petroleumworld

Petroleumworld`s
Opinion Forum:
viewpoints on issues in energy, geopolitics and civilization

Brazil and Pre-Salt

Reuters

President of Brazil, Luiz Inacio Lula Da Silva

Brazil is making moves to take more oil dollars to its pockets, proposing an overhaul of regulations of the country's hydrocarbons industry to "allow the government to become the owner of the petroleum." president Lula da Silva said.

Jeremy Martin, a well known expert in Latin American politics takes the theme and analyze it in a recent World Politics Review article that we reproduce and link here for you information:

In Brazil, Oil With a Grain of Pre-Salt, by Jeremy Martin

Brazil celebrated Independence Day twice this year: once on Sept. 7, the anniversary of its independence from Portuguese rule, but also a week before, on Aug. 31, when President Luiz Inacio Lula Da Silva declared the country "free" from poverty's dominion, delivered by oil.

President Lula's "New Independence Day" accompanied his government's announcement of a proposed overhaul of regulations governing the country's oil and gas industry. The new regulatory model, Lula said, would "allow the government to become the owner of the petroleum."

Specifically, the proposal dealt with Brazil's effort to increase its regulatory and fiscal control over the development of an offshore oil and gas formation known as the Pre-Salt -- so called for the thick salt layer that covers the deposit thousands of feet below the surface of the Atlantic Ocean.

Since the announcement, the move has been called a massive windfall grab or, alternatively, a game-changer for millions of impoverished Brazilians. Meanwhile, the debate has raged against the backdrop of domestic politics, as Brazil moves toward a presidential election in 2010 -- the first in 20 years without Lula on the ballot.

Oil-Driven Independence

Brazil's new independence movement traces its origins to a lack of easy-to-find on-shore oil reserves. With no choice but to explore for oil and gas in deep offshore waters, Brazil turned its Atlantic Coast into an expansive oil and gas research and development laboratory. In a significant move, the country also opened the industry to private and international investment in the mid-1990s to further the progress.

The initial shots for independence were subsequently fired from deep-sea drilling rigs over the course of a dozen years. But it wasn't until November 2007, with the announcement of the massive Tupi oil field discovery -- the Western Hemisphere's largest in 30 years -- that the movement solidified.

Most analysts tend to agree that the Pre-Salt discoveries will catapult Brazil into the midst of the world's top-10 reserve holders. It is currently ranked 17th.

New Rules

Sanctity of contracts and clear rules of the game have long been a rallying cry for the oil industry. Interestingly, in a roundabout way, the "new model" in Brazil appears to propose just that. That is to say, it is not an attempt to exclude private investors or partners, but rather to control the arrangement and potential return on their investment, while honoring existing contracts. Proponents of the revised model emphasize this last point in contrast with, for instance, Venezuela, where existing contracts and rules of the game are changed on a whim.

The "new model" will rewrite investment rules, transforming them from a concession structure to production-sharing agreements. They will thereby retain oil ownership -- and upside potential if prices surge -- for the state. To do so, Brazil will create a new state firm, already dubbed Petro-Sal, tasked with contractual and administrative duties in the Pre-Salt. Key to the "freedom from poverty" agenda, the expected windfall generated by greater state control will be channeled into a sovereign wealth fund -- essentially an escrow account controlled by the government to be spent on education, science and technology and poverty reduction.

But it is Brazil's national oil company, Petrobras, as Lula made clear, that is the linchpin for the New Independence. The firm will alternately be the operating partner of joint ventures and be granted exclusivity for certain fields in the Pre-Salt.

Granting the state oil company such a role has fueled the accusation that the revisions are nothing more than a nationalistic political ploy and windfall grab. Perhaps more importantly, it has also raised questions about whether international oil and gas companies will be interested in further investments in Brazil under the new framework.

Protecting the Resource

An intriguing development emerged linking both Independence Days. In arguing for the purchase of armaments from France, specifically nuclear submarines, Lula has pointed to Brazil's offshore oil investments and infrastructure as a motivating factor.

French President Sarkozy's visit and inking of a major arms deal on the Sept. 7 Independence Day firmly signaled Lula's desire for the oil reserves not only to be brought under greater control of the state, but also for the state to be prepared to properly protect them. Indeed, Lula's wish for an advanced defense industry is now intertwined with his aspirations for oil wealth as a means of delivering the nation from economic want.

Campaign Season: Seizing the Initiative

It seems clear that Lula's effort to rewrite the country's oil framework at this stage is also a maneuver meant for domestic political consumption.

Muhammad Ali famously employed a rope-a-dope strategy, in which he'd lean back against the ropes and take punches from his opponent while waiting for the right moment to regain command of the fight.

Lula is employing the opposite strategy. As the campaign season unfolds, he has no intention of lying against the ropes and waiting for an opening. Instead, he is seizing the initiative politically and otherwise, forcing Brazil and the world to accept new terms for the development of the nation's huge oil potential.

During the process, Lula was quick to fully embrace the role his chief of staff, Dilma Rousseff, played in crafting the new model. Rousseff spoke at length during the New Independence Day ceremony on Aug. 31, thus formulating a critical platform plank for her presidential candidacy in 2010.

Lula's oil gambit has forced presidential campaign opponents to tread carefully in criticizing the concept -- and thus Rousseff's anointed candidacy -- for fear of being branded as opponents of Brazil's New Independence. And it has provided interesting cover to proceed with large-scale military purchases as the campaign gets underway.

A New Independence has been declared in Brazil. Whether Rousseff, Petrobras and the Brazilian military can assure its preservation remains to be seen. If not, history will instead suggest that the Aug. 31 declaration be taken with a grain of pre-salt.

Jeremy M. Martin is Director, Energy Program of the Institute of the Americas.The Institute is a non-profit inter-American organization focused on economic development in the Western Hemisphere, located on the campus of the University of California, San Diego (UCSD). (jermartin@ucsd.edu). Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by World Politics Review, September 26, 2009. Petroleumworld review, comment and reprint this article in the interest of our readers .

All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.

Fair use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.

All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by the originator.

Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law.

If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

Internet web links to http://www.petroleumworld.com are appreciated

Petroleumworld welcomes your feedback and comments, share your thoughts on this article, your feedback is important to us!

We invite all our readers to share with us their views and comments about this article.

Write to editor@petroleumworld.com

By using this link, you agree to allow PW to publish your comments on our letters page.

Petroleumworld News 09/26/09

Petroleumworld welcomes your feedback and comments,
share your thoughts on this article, your feedback is important to us!

We invite all our readers to share with us
their views and comments about this article.

By using this link, you agree to allow E&P
to publish your comments on our letters page.

We welcome the use of Petroleumworld™ stories by anyone provided it mentions Petroleumworld.com as the source. Other stories you have to get authorization by its authors.