Brazil's Government to Discuss Subsalt Royalties

RIO DE JANEIRO (Dow Jones), Nov. 9, 2009

Brazil's government will discuss with state officials disagreements over distribution of royalties from recently discovered offshore oil reserves, a government official said Monday.

"We're going to discuss a federal deal for the distribution of these resources. The president could change his understanding about what is being discussed in Congress," Marco Antonio Martins, secretary for oil and natural gas in the country's Mines and Energy Ministry was quoted by the local Estado news agency as saying.

Brazil's lower house is currently debating four bills proposed in September by Brazilian President Luiz Inacio Lula da Silva that would revise the regulatory framework covering the country's oil and natural gas sectors. The measures would give the government a greater stake in recently discovered offshore oil deposits.

The lower house is expected to vote on the measures by Nov. 10. So far, two of the four bills have been approved at the committee level.

Last week, separate lower house committees approved the creation of a new state-owned oil company to administer exploration and production in the offshore oil fields. The creation of a social welfare fund to manage royalties from the deposits was also approved.

The bill implementing the production-sharing regime for the so-called subsalt oil discoveries, as well as a separate bill that would infuse capital into state-run energy company Petroleo Brasileiro SA (PBR), or Petrobras, must still be approved by their respective committees.

The production-sharing regime bill also includes sensitive royalty issues that are drawing criticism from governors in key oil producing states Espirito Santo, Rio de Janeiro and Sao Paulo. The states are chafing at proposals that would more evenly distribute the royalties.

The government wants the measures to be approved in the first half of 2010, but that will be a difficult task given the importance of the measures and the fact that 2010 is an election year. Such a high profile debate gives lawmakers--especially those in government-opposition parties--leverage in any negotiations over changes.

The new regulatory framework will give Brazil's government a greater stake in offshore oil reserves in the promising subsalt oil region, where several of the world's biggest oil finds in recent years have been made. The government first announced its plans for the new regime in late August.

The so-called subsalt oil discoveries were made recently 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.

The first of the subsalt discoveries, called Tupi, was estimated to hold recoverable reserves of between 5 billion and 8 billion barrels of oil equivalent. That was the Western Hemisphere's largest oil find in more than 30 years.  

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