Brazil's New Oil Law Could Be Approved Next Year

NEW YORK (Dow Jones Newswires), Sept. 15, 2009

The chief executive officer of Brazil's state-controlled energy firm Petroleo Brasileiro SA (PBR), or Petrobras, said Monday proposed legislation governing subsalt discoveries in the country could be approved in February or March.

Sergio Gabrielli and other top Petrobras officials were in New York on their first stop in a series of international investor and analyst meetings to explain the government's plan for the ultra-deep discoveries.

A certain amount of back-and-forth among Brazilian lawmakers and the executive power is to be expected in a healthy democracy such as Brazil, Gabrielli said.

The first vote is scheduled for early November. The proposed regulations broadly give Petrobras a key role in the exploration of the oil deep down in the earth's salt layer. Opposition party members have already said they intend to obstruct voting on the high-profile legislative changes.

But Petrobras, he said, is in an enviable position, looking to expand production to about 25 billion to 30 billion barrels of oil equivalent in proven reserves plus the Santos and Campos basins subsalt fields in the next few years.

Revenues from a planned capital increase will be only partly used to pay for the government plans, but other portions will be kept within Petrobras, Gabrielli said.

Moreover, the ongoing plans for the subsalt development do not interfere with ongoing investment, such as investments in refineries and the company's plans to issue more bonds to finish cover a $6 billion bridge loan with a consortium on banks, he said. Gabrielli declined to say when the company will be back at the international bond market.

Above all, Gabrielli sought to assuage concerns about Brazil's new regulatory plans, repeatedly reassuring investors and analysts that existing concessions will be "untouched" and minority shareholders have nothing to fear from the government.

But the proposals have rattled some investors as it proposes a complicated set of steps all set to be more clearly defined amid presidential elections in Brazil. Brazilians will choose a new president next year.

Petrobras is going to receive a capital injection from the Brazilian government, which plans to cede rights to explore and produce 5 billion barrels of oil equivalent in the subsalt region. Petrobras will pay fair market value for the oil with a share offering, and the company has pledged that minority shareholders' rights will be unaffected.

Investors will have between 30 and 45 days of knowing the value of the offer beforehand and before they are pressed into any decisions, Gabrielli said.

Petrobras first needs to know where to get the 5 billion barrels, then complete an assessment of the value, to be announced before the stock transaction.

Petrobras is likely to get a third-party assessment, a decision it has yet to reach, and the government could also get a third-party assessment, Gabrielli said.

During the presentation, the word "noise," as in political noise, was often heard as investors and analysts peppered Gabrielli and others with questions. Gabrielli acknowledged there were "a lot of questions," but they were not negative, he said.

Times are challenging, but "many companies envy Petrobras...we already have a very large portfolio for development but the possibilities of increasing this in the short run is unique worldwide," Gabrielli said.

The ultra-deep oil find was announced in 2007, and the government has estimated the fields hold recoverable reserves of up to 14 billion barrels of oil equivalent.

The subsalt region lies under more than 2,000 meters of water and a further 5,000 meters under sand, rock and a shifting layer of salt.

Since then, Brazil has grappled with how to deal with the expected windfall. The new regulatory framework calls for a new state company to deal exclusively with the subsalt discoveries and calls for the creation of a fund to pay for social projects.

Asked whether he was "confident" the new law would pass, Gabrielli said it is up to the Brazilian congress. "The government has presented a very good proposal (but) this is a democracy. Democracy sometimes is a surprise."  

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