The Aug. 31 WSJ article details how Petrobras will be the primary beneficiary of the offshore drilling discoveries off the coast of Brazil - at the expense of foreign rivals. Petrobras will obtain control of operations from the government and have a 30% stake in all sub-salt blocks. This policy will clearly draw a response from foreign oil companies salivating at Brazil’s sub-salt oil potential. The discovery of Tupi in 2007 put Brazil’s Petrobras in the limelight. Estimated to have recoverable reserves of between 5-8 billion barrels of oil equivalent, Tupi is the largest oil discovery in the Western Hemisphere in 30 years. Alongside Petrobras, a new-state owned company, called Petrosal, that will manage the government’s stake.
Brazil Plans Energy Shift
August 31, 2009
By JEFF FICK
RIO DE JANEIRO — Brazil’s government Monday embarked on a major shift in its energy policy, proposing new laws that give state-run energy giant Petrobras the primary role in the development of key offshore oil reserves at the expense of foreign rivals.
Brazilian President Luiz Inacio Lula da Silva said earlier Monday that the regulatory framework represented a new “Independence Day” for Brazil. It’s unlikely that foreign oil companies will feel the same way.
The proposals will mostly freeze foreign oil companies out of the action in Brazil, and those companies that do participate will be placed in subservient roles to Petrobras and a new state-owned oil company.
Petrobras will be made operator of the so-called subsalt blocks currently under government control, receiving a 30% stake in all of the blocks. The subsalt region 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 government will be allowed to contract Petrobras directly, although some blocks will be put up for auction.
While foreign companies will be allowed to compete in the auctions, any consortia operating in the subsalt blocks will have Petrobras as the lead partner. They’ll also have to deal with a new-state owned company, called Petrosal, that will manage the government’s stake.
Petrosal won’t have any operational activities, but they will have a seat on operating committees of subsalt consortia. They’ll also have veto rights on development decisions — a tough pill to swallow for foreign oil companies used to operating solo.
Brazil was once seen as one of the world’s most promising oil frontiers. A concession-based auction system opened exploration and production areas up to foreign competition in the 1990s, and privatization of Petrobras forced the company to adopt free-market efficiencies in order to compete.
The shift away from free-market principles started in late 2007, shortly after Petrobras revealed the Tupi discovery. Petrobras estimated recoverable reserves at Tupi of between 5 billion and 8 billion barrels of oil equivalent — the Western Hemisphere’s largest oil discovery in more than 30 years.
President Lula’s populist government responded swiftly with protectionist measures, yanking offshore blocks in the subsalt region where the Tupi discovery was made out of concession auctions.
The soon-to-be-extinct concession system had continued to grow interest in Brazilian prospects from foreign oil companies since their inception in the 1990s. Oil majors such as Exxon MobilCorp., Hess Corp., BG Group PLC and Royal Dutch Shell participated in the auctions, including purchasing stakes in subsalt blocks offered at previous concession sales.
Given the immense costs and production challenges of producing oil from Brazil’s ultra-deepwater province, it will likely be difficult for foreign oil companies to maintain that interest for a pauper’s share of the subsalt treasure.
Write to Jeff Fick at jeff.fick@dowjones.com
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