Brazil Readies New Oil Regime As Subsalt Challenges Mount

RIO DE JANEIRO (Dow Jones Newswires), Aug. 5, 2009

Brazil's government is preparing to submit changes to laws regulating the country's oil and natural gas sectors amid doubts about the "can't-miss" quality of recently discovered subsalt prospects.

Mines and Energy Minister Edison Lobao will hand over the completed proposals for regulatory change to President Luiz Inacio Lula da Silva later Wednesday. Details about the proposals will likely be released by the president's office.

The much-anticipated, and much-delayed, conclusions by a special government panel signal the next step in Brazil's possible rise to oil power -- and the challenges the country faces in that ascension.

President Lula is expected to evaluate the proposals for about a week, suggest changes and then forward the package of three legislative measures to Congress for approval.

But Brazil's legislative body is in the midst of turmoil amid a series of sensitive investigations.

The Senate is poised to start an inquiry into state-run energy giant Petrobras (PBR), the primary stakeholder in the subsalt oil blocks. Otherwise, legislative action has ground nearly to a halt because of an investigation into alleged irregularities involving Senate President Jose Sarney, a key government ally.

President Lula will ask Congress to give the bills the highest possible priority under legislative rules, but the current crisis could delay consideration.

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, Iara, were estimated to hold recoverable reserves of between 8 billion and 12 billion barrels of oil equivalent, or BOE. That was the largest oil find in the Western Hemisphere in more than 30 years.

And some industry experts and government officials think the Santos Basin could hold even more oil - as much as 70 billion to 100 billion BOE.

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

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 likely to be maintained.

Petrobras, which holds stakes in many of the subsalt E&P blocks previously auctioned, would also be protected under the new law. The measures are expected to guarantee Petrobras a slice of subsalt exploration blocks currently controlled by the government, including possible operator status.

Petrosal may also be allowed to grant concessions without auctions. That would allow Petrobras to receive some E&P blocks without competition.

Petrobras would also benefit from a so-called unitization process. It is believed that some fields, including Tupi and Iara, 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 levied on top of current royalties and special participation taxes.

A social investment fund would then be created to direct proceeds from the oil revenue 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.

The subsalt discoveries were made under a thick layer of salt. 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.

But development of the subsalt region is expected to be pricey and complicated. Oil majors Exxon Mobil (XOM) and Hess (HES) recently cast doubt on the region's can't-miss label with a highly publicized dry well, coming up empty at the Guarani prospect.

While Petrobras said it's had a 100% success rate so far with wells drilled in the Santos Basin, its long-term well test at Tupi was recently shut down because of technical problems.

Flow tests showed promise at the Tupi well, but an issue with a submarine well-flow control device known as a wet Christmas tree closed down testing for about four months.

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