Big Oil Sweats As Brazil Debates New Controls

Brazil, one of the most hyped new oil frontiers, is expecting a gusher of production offshore. Big Oil and other global companies have flocked, investing billions in technical plays. Newfound resources have also drawn a growing sense of national pride for Brazilians--who want to keep more of the profit at home.

The future got cloudier this week for oil companies with word the government was quietly debating increasing state control over the most promising reservoirs, which are in deep water buried under a rugged blanket of salt more than a mile thick. Currently 38% of the "pre-salt" plays are under concession with companies including ExxonMobil ( XOM - news - people ), Galp-Energia, Hess ( HES - news - people ), Repsol ( REP - news - people ), BG Group ( BRG - news - people ) and Royal Dutch Shell ( RDS.A - news - people ). Petroleo Brasileiro ( PBR - news - people ) or Petrobras, Brazil's state oil company that opened to private investment in the 1990s, of course is also a key competitor.

Before the rest of the prized blocks are opened for bidding, Brazil is considering the creation of a new state oil company to favor government interests in the pre-salt plays. It would reportedly lean more on Petrobras over its international competitors and establish better channels to invest more of the country's oil wealth into social programs.

President Luiz Inácio Lula da Silva has yet to send the legislation to Congress and is still debating with advisers what measures to include, Reuters reports, adding that changes are expected to face stiff resistance from Congress. Energy Minister Edison Lobao this week said even Cabinet members had important disagreements. Still, word of the talks caught the attention of multi-national players that own reserves in Brazil's offshore.

"We want to collaborate and work with the Brazilian government and the definition of any new legal framework for the pre-salt region of the country," says Shell spokeswoman Kelly op de Weegh. "Under the new framework, of course, we would like to see an environment that continues to promote the competitiveness of the market, protects the transparency and stability of the rules, and respects the contracts."

Optimism, even by Brazilian standards, seems to have peaked since the Tupi Field was discovered in the pre-salt in 2006. Perhaps holding anywhere from 5 billion to 8 billion barrels of oil, the field stands to be the largest discovery in the Americas since Mexico's giant Cantarell Field came on line in 1976. "This is a second independence for Brazil," Lula said in May, announcing Petrobras' start of an extended well test at Tupi.

Because offshore investments are risky and costly, companies tend to share projects. One company takes the majority stake, or operator role. The companies operating in the Gulf of Mexico, for instance, tend to rotate the operator role responsibility from project to project. Among the proposals in Brazil, Petrobras would be designated as the operator of all pre-salt projects. If Petrobras is given a bigger role, it could dampen the competitive spirit offshore, which has been credited for helping revive Brazil's oil industry, and bring Petrobras to the world stage (in June, Petrobras produced the equivalent of 2.5 million barrels per day).

George Baker, a Latin America oil analyst in Houston, draws comparison to Mexico, a country of high oil wealth where foreign companies are barred from owning a barrel of hydrocarbons. Instead, Petróleos Mexicanos, or Pemex, as the state-owned oil company is called, mainly hires contractors that don't have the obligation to question Pemex's actions the way a company sharing the investment potential would. Though not an ideal scenario in Brazil, with Petrobras potentially being the lead operator, Baker says, "So long as there is the structure of having minority partners, you still get the benefits of competition."

Ali Moshiri, Chevron's ( CVX - news - people ) president of exploration and production in Africa and Latin America, says that it is "premature" to comment on the news of the high level meeting in Brazil earlier this week. He says Chevron still has plans to evaluate pre-salt potential in its existing concessions. For the time being, Chevron is touting initial production this summer at Frade Field, the company's first effort in deepwater Brazil. Chevron, the operator, has a 51% stake in the estimated $3 billion project that is not below the salt; Petrobras has a 30% stake.

"Brazil has been one of the few countries in the region that has the conditions to maintain and grow investments," Moshiri says. "It is the future for the oil industry. It doesn't matter if it's above or below the salt, the potential is big."

[Source: By Jesse Bogan, Forbes, Houston, 07Aug09]

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