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Brazil's President Luiz Inacio Lula da Silva - Source: Reuters -
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Brazil's proposed overhaul of oil laws may slow development of offshore crude reserves but is not likely to prevent the South American nation from tapping one of the world's biggest petroleum finds in decades.
President Luiz Inacio Lula da Silva presented much-awaited legislation to Congress upping the role of state oil firm Petrobras and vastly boosting the power of the federal government in new oil field development.
The measures would reduce competition in the sector and could create political interference in oil field projects, but analysts say the changes, if approved by Congress, would not reduce investor interest in producing the deep-sea crude.
"The Brazilians are treating this like a business, they're telling companies 'We're not going to let you get rich, but we know you have to get a decent return,'" said Michael Lynch, an oil expert who heads the consultancy Strategic Energy & Economic Research, Inc.
The new framework would change the existing concession system to production-sharing contracts, make Petrobras operator of new fields with a minimum 30% stake and create a new state company to manage assets of the vast subsalt region.
Officials repeatedly pointed out that Brazil will respect existing oil contracts, easing concerns the nation was headed toward the aggressive nationalism seen in the Andes region, where energy output is slumping as investors are shying away from new projects.
"We do not break contracts," said Dilma Rousseff, a top Lula advisor and likely presidential candidate. "We are respecting all the contracts in the subsalt region (that were granted) by the concession regime."
This comes in stark contrast to the policies of Ecuador, Bolivia and Venezuela, in which leaders ordered companies to rewrite contracts and retroactively raised taxes to boost government revenues and tap into nationalist sentiment.
Those countries now face slumping energy output as they struggle to win over investors for new projects, an outcome Brazilian officials are clearly keen to avoid.
Risks remain
Still, analysts agree that Brazil's proposal creates new uncertainties for oil companies that will slow the overall development of the subsalt province, believed to hold at least 50 billion barrels of crude miles below the ocean's surface.
Most notable is the growing influence of an energy commission staffed with presidential allies that will be able to give Petrobras no-bid contracts for fields, declare certain areas "strategic" and therefore reserved for the state, and determine project signing bonuses.
Making Petrobras the sole operator risks scuttling the current competitive environment, especially as the government seeks to use local content requirement in oil contracting and equipment procurement to spur the Brazilian economy.
The new state company laid out in the proposal, called Petrosal, may also pave the way for political interference at the operational level because it would give large discretionary authority to officials likely to be designated by presidential allies.
The legislation also faces a long battle in Congress, with opposition leaders already promising to challenge the constitutionality of key portions of it.
Lula averted a battle with state governors by leaving politically sensitive changes to royalty rates out of the current proposal, meaning companies still face the possibility that royalties could change under future projects.
"This is clearly a move to a more state-centric model," said Erasto Almeida, Latin America analyst with the Eurasia group, a political consulting firm.
"But it's not Brazil moving in the direction of Venezuela ... It's pretty clear there will be opportunities for international oil companies, although they will have to partner with Petrobras."
