Oil and Gas in the Capitals

	Vol. 230 No. 9
DAYSE ABRANTES, CONTRIBUTING EDITOR, LATIN AMERICA

US eyeing Brazil’s changing oil rules and international activities

The US government is keenly interested in the new oil regulatory framework recently handed to Brazilian President Luiz Inacio Lula da Silva by a panel of ministers who have been elaborating this material for about a year.

At present, almost half of the hydrocarbon exports from Brazil’s state-controlled oil company, Petrobras, go to the US. As the company’s CEO, José Sergio Gabrielli, recently told World Oil, “Our next task will be integrating Brazilian oil production with the US markets. In terms of revenues, Petrobras sales to the US exceeded $8.9 billion last year. As our production grows in Brazil, and we export more, we expect these numbers will continue to grow.”

To finance the development of massive hydrocarbon reserves in the pre-salt area off Brazil’s coast, the US government will provide a $10 billion loan.  The matter was recently discussed with Brazilian officials by President Barack Obama’s national security advisor, Gen. James Jones.

Brazilian Planning, Budget and Management Minister Paulo Bernardo da Silva told journalists that the US Export-Import Bank already signed a letter of intent for this loan with Petrobras.

Gabrielli noted that Petrobras has invested more than $4 billion in US production and refining, making it the largest Brazilian investor in the US.

“The Gulf of Mexico is a core strategic area for us,” Gabrielli said. “We were the first to discover and now to develop the subsalt reservoirs of the Lower Tertiary in the GOM, perhaps the most exciting new frontier in the US.

“In Brazil we already applied most of our expertise with fantastic findings in the pre-salt area in the Santos, Campos and Espírito Santo Basins. Petrobras is now employing the know-how, capital and technology it developed in Brazil to operate the first commercial production in this new basin. Along with our partners Devon and Total, we will be the first to operate a floating production, storing and offloading unit in the GOM.”

The US loan is equal in value to an agreement Petrobras signed with the China Development Bank, also for exploiting Brazil’s new oil frontier.  Accepting oil as payment for the loan is part of China’s strategy to fuel its expanding economy’s voracious appetite for energy.  

Now on the road to recovery from the financial crisis, the US is still heavily dependent on oil from the Middle East and from Venezuela, which present huge headaches for US foreign policy. Many political analysts see the emergence of US-friendly Brazil as a counterpoint to the petro-diplomacy of Venezuelan President Hugo Chávez, which is closely tied to his project to spread socialism throughout Latin America.

“The opportunity to forge a more extensive association and even a partnership with Brazil presently exists. Strengthening trade ties would be a good place to start,” said Ray Walser, veteran US Foreign Service officer and senior policy analyst for the powerful conservative Heritage Foundation, in a speech delivered to the US House of Representatives’ Foreign Affairs Committee. “Under social democrat [Lula], Brazil has emerged as a regional powerhouse, competently leading international peacekeeping efforts in Haiti and acting as a ‘grownup’ restraining influence on a power-hungry, anti-US Hugo Chávez.”

But Venezuela isn’t the only US adversary whose relationship with Brazil may be affected by that country’s increasing closeness to Washington. Accustomed to guiding Petrobras’ activities abroad with a pragmatic business approach rather than as a political tool, Gabrielli and Brazilian Mines and Energy Minister Edison Lobão felt awkward when the company’s activities in Iran were openly criticized by Gen. Jones during a meeting in Brasilia, as reported by the business daily Valor.

As occurred in 2007, when the same criticism was made by the US ambassador in Brazil, Gabrielli again acknowledged the US concern with Iran but said the company intends to maintain its oil exploration activities in that country.

Unofficial estimates place 80 billion bbl of high-quality crude under Brazil’s rugged salt layer, including another prone area off the coast of Ceará state in the northeast, where Petrobras drilled in the pre-salt many years ago.

Currently, 38% of the pre-salt plays are under concession with multinational oil companies. In this concession regime, favored by these companies, the extracted oil belongs to the company that has acquired the license for an area. The company then sells the oil, keeps the proceeds and pays the federal government through bonuses, taxes, royalties and rent for the area.

President Lula wants to maximize the government’s take from the massive reserves. Under the production-sharing system proposed by the inter-ministerial commission, all oil belongs to the federal government and companies would receive a fixed share of revenues or of oil, to be decided case by case.

Minister Lobão surprised the country when he told reporters that the new oil regulations would also include production-sharing agreements in prolific post-salt areas considered “strategic” by the government.

Until Lobão’s announcement, production sharing was set to apply only to the pre-salt deepwater blocks where Petrobras had announced an 87% success rate in finding oil after drilling 30 wells.

After analyzing the ministers’ proposals, Lula will present to Congress an amendment to Brazil’s oil law (Law 9.478/97), which, in 1997, basically ended Petrobras’ upstream monopoly and drew scores of private foreign companies to the country.

Although Lula would like Congress to vote on the new law before the end of the year, most analysts do not expect a decision before the first quarter of 2010. There are too many powerful divergent political and economic interests involved, and a presidential election next year. WO