Brazil to unveil long-awaited overhaul of oil laws | business | Hindustan Times
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Brazil to unveil long-awaited overhaul of oil laws

Brazil's government will propose today a new law that will determine how it taps and manages huge crude reserves miles below the ocean's surface that it sees driving the nation's rise to developed status.

business Updated: Aug 31, 2009 17:29 IST
Brian Ellsworth

Brazil's government will propose on Monday a new law that will determine how it taps and manages huge crude reserves miles below the ocean's surface that it sees driving the nation's rise to developed status.

President Luiz Inacio Lula da Silva is scheduled to present Congress with legislation that will increase the role of the government and state-run Petrobras in the oil fields that could turn Brazil into a major energy exporter.

Lula says Brazil needs a new energy framework to keep its fair share of riches from the subsalt area that drew global attention with the 2007 discovery of the Tupi field, one of the world's biggest finds in a decade that opened a new frontier in petroleum exploration.

Monday's proposal could fuel a new round of investment in energy output if investors find the terms acceptable. But it could also leave billions of barrels of light crude trapped under the sea if it creates onerous conditions amid lingering uncertainty about world oil prices.

"This legislation is going to be a real milestone -- the question is, a milestone in what direction," said Francois Moreau, a former oil executive who works as an independent energy analyst in Rio de Janeiro.

Lula, a charismatic former union leader who has mixed market-friendly policies with social handouts to guide Brazil to years of prosperity, says the oil is a divine gift that must be used to upgrade the South American giant's lagging education system and infrastructure.

Government officials have said the proposal will create a new production-sharing system for oil contracts that they say will give Brazil greater control over the estimated minimum of 50 billion barrels in the subsalt fields.

They have also said it will create a development fund for oil revenues and open a new state holding company to manage assets in the subsalt region, so-called because the oil lies under a thick layer of salt deep beneath the ocean floor.

The legislation would also propose that Petrobras, partly privatized but 55 percent controlled by the government, be the sole operator in new subsalt projects with a minimum stake of 30 percent, Energy Minister Edison Lobao recently said.

Lula allies, who have promised not to modify the contracts of projects that are already operating, say the country needs to change the rules because exploration in the subsalt region now has limited risk following the Tupi discovery.

But energy giants BG and Exxon Mobil in recent months have drilled expensive deep-sea holes that did not contain significant volumes of oil, a reminder that exploration risk is still a hazard in Brazilian offshore plays.

The group representing oil companies in Brazil says it prefers the current concession system in which firms bid for the right to explore an area and pay taxes on discoveries, a possible sign of resistance to the overhaul.


Subsalt development has become a hot-button political issue within Brazil as politicians squabble over how best to ensure a fair distribution of future revenues.

It is expected to be a key issue in next year's presidential race in which Lula is grooming his chief of staff Dilma Rousseff, who is also chairwoman of Petrobras's board, as the ruling party's candidate to succeed him.

The legislative changes are likely to face stiff opposition in Congress, particularly among legislators whose districts currently receive royalties from Brazil's 2.1 million barrels per day of oil production but could lose future royalties under the new arrangement.

Critics say the effort to change the oil laws is political pandering meant to rally Lula supporters and insist it will not bring in more revenues for Brazil, nor give the state greater control over oil fields.

Brazil halted exploration auctions for promising offshore areas in 2007 as oil prices were heading toward their peak near $150 per barrel -- just as energy firms were most willing to invest in projects with higher costs and logistical barriers.

The complex production requires drilling into the ocean floor through a layer of salt to depths of up to 4-5 miles (6.5-8 kilometers) to the oil fields below, then pulling the oil to the surface with floating production facilities.

Petrobras still has not carried out any commercial production of subsalt oil, with Tupi only producing a small amount of crude as part of a test -- meaning complications may still arise in the development phase.