August 14, 2008 / 8:38 PM / 11 years ago

Brazil's plans to control oil could cause delays

BRASILIA (Reuters) - The Brazilian government’s plan to take greater control over huge new oil discoveries will face obstacles in Congress and could delay its ambitions to become a global oil player, experts said on Thursday.

President Luiz Inacio Lula da Silva wants to change the structure of oil control to give the government more funds for social welfare and education while reducing the power of state-owned oil firm Petrobras and its partners.

“Some think that the oil is for Petrobras. The oil is for the union,” Lula said on Thursday at an event in the Amazon state Para.

In neighboring Venezuela, President Hugo Chavez has tightened controls over oil to fund social projects. But in Brazil the plan could face a long battle in Congress.

“The debate in Congress won’t be easy, it’s a debate over trillions (of dollars),” Ideli Salvatti, Senate leader for the ruling Workers’ Party, told Reuters.

Petrobras shook the oil world last November when it discovered a deposit with estimated reserves of 5-8 billion barrels, the world’s second-biggest find in 20 years.

Other reserves thought to exist in the area could vault Brazil from 17th to 10th among world oil producers. The government has said it plans to join The Organization of Petroleum of the Exporting Countries (OPEC).

Under guidelines from Lula, government sources say a new state holding company would now manage exploration and production in the so-called sub-salt fields, taking some power from the oil industry regulator ANP.

In addition, production-sharing contracts would give the government the right to sell the oil and pay companies a share. Currently, oil companies own the oil they produce and pay the government royalties and taxes.

“The idea of a new state company and of production-sharing contracts are guidelines by the president but nothing has been decided yet,” a spokesman for the Ministry of Energy and Mines told Reuters.

With more control over oil, the government wants to export more derivatives than crude.

“What are we going to do with this oil? Sell it purely and simply? No. Whoever wants to come here and get oil and take as much as he likes. Can he come? No,” said Lula in Para.

PANDORA’S BOX

Even government supporters say the government may be opening a Pandora’s box by renegotiating spoils after finding the treasure.

If reforms involve constitutional amendments, the opposition may be able to block the proposal, Salvatti said.

“If the government has any common sense, it will avoid altering the Constitution,” Salvatti said.

The government intends to respect the contractual rights of companies already prospecting in the new oil fields.

“Twenty-five percent of the sub-salt cluster has already been tendered. We won’t touch that,” said a senior government official close to Lula.

But if seismic testing confirms the entire cluster is a single field, the government will have to lump together old and new contracts under the new legislation, experts said.

Petrobras shareholders, who include large foreign investment funds, have threatened to take legal action against the government if they lose out.

The government intends to present a proposal to Congress in early 2009, before campaigning for 2010 presidential elections.

But that may prove an optimistic timeline.

“I don’t want to talk about resistance but (we want) clarifications, debate and exhaustive discussions,” said Jose Agripino, Senate leader for the opposition DEM party.

The government also wants to discuss a redistribution of oil revenues for states and municipalities. That is an even more daunting task, experts say.

“It will be a tight schedule before the 2010 presidential elections and the end of the Lula administration,” said Erasto Almeida,” analyst with Eurasia Group consultancy in New York.

Almeida said the government may end up raising its tax take from oil rather than changing the legal structure.

Petrobras in one of the sub-salt clusters shares drilling rights with Galp, ExxonMobil Corp, Amerada Hess, BG Group, Repsol and Shell.

Additional reporting by Stuart Grudgings in Rio de Janeiro and Peter Murphy in Barcarena; Writing by Raymond Colitt; editing by Stuart Grudgings and Todd Eastham

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