Battle looms in Brazil offshore oil push 

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Brazil's plan to overhaul laws governing massive offshore oil reserves faces an uphill battle for approval in a potentially hostile Congress, slowing Brazil's drive to become a major energy exporter.

President Luiz Inacio Lula da Silva wants to change rules for oil companies seeking to tap into the reserves discovered in 2007 to ensure South America's biggest country makes the most of the revenues to drive its economic development.

But nearly two years after halting auctions of new oil blocks, he has not presented a proposal to Congress and may struggle to get the plan approved this year amid a Senate ethics scandal and the run-up to the 2010 presidential race.

Further delays will increase uncertainty for oil companies hoping to invest billions of dollars to tap the newfound reserves that have become a hot-button political issue.

"The government has to be very careful not to scare off investors," said Sen. Delcidio Amaral, a member of Lula's Workers' Party and a former director of state-run oil company Petrobras.

"It's not going to be easy to approve (the reform) because its going to spur debates over the future of the country."

Stunning discovery

Brazil in 2007 stunned the world with the discovery of some 8 billion barrels of crude in the Tupi field, opening up a new oil exploration frontier deep below the Atlantic that may hold more than 50 billion barrels.

Lula has called the huge oil find a "gift from God" that could push Brazil to developed-country status, but even some of his allies may oppose the potential overhaul, partly because it may deprive states of billions of dollars in annual oil revenues.

Amaral and other legislators said the law change may become tied up in electoral politics and might not be resolved before Lula leaves office after the October 2010 elections in which he is constitutionally barred from standing.

Government leaders say the eventual proposal will likely change existing oil concessions to production-sharing ventures in which the government owns part of the oil, open a national development fund for oil revenues and create a state company to administer the offshore contracts.

Currently, the government auctions rights to oil blocks to the highest bidder and charges royalties and taxes in return.

Under a production-sharing agreement, state revenues could be slashed as the federal government takes over a share of the oil production - something that is likely to be fiercely resisted by politicians from areas that stand to lose out.

"There is going to be heavy pressure by producer states, so I think the bill is going to move slowly," said Eduardo Cunha, a Congress representative of Rio de Janeiro state, which pumps most of Brazil's roughly 2 million barrels per day of oil.

Two organizations of oil-producing municipalities have already begun protesting the proposed changes. Last year, more than two-thirds of oil royalties went to Rio state, while the wealthy state of Sao Paulo is in line to receive much of the revenues from new sub-salt finds such as the huge Tupi field.

Political minefield

Freezing exploration in promising areas and canceling some tenders at the height of the oil boom has already sent mixed signals to investors and meant Brazil did not tap into investment dollars when companies were desperate for exploration opportunities.

Now Brazil's Senate is mired in a corruption scandal over inappropriate use of state funds by legislators that has nearly ground Congressional activity to a halt.

The Senate announced two months ago an investigation of Petrobras on charges of corruption and political favoritism of Lula's allies that may further politicize the already sensitive issue of oil development. The probe has not yet started.

Energy Minister Edison Lobao has said Brazil in 2009 could resume licensing of exploration for sub-salt reserves -- but only if legislation is approved this year.

"There is a significant risk of regulatory uncertainty for the pre-salt deposits at least through 2011 when the next administration assumes office," the Eurasia Group said in a recent report on Brazil's oil sector.

Opposition congressman Luiz Vellozo Lucas has furiously criticized the plan, warning that putting the government in charge of selling oil would spur corruption in a country still battling the problem.

He says the government could easily raise oil taxes and royalties and alter their distribution within Brazil through simple legal changes that would not involve a major legislative overhaul - or the current delays.

Analysts say the government is avoiding this option because the company that would lose out the most would be Petrobras.

"We are against this, we're going to campaign against it and we're going to show that it's stupid," said Vellozo Lucas.