Brazilian oil on target

brasilobserver - Jul 20 2015
Senator José Serra speaks at the 2015 edition of Brazil Offshore, the largest oil and gas conference in the country, held in June in the city of Macae, State of Rio de Janeiro (Photo: Rui Porto FIlho)

(Leia em Português)

Among the many controversial projects implemented by Congress in the current legislature, one changes the rules of pre-salt exploration. It is accused of being “submissive” and is firmly on the Senate’s agenda


By Wagner de Alcântara Aragão

In the last six months, week after week the Brazilian society has been surprised by the current legislature of the Congress with initiatives that represent steps back in many areas of national life. At the turn of June to July, shocks came from both the Chamber of Deputies and the Senate, confirming what the Parliamentary Advisory Inter-Union Department had predicted: the current Congress is the most conservative since the democratization of the country, in 1985.

In the Chamber, after a new manoeuvre of the President of the House, Eduardo Cunha (Brazilian Democratic Movement Party), parliamentarians approved a constitutional amendment that reduces the legal age of responsibility in Brazil from 18 to 16 years. While 16 is the legal age across much of the developed world, Brazil doesn’t have appropriate measures or infrastructure in place to rehabilitate young offenders.

In the Senate, meanwhile, the senators were discussing another project that generated a lot of controversy: the end of Petrobras’ mandatory presence in the exploitation of oil reserves in the pre-salt layer.

Reducing the legal age has yet to be considered by the Senate, and there is no provision for this to occur. In addition, parliamentarians announced they would appeal to the Supreme Court (STF), claiming the unconstitutionality of the proposal and the voting process (read more on page 19). Regarding the pre-salt issue, this was expected to be considered by senators between 30 June and 2 July, but the vote was postponed without a new date set. It may be under discussion while this edition of Brasil Observer circulates.



The matter on debate is a Senate Bill authored by Senator José Serra (Brazilian Social Democracy Party), former mayor and governor of São Paulo and who twice ran for Presidency (2002 and 2010). Like the proposal that reduces the criminal age of responsibility, the project has yielded heated debate, although it has not achieved great impact on public opinion.

Serra’s project changes the federal law that deals with the rules for the operation and production of oil from the pre-salt reserves, discovered in 2006. The current law was proposed by former president Lula administration and was approved by Congress five years ago. The text creates specifically for the pre-salt, the so-called sharing basis, as opposed to the concession regime, which continues to apply to oil exploration in conventional areas (post-salt layers).

Among other rules, the current legislation does not obligate the Union to conduct bids for the pre-salt oil fields, allowing it to automatically engage Petrobras in the process. Or, in cases where the government sees fit to bid for exploration areas, the law establishes that Petrobras should have a minimum 30% stake in the venture. The PSDB senator project repeals this mandatory participation of Petrobras in exploration consortia, opening the possibility for pre-salt fields to be operated solely by private corporations, including foreign.



Not only by the nature of the project, José Serra’s initiative sounded strange because the senator is involved in an episode revealed by Wikileaks – an organization that published a series of messages related to international economic and political interests – denoting a certain political agreement with American oil companies. The episode came to light in December 2010, just over a month after the second round of the presidential election, in which Serra ran for president and was defeated by Dilma Rousseff (Workers Party).

According Folha de S. Paulo newspaper, the then candidate José Serra exchanged messages with Patricia Pradal, a Business Development and Government Relations Director of the US oil company Chevron. He said, according to the article: “Let these guys [Workers Party] do what they want. The bidding rounds will not happen, and then we will show everyone that the old model worked out well… And we’ll change back.” The US oil companies opposed the participation of Petrobras in exploration and production of pre-salt.

In a thematic session on the bill conducted by the Senate on 30 June, José Serra rejected accusations that he was defending the interest of large international corporations. Serra said his project was a “patriotic measure”, for allowing Petrobras to be relieved of bearing a 30% cost of all investments in exploration and production of pre-salt layer oil in time of “difficulties” crossed by the state company. For the senator, the project does not “discredit” Petrobras, only detracts from any obligatory “burden”.



It is not what would happen in practice if the project is approved, in the view of many Serra colleagues in the Senate, experts and movements representing the workers of the sector. “It’s absurd. It is to give our wealth to the seven sisters [multinationals of the industry]. I cannot understand how they want to give away national control of such an important resource such as oil. It is a crime against national sovereignty, this project,” said Senator Roberto Requiao (Brazilian Democratic Movement Party), who has led criticism in Congress.

Professor Ildo Sauer, director of the Institute of Electrical and Energy (IEE) at the University of São Paulo (USP) is contrary to changes, also considering that the Brazilian government would give up its control of a strategic wealth for economic and social development. A speaker on the thematic session in Senate, Sauer warned the potential of pre-salt reserves are not completely known.

