Brazil Said to Study Scrapping Nationalist Pre-Salt Rules

  • Government said to mull concession model return for deep water
  • Changing legislation would be ideological battle for Temer

For international oil companies that saw access to Brazil’s gargantuan offshore reserves curtailed back in 2010, the tide is turning.

Brazil’s interim government is studying the benefits of scrapping nationalistic oil legislation that was championed by now suspended President Dilma Rousseff and her leftist Workers’ Party, said three people involved in the discussions who asked not to be to be named because the plans aren’t public. The government is considering going as far as returning to a concession model that companies prefer, the people said.

Michel Temer
Michel Temer
Photographer: Jin Lee/Bloomberg

The studies are expected to be presented in September to Acting President Michel Temer, who has yet to take a side in the debate, one of the people said. The plans under study go beyond a bill currently in Congress that, if passed, would remove the obligation that state-controlled oil company Petrobras operate all pre-salt fields even if it doesn’t find them attractive.

The discussion has just begun and any changes to the oil legislation would require a broad debate in Congress, which could take a couple of years, the people said. Rousseff’s predecessor, Luiz Inacio Lula da Silva, put Petrobras in charge of the country’s most prolific oil fields during the commodities boom. The Workers’ Party also pursued interventionist policies in the electricity industry, discouraging foreign investment.

Temer’s press office didn’t respond to an emailed request for comment on studies to change the auction model for the pre-salt oil fields.

Ideological Issue

Under the current production-sharing model for Brazil’s most promising offshore region known as the pre-salt, Petrobras and its partners share a portion of production with the federal government through a consortium member known as PPSA, which represents the government’s interests. The first and only time this model was put to the test at the Libra field auction in 2013, only one consortium participated and paid the minimum signing bonus, underscoring the reluctance by foreign oil companies.

The rules governing access to the country’s oil reserves are a deeply ideological issue for many Brazilian, especially members of Rousseff’s Workers’ Party who accuse Temer of trying to hand Brazil’s geologic riches to foreign oil companies. But now Brazil’s oil industry, dominated by Petrobras, has been slammed by widespread corruption, government interference and low oil prices, and those who support changing the legislation say new rules are necessary to attract investment and create jobs.

A return to a more traditional concession model for the pre-salt fields, which hasn’t yet been discussed publicly, could generate more competition at licensing rounds and accelerate the development of the region, bringing much-needed tax revenue to producing states and the federal government. The concession regime doesn’t have a mandatory participation by the state, and all oil production belongs to concession partners after paying royalties and taxes.

Even if Temer decides to throw his administration’s support behind such changes, the legislation would probably not be sent to Congress until at least next year, two of the people said.

The government is also preparing other changes that could be implemented faster to attract foreign investment to the industry. The government plans to start announcing new measures in August that include easing buy-in-Brazil requirements, extending a tax refund on imported equipment, and clarifying how to develop oil deposits that extend outside of the concession boundaries into unlicensed acreage, Oil and Gas Secretary Marcio Felix said in a Tuesday interview. The lack of clarity has delayed several large discoveries, including Petrobras’ Carcara field and Gato do Mato, operated by Royal Dutch Shell Plc, he said.

The government should resolve regulatory changes this year, ahead of a planned pre-salt bidding round in 2017, PPSA president, Oswaldo Pedrosa, said in an interview in Rio on Wednesday. Areas that extend beyond concession boundaries at the Sapinhoa, Tartaruga Verde, Carcara and Gato do Mato fields should be auctioned with clearer rules for investors, he said.

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