Oil Finds Prompt Brazil to Change Rules

RIO DE JANEIRO, April 18, 2008 (Dow Jones Newswires)

Following news of another potentially massive offshore oil find, Brazil's government is likely to change the rules for its oil sector sometime this year, joining a long list of countries that have used high oil prices as an excuse to raise the amount of revenue the government gets from the oil industry.

Currently, Brazil charges a lower tax and royalty rate than many other oil producers -- a legacy from the late 1990s when the country was a net oil importer and wanted to attract companies to explore and find new deposits. But Brazil is now a net oil exporter, and appears to have made two major discoveries in recent years that could turn the country into a major oil exporter.

The first discovery, a field called Tupi, is believed to have between 5 billion and 8 billion barrels of reserves. This week, a Brazilian oil official said that a second recent discovery, which comprises a much larger area, could hold as much as 33 billion barrels of reserves. State oil firm Petroleo Brasileiros SA (PBR) downplayed the official's estimate and said it was too early to tell, but experts agree the second discovery appears very large.

As in any country, the oil bonanza is likely to become a political issue over how much the government should take for spending and how much it should leave to the private sector. That is an even bigger issue when oil prices are so high. Venezuela just this week announced a new "windfall" tax when oil prices are above $70 and $100 dollars a barrel.

The Brazilian government of President Luiz Inacio Lula da Silva is studying the best way to change the rules for the oil sector, Mines and Energy Minister Edison Lobao said recently. Other officials say there is a consensus that the government needs to raise its take from the industry. What is unresolved is how.

The change will affect Petrobras, as the state firm is called, as well as international firms operating offshore such as Norway's StatoilHydro ASA (STO), Exxon-Mobil Corp. (XOM), BG Group Plc. (BRGYY), and Portugal's Galp Energia (GALP.LB).

Private companies say the Brazilian government has every right to raise its take after recent discoveries, but they hope the government doesn't go too far. Brazil is one of the few promising frontiers in global oil exploration. Both recent discoveries lie in an area known as the "pre-salt area" -- in very deep water and below some 5,000 meters of sand, rocks and salt - that is believed to be rich in oil but difficult and costly to reach.

"I think the government is entitled to increase its take after the Tupi discovery," Jorge Camargo, the president of the Brazilian unit of Norway's StatoilHydro ASA, told Dow Jones Newswires in a recent interview. Mr. Camargo is also the chairman of the steering committee of the Brazilian Petroleum Institute, or IBP, Brazil's main oil industry group. He made his comment before news of the latest discovery.

But Mr. Camargo suggested the rule changes shouldn't go too far or apply to existing contracts. "We hope that the new rules will be created respecting previous contracts. The current system has served both Petrobras and foreign firms well," he said.

Companies that produce oil or gas in Brazil pay 10% in fixed royalties. On top of that, they pay a special tax for large fields between 10% and 40% of revenue depending on volume, location, depth and age of the field. Sales taxes levied by Brazilian states come on top of that, but are relatively minor.

Brazil's oil regulatory agency is working out a proposal for changes which it plans to present to the government's National Energy Policy Council by the end of June. It may propose to hike the special participation tax to a range of about 40% to 60%.

Petrobras, which currently produces more than 95% of Brazil's oil, would be the hardest hit. Should special participation taxes rise to 50% to 60% of revenue, the company may have to pay an additional $4.1 billion, more than doubling what it pays in special participation now, Nomura Equity Research analyst Xavier Mieles Grunauer said in a recent report.

As private firms are set to increase their oil output in Brazil to several hundred thousand barrels a day in coming years, they would also increasingly be hit. BG Group has a 25% stake in Tupi, with Galp Energia holding another 10% and Petrobras the rest. The companies expect to start producing an initial 100,000 barrels a day at Tupi in 2011, but production could peak at 1 million barrels a day, Petrobras has said.

Several other foreign firms have recently made optimistic production forecasts for Brazil. StatoilHydro in 2010 expects to produce 100,000 barrels a day at Peregrino in the Campos Basin. Camargo calls Peregrino a "gigantic field," which means it may be subject to the payment of special participation taxes.

Brazil in 1997 ended Petrobras' monopoly on oil exploration and opened the sector to foreign competition. Petrobras has since flourished, and more than doubled its oil output to 2.35 million barrels of oil equivalent a day.

Annual auctions for oil and gas exploration and production blocks in recent years have earned the government billions of dollars. And the industry is excited to bid for more exploration blocks. But it remains to be answered whether Brazilian concessions will remain attractive after a hike in production taxes.

As special participation taxes only have to be paid on very large fields, doubling that tax at 2007 levels would have increased Brazil's government take "from a reported 57% to 62%, closer to its peers in Russia and Kazakhstan, which according to our calculations surrender over 70% of their pre-tax earnings," Mr. Grunauer said.

RIO DE JANEIRO, April 18, 2008 (Dow Jones Newswires)

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