Eric Watkins
OGJ Oil Diplomacy Editor
LOS ANGELES, Sept. 2 -- Brazil’s President Luiz Inacio Lula da Silva has proposed new legislation aimed at governing the development of his country’s potentially enormous reserves of oil in the offshore presalt layer, about 270 km off Brazil.
“The subsalt oil fields are a gift from God—wealth which, if properly managed, can drive major transformations in Brazil, improving living conditions for our people,” Lula said while announcing the proposal.
Lula also reiterated that Brazil does not want to be a “mere exporter of crude oil” and that the plan also aims to establish a powerful petrochemical industry to refine the oil into derivatives in order to export value-added products like gasoline.
The development model, which must be ratified by Brazil’s Congress, includes: a new production-sharing system for contracts; a new public company for presalt contract agreement and administration; and a new social fund for investment in education and mitigating poverty in Brazil.
Production-sharing system
The new development model involves Brazil’s move from a concession model to a production-sharing system for the award of new contracts.
Brazil’s Minister of Mines and Energy Edison Lobao said the proposed production-sharing system reflects a change in Brazil’s standing from an oil importer to a self-sufficient global energy producer.
“With the discovery of the presalt oil fields in 2007, the realities of Brazil’s energy reserves have changed profoundly as have the risk-reward ratios,” Lobao said.
“In 1997, when Brazil adopted a concession model, the level of risk for exploration was much higher with much lower profitability than currently estimated for the presalt play,” the minister said, adding, “As an oil importer, the country sought investments.”
But the discovery of the presalt area has changed that outlook, not least due to the potentially high rewards and low risk associated with the presalt layer.
“For strategic reserves with low risk and high profitability, as is the case the in the presalt area, the production-sharing system is more suitable,” said Lobao.
Under the proposed system, Brazil’s state-owned Petroleo Brasileiro SA (Petrobras) will be the operator of all contracts for E&P of the presalt layer, while interested parties can seek contracts through a partnership agreement.
The production-sharing system will apply to new contracts signed for fields in 72% of the presalt area, while previously awarded contracts, which involve 28% of the presalt region, will remain unchanged.
Public company, social fund
The government's new model also includes the creation of a public company responsible for controlling and monitoring the cost of E&P of presalt and the administration of sharing contracts.
This company will represent the country in the consortia and operating committees to be created for directly managing different sharing contracts and monitoring all activities in E&P.
The presalt development model will establish a social fund that will set up a means to direct revenues from presalt exploration toward investment in poverty reduction, in education and in science and technology.
The new social fund will take the form of a public savings account that receives income from various sources such as royalties, signature, bonuses, and commercial revenues from petroleum and gas, originated in production sharing, and resources from activities such as mining.
Reduced estimate
The announcement of the proposed legislation coincided with a report that Credit Suisse has reduced to 28.2 billion bbl from 50 billion bbl its estimate for presalt oil reserves in Brazil's Santos basin.
According to the report by Brazil’s state news agency, the previous estimate was made when potential reserves of 8 billion and 4 billion bbbl were announced respectively for the Tupi and Iara prospects.
In his assessment, analyst Emerson Leite considered a total of 19 blocks, located in Tupi or its immediate surroundings, known as the presalt fringe.
According to Leite, the revision was necessary because the region is becoming clearer as more wells are drilled. He noted that in July two wells, drilled respectively on BM-S-22 and BM-S-52 blocks, turned up dry.
“The market tends to get used to more dry wells in the subsalt, given that no exploratory area has a rate of 100% success," he said.
Although he hasn't raised estimates for any areas, Leite made positive comments about the Guara prospect, on BM-S-9 block. “We believe this is the most promising area in the block,” he said.
Contact Eric Watkins at [email protected].
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