More Doubts Than Answers As Brazil Prepares New Oil Law

RIO DE JANEIRO (Dow Jones Newswires), Jun. 16, 2009

Work on a critical new oil law for Brazil is near completion but doubts remain about how the new framework might work and when it will be implemented.

Brazilian President Luiz Inacio Lula da Silva created an internal panel last year to craft the new law, with the aim of giving the government a greater share of huge oil discoveries made in the subsalt region off Brazil's coast.

A Mines and Energy Ministry official told Dow Jones Newswires that nothing concrete has been presented yet to the president.

The working panel will finalize its proposal at a meeting later this week, then send it to President Lula, the official said. "Any further announcement belongs to the president's office," he added.

Clamor for the changes resulted from the discovery of the Tupi field in the Santos Basin, off the coast of Rio de Janeiro and Sao Paulo states.

Tupi and a sister field, called Iara, were estimated to hold recoverable reserves of between 8 billion and 12 billion barrels of oil equivalent, or BOE. Some industry experts and government officials think the Santos Basin could hold as much as 70 billion to 100 billion BOE.

The new regulatory framework has been partially revealed in public comments by key officials, including Energy Minister Edison Lobao and Haroldo Lima, chairman of Brazil's National Petroleum Agency, or ANP. The two men are members of the working panel.

The foundation of Brazil's new oil legislation will likely be based on the so-called Norway model. Norway created Petoro, a state-owned company that manages the country's offshore oil and gas reserves. The Norwegian government also holds a controlling stake in leading oil and gas producer StatoilHydro ASA (STO).

Brazil plans to create a new, wholly state-owned company, dubbed Petrosal, to manage development of subsalt acreage currently under government control. Petrosal would then offer up concessions for exploration and production blocks under production-sharing agreements, reviving auctions of offshore E&P blocks halted in 2007.

E&P concessions awarded in previous auctions, including those containing the recently discovered subsalt deposits, are expected to be maintained.

Brazilian state-run energy giant Petrobras (PBR), which holds stakes in many of the subsalt E&P blocks previously auctioned, would also be protected under the new law. Petrosal will likely be allowed to grant concessions without auctions, allowing Petrobras to receive some E&P blocks without competition.

Petrobras, as the current leading stakeholder in offshore blocks, would also benefit from a so-called unitization process.

It is believed that some fields, including the Tupi and Iara fields, extend beyond the boundaries of current exploration blocks into areas now controlled by the government. The government, via Petrosal, could grant Petrobras and its consortium partners the rights to connect up, or "unitize," such fields under production-sharing agreements.

The new regulatory framework will also include a special tax on production from the subsalt oil fields that would be levied on top of current royalties and special participation taxes.

A social investment fund would then be created to take proceeds from the oil revenue and direct them toward improving Brazil's education system and diminishing the country's crushing poverty. That would fulfill President Lula's pledge to use the country's newfound oil wealth to benefit the broader population.

A source with knowledge of the discussions told Dow Jones that negotiations among factions within the government's working group were still ongoing.

"These elements are all part of the discussion, but nothing has been finalized yet," the source said.

Furthermore, the proposals will need to be submitted to Brazil's Congress for debate and approval, a sticky situation with elections on the horizon in 2010. President Lula is expected to submit the new regulatory regime for approval when Congress returns from recess in August.

The likelihood of congressional delays, however, could result in additional regulatory uncertainty through 2011, when the next administration enters office, according to political analysts at Eurasia Group. President Lula isn't eligible for a third four-year term in 2010.

"Such uncertainty could limit future E&P opportunities for international oil companies and the potential increase in Brazil's oil production," Eurasia Group said in a research report Monday.

Petrobras and foreign oil majors also face the prospect of higher taxes on subsalt oil deposits, Eurasia Group added.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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