Political Bickering Already Bogs Down Brazil Oil Debate

RIO DE JANEIRO (Dow Jones Newswires), Sept. 4, 2009

Political bickering over potential windfall oil profits threatens to derail debate over Brazil's new regulatory framework for oil and gas, mere days after the proposals were announced with great fanfare.

Governors from key oil-producing states clamor to maintain royalties; opposition leaders vow to fight the monopoly granted to state-run energy giant Petrobras (PBR); and bad blood remains from a string of recent congressional investigations pitting many lawmakers against one another.

Brazilian President Luiz Inacio Lula da Silva submitted his reform package for the oil industry in four bills under a legislative procedure calling for "urgent" debate and action. The procedure stipulates a maximum of 135 days of debate, including action in both houses of congress and eventual reconciliation of differing versions of the legislation.

Many experts and analysts consider the time frame ambitious, at best, considering that the current regulatory regime took about 18 months of often-heated debate before being passed in 1997.

"I think the fast-track is an overly optimistic view," said David Cassuto, a law professor at Pace University and director of Pace's Brazil-American Institute for Law and Environment.

For many experts and political insiders, the changes proposed by President Lula to give the government a greater share of recently discovered offshore oil deposits are too sweeping to be passed with haste.

Brazil will move from a primarily free-market, concession-based system for oil exploration and production to a production-sharing regime that gives Petrobras -- once a bastion of patronage and inefficiency -- a monopoly on development of the so-called subsalt discoveries.

The subsalt reserves were found under a thick layer of salt, with oil buried under more than 2,000 meters of water and a further 5,000 meters under sand, rock and a shifting layer of salt.

In 2007, Petrobras shocked the world with the announcement of the Tupi discovery, the Western Hemisphere's largest oil find in more than 30 years.

Trade groups such as the Brazilian Petroleum Institute and the National Confederation of Industries blasted Petrobras' return to a monopoly, noting that the country's oil production doubled in the decade after the company was partially privatized. The trade groups also said the lack of competition would hurt suppliers and undercut private investment.

That would undermine a key pillar of President Lula's proposal, which is to create a vibrant oil-services industry that could not only feed local oil development but export equipment and services abroad. The supply chain will need to invest about $40 billion over the next five years alone to meet demand for existing offshore projects, government officials have estimated.

Meanwhile, governors in the key oil-producing states of Espirito Santo, Rio de Janeiro and Sao Paulo have banded together with representatives and senators to protect current royalty regimes. Pressure from the three states caused President Lula to remove any changes to the royalty payments from the proposals.

While President Lula created a new social investment fund to more equitably distribute revenue from subsalt oil, states are lining up to divide up the future wealth -- or possibly create separate, state-based funds.

"There are going to be a lot of negotiations over the next few months," Pace's Cassuto said. "The final product is going to look much different than the current one. And the jury is still out on any future legal challenges."  

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