The Rising Influence of Rising Affluence

[DewDiligence]

John et al re PBR: This write-up from last week illustrates the
kinds of games the government of Brazil can play with PBR’s
minority shareholders. In effect, the government can transfer
wealth from PBR to a new government agency.

http://www.ft.com/cms/s/0/c86245de-5620-11de-ab7e-00144feabdc0.html

›Brazil Readies Oil Reserves Law

By Jonathan Wheatley in São Paulo
June 11, 2009

The Brazilian government is preparing legislation that will set new regulations for the country's enormous off-shore “pre-salt” oil reserves, discovered in 2007.

International oil companies have been anxiously awaiting the regulations as they cover some of the world's few big unexploited oil reserves, which industry leaders say will be as significant as the North Sea discoveries of the 1970s.

But the proposed legislation has caused alarm among many in the industry, who fear it may be open to political interference and give unfair advantage to Petrobras, Brazil’s government-controlled but publicly traded oil company.

In a recent interview with the Financial Times, Edson Lobão, mines and energy minister, said international oil companies should “prepare their treasury reserves” as the government would introduce regulations in time to auction new concessions in the pre-salt fields next year.

The statement surprised many in the industry, who had expected the process to take longer.

The ministry confirmed on Wednesday local press reports, saying three bills were being prepared to go before Congress. They would create a new, 100% state-controlled oil company to take ownership of the fields and award concessions; production sharing agreements in the fields, in which oil companies would give part of the oil they produced to the government, replacing the existing concession system in which companies take ownership of whatever oil they discover; and a fund to channel proceeds from the fields to social spending.

Several concessions in the fields were sold before their potential became clear. Almost all are controlled by Petrobras, in partnership with foreign companies.

Those concessions will not be affected by the new rules and are likely to keep Petrobras and its partners busy for several years.

But because about 60 per cent of Petrobras’s capital is held by private investors, the government has been keen to create a new company to secure ownership of the remaining pre-salt fields for the Brazilian state. Government officials estimate that pre-salt concessions already granted could contain more than 50bn barrels of oil; the remaining area is likely to be much larger.

The proposed new structure is based on that in Norway, where Petoro, entirely controlled by the state, oversees the industry in which StatoilHydro, controlled by the state but with private investors, plays a dominant role.

Brazil’s ministry said the new regulations would follow the Norwegian model, including measures that allow the new state company to grant concessions without putting them out to tender – a move widely seen as protecting Petrobras from being squeezed out by wealthier foreign competitors.

“This is worrying,” said Eric Smith of the Tulane Energy Institute in New Orleans. “There is likely to be a lot less transparency in Brazil than there is in Norway. This could allow for political interference and favours.”‹