Oil Investors Await Pre-Salt Talks

By Juliana Tafur, Contributing Reporter

RIO DE JANEIRO – Foreign companies and investors have flocked to Brazil since the extent of the pre-salt oil fields became known in 2006. Companies like Exxon Mobil, Shell and Repsol hurried in and acquired oil concessions. In exchange, they have operated independently by paying taxes and royalties to the Brazilian government. But now, a regulatory framework plans to change this scenario.

The subsalt fields would cease to be operated through oil concessions and would be run instead under a production sharing system. This means that all oil in question will belong to the Brazilian government, with companies receiving a fixed share from oil revenues. Current concession agreements will remain untouched, but companies who have been waiting to enter the bidding process to get their hands on new oil blocks will miss out on the chance to operate free from government regulations.

The pre-salt area has estimated reserves of between five and eight billion barrels of oil. It runs 800 kilometers along the coast, from Espirito Santo to Santa Catarina. The oil deposits are located beneath a salt layer that lies 3,000 meters beneath the ocean’s surface and up to 5,000 meters below the seabed. The government has been discussing the creation of the regulatory framework for more than a year now and a proposal is expected to be sent to Congress soon.

“Oil, down in the ocean, costs an average of US$5 to US$15 a barrel. When it reaches the market, it costs about US$70. The way it works today, companies pay us an amount based on the cost of it below [the ocean] and when it gets up [to the market], it belongs entirely to the company,” said Brazilian President Luiz Inácio Lula da Silva recently. “We want to change this… we want oil to be ours down below and up high, where it has value,” he added.

But in a meeting held last Wednesday, the president was not so resolute. After all the hype, experts believed the proposal would be approved without a hitch and move to Congress for review. Instead, Energy Minister Edison Lobão said the meeting was “full of divergences”, with crucial disagreements about some of its plans. Lula, who had urged the committee in charge of drafting the proposal to speed up the process, now wants to take time to consult with political and business leaders before moving forward.

If approved, the framework will include the creation of a social fund to be supported by pre-salt monies. “When you have this amount of oil, you need to avoid the so-called oil curse… a lot of oil and a lot of poverty,” said Minister Dilma Rousseff in a press conference in Washington DC last month. She explained that this fund would be used to fight poverty and for investments in education, science and technology.

When questioned on the impact this could have on foreign investments, Rousseff said Brazil would continue to be “extremely attractive”: “Brazil offers access to reserves in a stable country, without war and ethnic problems.”

Norway’s Commercial Consul in Brazil, Erik Hannisdal, agrees. “International oil companies expect the new rules to allow them to continue their growth in the Brazilian market, in a predictable and stable environment,” he says.

Hannisdal believes, though, that it’s important to define the framework’s conditions soon, so that market momentum doesn’t die down. “Brazil will now have to find a model that is accurate for their situation and is of their national interest. A model that allows competition and also represents opportunities for international companies is essential,” he added.