Brazil, Petrobras, and the Pre-Salt Regulatory Framework: the debate starts…

 

President Lula ended months of speculation over how Brazil will deal with its mega oil and gas pre-salt reserves on Monday, when with much fanfare, he tabled four bills for congressional approval. The package was sent to congress with “urgent” status, which translates into a 90 day limit for discussion and votes.Since, the newspapers, radio and television broadcasts have dedicated much space for the subject. This is not surprising. President Lula defined the new legislation as a moment of equal importance to the “independence” of Brazil. And it is not all rhetoric. The talk of “Petroleo é nosso” (the Oil is ours) is being backed by substantive legislation set to ensure government control over the resource and the primacy of Petrobras as a global leader in the energy sector.

 The debate over the next few months promises to be heated and interesting. Likely, the outcome will define a new pathway for government involvement in the energy sector – where the public involvement is active but where private investors do have a role to play. This is not the blind activism seen in Bolivia, Venezuela, and Ecuador.

We plan to use this blog as an active part of this debate. We will make sure to post relevant articles, keep you abreast of the discussion, and invite guest contributors who can offer different views. If you have any questions or comments, make sure to let us know.

 To start, here are the bills under discussion:

 New Exploration and Production Contract – Production Sharing: The new model won’t void the existing Concession Contracts, even the ones awarded to pre-salt reservoirs. The National Petroleum Agency (ANP) will continue to auction exploration rights to areas considered non strategic. For all future pre-salt exploration – considered strategic, of low exploration risk, and high returns– the new regime will be a production sharing contract. Petrobras will be the operating partner in all contracts with a minimum 30 percent participation.

 Creation of a new state company – Petro-Sal– The new company, Empresa Brasileira de Administração de Petróleo e Gás Natural S.A, will represent the State’s interest in all production contracts. It will not, however, invest or undertake any relevant research. In contrast, it will have a significant presence (with veto rights) in the individual projects’ “working group” responsible for all of the consortium exploration and production decisions.

 Creation of a Sovereign Social Fund– linked to the office of the President, has the objective of being a stable financial source for projects and programs aimed at aliviating poverty, strengthening education, culture, science and technology, and environmental sustainability.

Research– (correction added on Saturday, Sept 5). Although the proposal reads as an authorization from the Federal Government to cede to Petrobras all research and oil and gas surveying activities on a specific area equivalent to 5 billion barrels of oil, it is the bill which defines the financial transactions to increase Petrobras’ reserves by 5 billion barrels while simultaneously, add new capital to the company. My apologies for the earlier error in explaining this bill.

 As usual, the devil is in the details. Embedded into the legislation is a new capitalization of Petrobras as well as a number of other controversial measures. Still, this should be enough to get you started.

 Let the discussion begin!

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