Independence Day: Brazil Maps New Rules for Offshore Oil

The New York Times
August 31, 2009, 2:15 PM ET
By Keith Johnson
Brazil announced today new rules to protect the country’s expected oil windfall. The big question is whether the long-awaited shift really strengthens Brazil and state-owned Petrobras, or whether it backfires by scaring off investment by international oil companies.
The new rules, in the works for a year, change the terms for Brazil’s massive offshore oil fields to production-sharing agreements, rather than outright concessions. (More here and here.)
This means that if oil prices soar, as some expect, most of the windfall would accrue to the Brazilian government not the oil companies. (Oil wasn’t doing any soaring today, plummeting below $70 a barrel.)
Big Oil can live with that. These agreements are the norm in West Africa, where both the companies and nations such as Angola have profited mightily.
Brazilian president Lula heralded the new rules as “the new independence day” for Brazil. They name Petrobras as the operator for all of Brazil’s “pre-salt” offshore oil fields (the fields that lay under huge slabs of salt on the sea floor, which make up the bulk of Brazil’s recent offshore finds). Petrobras will have the right to operate some fields exclusively; even those that are opened up to international investors will see Petrobras hold a minimum 30% stake. And the rules are geared to maximize income for the Brazilian government: Winning foreign bidders will be those who offer the biggest cut to the government.
This means Petrobras will have its hands full and the Exxons and Shells of the world will have to settle for a back seat.
Finally, to underscore how political Brazil’s oil wealth is becoming, the country will create a new state company, Petrosal, that will manage all its oil and gas resources. Though Petrosal won’t have any say over investments or operations, it will have “voting rights and veto powers that will define consortium activities,” according to Petrobras.
Five years ago, such a move might have looked risky, if not downright foolish. Today, though, things have changed.
Western oil companies, for starters, are desperate to tap into oil finds anywhere they can—and Brazil’s offshore fields are among the world’s biggest discoveries in recent decades. Recently, Big Oil has been willing to accept increasingly tough terms for oil exploration in Iraq; the lure of Venezuela’s huge oil fields for some outweigh the risks of dealing with the Chavez government.
And Petrobras doesn’t lack experience in offshore oil exploration, which is trickier and more expensive than onshore production.
Still, putting the development of Brazil’s vast oil wealth squarely on the shoulders of Petrobras could test the company. It already plans a rights issue to raise fresh funds to plow into offshore exploration; it may need even more cash if the government’s new rules dissuade the Exxons, Chevrons, and Shells of the world.