Chevron: New Oil Law Reduces Opportunities in Brazil

BUENOS AIRES (Dow Jones), Oct. 8, 2009

Changes to Brazil's oil laws don't allow much space for international oil companies to take part in recent offshore oil finds, the vice president for global upstream and gas at U.S. oil major Chevron Corp. said Wednesday.

In September, Brazil's government proposed changes to the country's regulatory framework, giving the government a greater stake in the discoveries and state-run energy giant Petrobras the lead role in development.

"The opportunity set in Brazil has been reduced, there's no question of that," Chevron's George Kirkland said on the sidelines of the World Gas Conference in Buenos Aires. "It's really limited now, frankly, to the present licenses that you hold."

Kirkland, who will take over as vice chairman at the company next year, spoke with Dow Jones Newswires in an exclusive interview.

"I really didn't see at this point in time that it really provided much opportunity" for international oil companies, Kirkland said.

Chevron recently achieved its first success in Brazil, pumping the first crude oil from the offshore Frade field in the Campos Basin. The company is in the ramp-up phase at Frade, which is expected to reach peak production of 90,000 barrels a day in about two years.

Chevron also holds non-operating stakes in four other offshore Brazilian fields in the Campos Basin: Atlanta, Oliva, Maromba and Papa-Terra.

"We've got a couple other developments that make a lot of economic sense, and that's good. But we are such a long-term business," Kirkland said.

That long-term future would have looked much brighter with greater access to Brazil's so-called subsalt oil discoveries. While some foreign oil companies snapped up so-called subsalt blocks, remaining acreage was yanked from concession auctions after the first discovery was made.

The subsalt discoveries were made under a thick layer of salt in the Santos Basin off the coast of Sao Paulo and Rio de Janeiro states. The oil lies under more than 2,000 meters of water and a further 5,000 meters under sand, rock and a shifting layer of salt.

In November 2007, Petrobras shocked the world with the announcement of the Tupi field. Tupi was estimated to hold recoverable reserves of between five billion and eight billion barrels of oil equivalent. That was the Western Hemisphere's largest discovery in 30 years.

Tupi's coming out party also turned out to be the end of free-market policies in the exploration and production segment. But oil companies have learned to adapt.

"We've seen this happen before," Kirkland said. "Of course, we'd like greater access but we recognize that that's the decision of the resource holder."

For oil and natural gas companies, the best course of action now is to be ready to provide help if a country shifts course and opens up resources to development, Kirkland said.

"We have to have something to offer that creates value for them," the executive said.

Also, there exists the possibility the proposed changes in Brazil could be watered down. The measures are still under debate in the country's Congress - and some senators and lower house members oppose the changes to the regulatory framework.

Meanwhile, Kirkland said he planned to meet in the future with Petrobras officials and Chevron executives in Brazil to discuss the possible changes.

"I really need to dig into what the new laws truly mean and what the don't mean -- and how we can mature toward opportunities," Kirkland said.

Chevron needs to establish what Brazil will look like in the long term, both based on the company's current holdings and what opportunities the new law might provide, he added.

"We always like to see opportunities. The more opportunities, the better," Kirkland said. "Access is a huge, huge issue for us, and we move through our project queue pretty fast. So that means you always have to have new stuff coming in."  

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