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BRAZIL: New Law Would Put Oil Revenue into Development

Fabiana Frayssinet

RIO DE JANEIRO, Aug 31 2009 (IPS) - On what he referred to as “a new independence day for Brazil,” President Luiz Inacio Lula da Silva announced Monday proposed new legislation that would increase state control over the management of the country’s enormous offshore oil finds, with the aim of channeling much of the state’s oil revenue into a national social fund.

The oilfield was discovered two years ago in an area of nearly 800 square km, at a depth of seven km, beneath a layer of salt up to two km thick which extends 500 km offshore in the Atlantic Ocean from the state of Espíritu Santo to Santa Catarina.

Lula said Brazil must take advantage of the reserves to strengthen Brazil’s state oil company, Petrobras, which trades on national and international stock exchanges.

On his weekly radio programme “Coffee with the President”, Lula said “We are talking about very large reserves that put Brazil among the world’s largest oil producers.”

“The subsalt oilfields are a gift from God – wealth which, if properly managed, can drive major transformations in Brazil, improving living conditions for our people,” Lula added later, during the official ceremony held to announce the proposal, which must still be approved by Congress.

He also stressed that Brazil does not want to be a “mere exporter of crude oil,” and that the plan is to create a powerful petrochemical industry to refine the oil into derivatives in order to export value-added products like gasoline.

If the new plan goes through, the state would be the owner of the oilfields and private companies would operate as service providers, replacing the current concessions system, under which companies bid for the rights to explore new oil blocks.

With the new framework, the government could hire Petrobras as operator of the subsalt oilfields, or open them up to competitive bids, in which the winner would be the company “that guarantees the greatest percentage of profits for the state,” according to cabinet chief Dilma Rousseff.

If Petrobras is the operator, it would have a minimum 30 percent stake in the oil project – a privilege that Rousseff justified by the need for the operator to have access to strategic information on the reserves and control the pace of production and technological development.

These decisions were reached, according to Lula, on the premise that the country’s oil and natural gas belong to “all of the Brazilian people,” and in order to ensure that “most of the revenues generated remain in Brazilian hands.”

Under the new plan, which was discussed for the past two years, the government’s share of oil revenues would go into a national development fund, to be spent on education, science, technology and anti-poverty projects.

“We don’t have a right to take that money and spend it on the government’s budget,” said Lula.

He added that the newfound wealth must bring development, and must not be allowed to undermine other industries, as has occurred in other oil-producing nations.

Rousseff, Lula’s candidate for the 2010 elections, said the national social fund will also make it possible for Brazil to avoid the “curse of oil, which has kept the people of so many oil-rich nations in poverty.”

Minister of Mines and Energy Edison Lobao called the reserves “a treasure that belongs to all Brazilians,” and said they will help Brazil play “a leading role” in “global geopolitics.”

The production-sharing model is seen by some market analysts as a step backwards from the concession model, which resulted from the process described as the “flexibilisation” of the state oil monopoly, launched by then president Fernando Henrique Cardoso (1995-2003) in 1995.

In an interview with IPS, Rafael Schechtman with the Brazilian Infrastructure Centre described the proposed new legislation as “a complete setback,” and said the government’s plan would “restore Petrobras’ monopoly.”

According to Schechtman, there are no guarantees that the government will not expand the minimum 30 percent stake for Petrobras in oil operations into a 100 percent stake, “to give total control back to the company.”

Anticipating such criticism, Lula described the years during which the system of concessions for local and foreign private companies was put in place as a time of “market worshippers” when “the presence of the state was shrinking.”

According to official estimates, the new offshore subsalt oilfields could hold 50 to 80 billion barrels of oil – up to six times the country’s entire proven reserves of 14 billion barrels.

The Tupi oilfield alone, where Petrobras has already begun to extract crude, holds an estimated five to eight billion barrels.

Fighting over future riches

The leading oil-producing states, Rio de Janeiro, São Paulo and Espíritu Santo, are determined to secure a large share of the future oil earnings.

They are opposed to the new system, which would create a profit distribution mechanism under which the largest share of the state’s revenues would go to the central government while the rest would be shared out with non-oil-producing states.

The governors of the three oil-rich states – who did not participate in Monday’s ceremony – want the current system of state royalties to remain in place.

The touchy question will be left up to Congress to work out.

Referring to the proposed national social fund, Rio de Janeiro Governor Sergio Cabral said the government was playing “Robin Hood.”

Another controversial point is the creation of a new state holding company, Petrosal, to manage new projects and contracts in the subsalt oilfields.

The proposed legislation would apply to the subsalt reserves not yet granted in concession to local or foreign private firms – in other words, 70 percent of the offshore reserves.

Lula said Petrobras would invest 174 billion dollars from here to 2011 in exploration in the subsalt oilfields, which makes it important, he added, to create safeguards guaranteeing that the wealth “will function as an unprecedented industrial revolution in the economic history” of Brazil.

Such a massive investment is due to the fact that the oil is located in an extremely difficult-to-reach area, which implies greater costs and requires new technological developments.

Not only is the oil located around seven km below the surface of the ocean, but it is beneath thick layers of sand, rock and salt.

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