Brazil Congress Makes Petrobras Sole Pre-Salt Operator

Brazil’s lower house of Congress approved new oil regulations that will increase government control over the energy industry and reduce competition against Petroleo Brasileiro SA, the state-controlled producer.

The regulations approved yesterday allow Petrobras, as the company is known, to be sole operator of oil fields where licenses haven’t yet been auctioned. The oil producer will be able to explore every field in areas designated “strategic.” The bill needs the president’s signature.

Brazil is tightening the state’s grip on the domestic oil industry after the discovery of the Tupi and Libra fields, which may hold as much as 8 billion barrels of oil and 15 billion barrels, respectively.

“This represents a strong position of the state to keep this wealth,” Petrobras Refining Director Paulo Roberto Costa told reporters today in Rio de Janeiro.

The new legislation will grant Petrobras a minimum 30 percent stake in joint ventures that bid for exploration licenses. The government expects other oil companies to bid for the rights to explore fields as Petrobras’s partner. The companies that offer the biggest share of oil output to the government will win the contracts.

The bill defines strategic areas as fields in the so-called pre-salt region along Brazil’s coast and fields “with low exploratory risks and high oil output potential.” Under current laws, Petrobras is required to compete equally with other companies for exploration and production accords.

Social Funding

The bill also allows non-producing Brazilian states and cities to receive more royalties from the sale of oil and creates a fund to finance social programs with future oil revenue. Brazilian President Luiz Inacio Lula da Silva has said the South American country is relying on its oil wealth to help lift the nation’s 192 million residents from poverty.

Petrobras faces the risk of being “overwhelmed” with projects, given its extensive capital expenditure program, Banco Santander SA analysts Christian Audi and Vincente Falanga Neto said in a note to clients today.

“Although the government constitutes the majority of Petrobras’s board of directors, and is, thus, aware, of how full the company’s portfolio of upstream projects is and how its capex is, this does not guarantee that the government will not require a sizable signing bonus,” they said.

Petrobras Investment

Petrobras aims to invest $224 billion through 2014 to develop reserves in a deep-water region along Brazil’s coast. The budget doesn’t include any projects under the new law.

The pre-salt region runs 800 kilometers (500 miles) along the coast from Espirito Santo state to Santa Catarina state and has oil deposits beneath a layer of salt resting as deep as 3,000 meters (9,843 feet) beneath the ocean surface and another 5,000 meters under the seabed.

The new rules allow Brazil to start auctioning exploration areas in deep waters of the Atlantic Ocean next year, said Luisa Palacios, an analyst at Medley Global Advisors. Brazil stopped selling deep-water blocks in 2007 after it announced reserve estimates for Tupi.

“You finally have clarity -- legislative clarity -- on the rules of the game going forward, and that is important for Brazil to renew the auction process,” Palacios said in a telephone interview from New York.

Libra will be the first field the government sells next year under the new model, Magda Chambriard, a director at Brazil’s oil regulator, said in September. Brazil will still be able to boost production quickly even if it takes longer to organize an auction, Palacios said.

"There is so much in the pipeline at this time it does not affect the very positive production outlook in Brazil," Palacios said. "Brazil will remain the most important non-OPEC story going forward."

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