

Earlier this year, Congress passed three other measures that have already been signed into law by President Lula. One bill created the social investment fund that will use oil revenues for education and health care initiatives. Another bill created a new state-owned oil company, called Pre-Sal Petroleo SA, that will manage the government's pre-salt assets.

Congress also approved the complex capitalization plan for state-run energy giant Petrobras that included the company's $69.9 billion share issue, the world's largest-ever share offer. The capitalization plan included an oil-for-shares swap with the government, with Petrobras receiving the rights to pump 5 billion barrels of oil from government-held areas.

The measure passed late Wednesday, however, was the most controversial. Debate was delayed for months after lawmakers attached an amendment that would more equally distribute oil royalties among Brazil's 26 states and the federal district of Brasilia. Rio de Janeiro and Sao Paulo states, the country's largest oil-producing states, say the changes will mean billions in lost revenue.

"The Lower House cannot maintain the actual distribution, under which 92.5% of royalties go to the federal government and these two states," Rio Grande do Sul Congressman Ibsen Pinheiro, a key player in the royalties debate, told the congressional press office.

President Lula, who has line-item veto power, could--and some say is likely to--decide to veto the royalties amendment. The president's press office declined to comment about passage of the bill, but said Lula could address the measure at events during the day.

If Lula vetoes the amendment, he would leave the controversial topic for his handpicked successor and the president-elect, Dilma Rousseff, to resolve. Rousseff would have to propose a new royalty scheme and send it to Congress for debate, congressional officials said.

Lawmakers from Rousseff's Workers' Party, or PT, and the affiliated Brazilian Democratic Movement Party, or PMDB, would not confirm whether that was indeed the president-elect's plan.

The measure to implement production-sharing agreements for pre-salt oil fields currently under government control, however, will likely be signed into law. Petrobras will be the operator of the fields under the production-sharing deals, but other oil companies will have the right to bid for a piece of the action by guaranteeing the government a large percentage of oil output.

The production-sharing agreements will not cover onshore or shallow-water areas, which will be auctioned off under the current concession-based system. Pre-salt areas previously auctioned off under the concession system will also not be affected by the changes.

Brazil's National Petroleum Agency said earlier this year that it expects to hold the first auction of government-held pre-salt areas in 2011. The auction will likely include the Libra prospect, which is estimated to hold recoverable reserves of between 3.7 billion and 15 billion barrels of oil equivalent--although ANP officials said the best estimate is about 7.9 billion barrels.

Copyright (c) 2010 Dow Jones & Company, Inc.


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