That is, the amount of oil that would be exploited by foreign companies if the new rules are approved may be much higher. “The current model is the most efficient, and lets you take advantage of two major comparative advantages of Brazil: the technological capacity of Petrobras, despite the problems that afflict the company, and the sheer volume of oil in pre-salt, not yet fully established.”

Legislative consultant Paulo César Ribeiro Lima, gas and oil expert and author of “Pre-salt: the new legal framework and the capitalization of Petrobras”, also draws attention to the existence of still immeasurable reserves, echoing Ildo Sauer in the thematic session in the Senate, defending the current model. “To prevent private interests outweigh the interests of the majority of the population, it is essential Petrobras leads the production of pre-salt.”

Paulo Lima also noted that since the start of oil extraction in pre-salt, in 2009, Petrobras has been breaking production records. This shows that the company, despite turbulence regarding deviations investigated by Lava Jato Operation, maintains its technical and economic capacity to be a leader in activities. “Petrobras is the most experienced company in the world in deep water. The efficiency is proven by the very high exploration success rate and high productivity, much higher than world averages. Pre-salt is a real treasure and should be exploited to the maximum participation of Petrobras to ensure higher return for the country.”



Believing that ending Petrobras participation of at least 30% in the projects of exploitation of pre-salt means attracting more investors, supplier industry representatives of the oil production chain defends the changes contained in the José Serra project. In the thematic session in the Senate, the executive director of the Brazilian Association of Machinery and Equipment, Alberto Machado, said that such flexibility can provide to the national mechanical capital goods more technical exchange with the industry. According to the line of reasoning of the business leader, there would be a wider range of customers with whom the industry would be in partnership.

The President of the Brazilian Institute of Oil and Gas, Jorge Marques de Toledo Camargo, also cited the possible increase in customers, reduces the risk of investment by the supply chain. The director of the Brazilian Infrastructure Centre, Adriano Pires, said that the difficulties faced by Petrobras must reduce the company’s investments.

The latter argument was rebutted by Paulo Lima, for whom companies such as Petrobras have “peculiarities” that are not always captured by risk agencies or financial analysts. “Petrobras has an excellent financial, economic and operational situation with a highly promising future. The narrow visions of ratings agencies and some analysts that do not know the reality of the company may lead people to believe that Petrobras is going through a situation that is not real.”



Petrobras will invest less in the coming years. The Business and Management Plan from 2015-2019 provides US$ 130.3 billion in investments – 37% reduction compared to the previous plan, from 2014 to 2018. The new business plan was approved on 26 June. The company announced on the occasion that the plan aims to “create value for shareholders” and also the “company’s deleveraging”.

To improve the state of the company’s accounts, beyond reducing investments, Petrobras plans to sell goods and other assets. The sales amount for this and next year amounts to US$ 15.1 billion.

According to Federal Police information, the hole in the state oil company’s cash caused by the corruption scandal being investigated by the Lava Jato Operation has already reached 19 billion reais.


New bidding and local content

The federal government has not signalled if it will open bidding to explore new fields of pre-salt soon. Since the sharing scheme was set up in 2010, there was only one competition in 2012 for the field of Libra, in the Campos Basin. The winning consortium has a 40% stake in Petrobras – 60% is distributed between Dutch Shell (20%), French Total (20%) and Chinese NSCLC and (10%) and CNOOC (10%).

But a new round of bidding for oil exploration in conventional fields (post-salt) was confirmed. The round – the 13th since 1997, when the law established the concession regime in oil exploration in Brazil – is scheduled for 7 and 8 October. According to the National Petroleum Agency it will be auctioned 266 exploration blocks.

President Lula’s campaign banner since his first election in 2002, and also of the current president Dilma Rousseff, the local content policy of the Brazilian government for the oil and gas industry should not be stirred. At least that’s what safeguards the federal government, although recent statements by the Minister of Mines and Energy, Eduardo Braga, have passed the impression that the government would consider easing such requirements, to attract more investors.

The priority of local content has been practiced both by Petrobras and featured in the clauses of the concession contracts for exploration of oil fields by private companies. The local content in purchases and contracted services varies, but has reached up to 80% in some cases.

Fixing this market reserve, the government seeks to increase the participation of domestic capital goods industry in providing the oil production chain. The local content policy was responsible, above all, by the recovery of the Brazilian naval industry, which almost became extinct in the 1990s. “The redeployment of the shipbuilding industry in Brazil led us to incorporate technology, make amends the training of our employees and enable us to create employments and income. What we want is to produce in Brazil which can be produced in Brazil,” said Dilma Rousseff during delivery of an oil tanker to Transpetro (Petrobras subsidiary), at the complex of Suape in May.