Brazil Moves to Boost Control Over New Oil Wealth

Brazil’s president proposed on Monday giving the state more control over one of the world’s biggest recent oil finds in a high-stakes move that could drive the country’s development for decades to come.

The long-awaited proposal for offshore “subsalt” fields thought to contain at least 50 billion barrels of light crude could usher in a new round of investment in Brazil’s oil industry if energy companies find the terms acceptable.

But the overhaul, a major step towards greater state control of Brazil’s successful oil sector, could also leave much of the treasure trapped under the sea if the regulatory framework turns out to be too onerous.

President Luiz Inacio Lula da Silva, a charismatic and hugely popular former union leader who has steered Brazil through an economic boom with a mix of market-friendly policies and social spending, hailed the oil reform as a “new independence day” for South America’s largest nation.

“The subsalt is a gift from God. Well explored and well managed, it can create big transformations in Brazil,” Lula said at an event to unveil the plan in Brasilia, the capital.

“If we don’t make the right decisions, what appears to be a winning ticket could be a source of enormous problems.”

Under Lula’s plan, the government will create a new state holding company called Petrosal to manage new projects and a new contract system that gives the state a share of the oil. The government will also have the right to declare any oil region strategic and implement a production-sharing system.

The plan would make state-run energy firm Petrobras the sole operator of new fields with a minimum 30 percent stake in all future projects in the so-called subsalt oil fields.

Presenting the plan, Lula and his chief of staff, Dilma Rousseff, stressed that Brazil would not fall victim to the so-called “resource curse” that has soured oil bonanzas in countries from Iraq to Nigeria to Venezuela.

The government’s oil revenues will go into a “social fund” aimed at channelling money into poverty reduction, science and technology, the environment and improving an education system that lags much of the world.

WORLDWIDE TREND

Brazil’s proposal is part of a worldwide trend of governments seeking greater control over natural resources. But Brazilian officials stressed that their plan does not seek to shunt aside foreign capital, as has happened in Venezuela.

“This is clearly a move to a more state-centric model, more than Brazil has had, and more than the government was talking about a few months ago,” said Erasto Almeida, Latin America analyst at Eurasia Group in New York.

“But it’s not Brazil moving in the direction of Venezuela. They are respecting existing contracts and it’s pretty clear there will be opportunities for international oil companies.”

Foreign energy companies were loathe to judge the proposal. Devon Energy declined to comment, while Chevron was noncommittal on the proposal but called Brazil “the future for the oil industry.”

Exxon Mobil said Brazil would benefit most from a “framework that encourages additional investment and timely resource development, and rewards innovation and the deployment of advanced technologies.”

The plan also calls for a capital infusion of about $50 billion (30.7 billion pounds) in Petrobras to boost state control over the firm, which is currently 55 percent controlled by the government.

Petrobras shares posted their biggest drop on Monday since June 3, shedding 3.6 percent to 31.38 reais on falling oil prices and concern the capitalisation plan will dilute shares.

CONGRESSIONAL BATTLE LOOMS

Critics say the changes inject too much political influence into Brazil’s oil industry. The oil wealth is likely to be used as a major plank in Lula’s campaign to get Rousseff elected as his successor in elections scheduled for October 2010.

Some also say the government has played down the exploration risk of tapping the oil, which lies below shifting sand and a thick layer of salt up to 5 miles (8 km) beneath the ocean surface.

The proposal gives an “absurd amount of power” to a cabinet-level energy commission that could open the door to political interference in operational decisions, said Marilda Rosado, a Rio de Janeiro-based lawyer who specializes in energy.

The prospect of prolonged wrangling in Congress over Lula’s proposal could also weigh on Petrobras and hold up further investments in the sector.

The opposition may struggle to argue against a greater state share of the oil wealth in the run-up to an election, but Congress is notoriously slow and its legislative agenda has been put on hold by a 3-month-old Senate graft scandal.

“The government doesn’t want to improve the oil model. This is obviously only for electoral purposes,” said Luiz Paulo Vellozo Lucas, a deputy with the main opposition PSDB party. “We will attack the proposal as a whole.”

The proposed overhaul focuses on vast new oil reserves that were discovered off Brazil’s southern coast in 2007, giving the country the potential to become a major energy exporter.

Lula proposes switching to a production-sharing system in which the government owns a part of the oil produced. That is a shift from the current system in which companies participate in competitive auctions to win the rights to explore for oil in blocks.