Brazil approves oil laws, opens presalt region for development

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Dec. 3 -- Brazil’s lower house of congress has approved long-awaited oil industry legislation granting the federal government greater control over deepwater reserves off the nation's coast.

The legislation passed this week replaces the current concession-based system with a production-sharing scheme that gives Brazil’s Petroleo Brasileiro SA (Petrobras) a minimum 30% operating stake in all new subsalt fields.

Under the legislation, Petrobras will be the operator of the fields under the production-sharing deals, but other oil companies will have the right to bid for stakes by guaranteeing the government a large percentage of oil output.

The new production-sharing agreements will not cover presalt areas previously auctioned off under the concession system. The agreements also will not affect onshore or shallow-water areas, which will be auctioned off under the current concession-based system.

The lower house also passed a separate law to even out the distribution of oil royalties among Brazil's 26 states and the federal district of Brasilia.

"The lower house cannot maintain the current distribution, in which 92.5% of royalties go to the federal government and [Rio de Janeiro and Sao Paulo] states,” said Congressmen Ibsen Pinheiro.

Reports suggest that President Luiz Inacio Lula da Silva is likely to veto the royalty measure, sending it back to congress for further debate. According to Petrobras Chief Executive Officer Jose Sergio Gabrielli, the royalty question is unlikely to be resolved until next year.

“It's probable that it could return to the lower house in 2011 as a new bill that discusses in a more-equitable way the question of royalties, allowing a larger share to be distributed to producing states while at the same time allowing other states to receive the benefits of production,” Gabrielli said over national radio.

The inclusion of the law on distribution had held up passage of the main laws for months as Brazil’s largest oil-producing states, Rio de Janeiro and Sao Paulo, said the changes would cause them to lose billions of dollars in revenue.

While Lula is expected to veto the royalty provision, he is considered likely to sign into law the measure to implement production-sharing agreements for presalt oil fields currently under government control.

Passage of the law, the last of four related pieces proposed by the Lula administration, means that Brazil can begin to step up development of the presalt oil regions, which are variously estimated to hold 50-100 billion bbl of oil.

Earlier this year, Congress passed the three other measures that Lula had proposed:

• The first created the social investment fund that will use oil revenues for education and health care initiatives.

• The second created a state-owned oil company, called Pre-Sal Petroleo SA, that will manage the government's pre-salt assets.

• The third involved a complex capitalization plan for Petrobras that granted the firm rights to produce 5 billion bbl of oil from government-held areas.

The new legislation may well improve the investment atmosphere over the 10th bidding round which took place 2 years ago. At the time, Petrobras and Royal Dutch Shell PLC were the only international oil companies to secure areas in the round.

That round saw reduced participation largely because the auction was restricted to onshore areas and excluded bidding on the potentially more-lucrative subsalt offshore areas due to the pending oil legislation (OGJ, Oct. 20, 2008, p. 29).

The government now is promoting interest in Brazil’s offshore regions with Brazilian regulator ANP last month saying that the recent Libra subsalt oil find could hold as much as 15 billion bbl of oil—a figure 2.4 billion bbl greater than the country’s existing reserves.

“The volume of recoverable oil belonging to the nation could vary from 3.7-15 billion bbl, with the most likely estimate being 7.9 billion bbl," ANP said, citing a study carried out by certification firm Gaffney, Cline & Associates (OGJ Online, Nov. 5, 2010).

According to analyst BMI, passage of the new legislation means that, “The stage is now set for a resumption of deepwater licensing in mid-2011, with the 8 billion bbl Libra field one of many bright stars in the subsalt firmament.”

Contact Eric Watkins at hippalus@yahoo.com.

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