Critics warn Brazil oil plan will deter investors

“For us, the pre-salt is a passport,” says Dilma Rousseff, chief minister in Brazil’s government and a would-be next president. “It’s a passport out of the condition of being the most unequal country in the world.”

The pre-salt fields are potentially huge oil deposits discovered two years ago off Brazil’s coast, beneath up to 7,000m of water, rock and a hard-to-penetrate layer of salt. Not only will they turn Brazil into a big oil exporter. They will also, the government hopes, finance the fight against poverty and deliver spending on education and other social goods that Brazilians badly need.

In a television address on Sunday night, President Luiz Inácio Lula da Silva made clear that he had two priorities for the pre-salt fields; to keep the oil in Brazilian hands and to ensure that its proceeds were spent on the Brazilian people.

In a rare interview, Ms Rousseff told the Financial Times how the government hoped to capture the pre-salt wealth. But its plans, outlined in draft legislation revealed last week, have caused dismay among many in the oil industry, who say they will deter the necessary investment.

At the centre of the controversy is a plan to switch from the current concessions system to production sharing agreements, or PSAs.

In a concession, oil companies are given any oil they produce in return for shouldering exploratory and operational risks and for paying royalties and other fees to the government. Most of Brazil’s oilfields use this system, including about 30 per cent of the pre-salt region. These were put out in several concessions before the region’s potential was understood, mostly to Petrobras, the government-controlled but publicly traded-oil company, either alone or in partnership with international oil companies (IOCs) such as ExxonMobil, Royal Dutch Shell and BG.

In a PSA, the oil remains government property and oil companies are given a share of it as payment for their services.

Under the government’s plan, a new oil company, Petro-Sal, 100 per cent government-owned, will oversee PSAs. It will have half the votes on each consortium’s operational committee and a veto over any decisions, including the rate of oil production and acquisition of goods and services.

Petrobras will take at least 30 per cent of any consortium, will be the lead operator in all of them, and may be granted licences on its own for any field at the government’s discretion.

“This model is right for the amount of oil we have, for the low level of exploratory risk and because of the high levels of returns. We want to keep a bigger part of the oil revenues,” said Ms Rousseff.

Industry figures say ownership of the reserves is not in question, and that the government could keep more money under the concession system simply by charging bigger royalties. They also say that the risks are not so low. Of about 30 wells drilled in the pre-salt region so far, three are dry and another eight have failed to find commercially viable deposits, according to an executive at an IOC operating in Brazil who asked not to be named. And drilling through the salt presents operational risks likely to cause expensive delays. “This is a good place to explore and there’s a lot of oil there,” the executive said. “But it’s not zero risk.”

Many also wonder why the government is determined to adopt PSAs. Luiz Antônio Lemos, an oil industry lawyer whose firm helped to prepare a comparison of the world’s oil regimes for the government, said PSAs were best suited to countries where political or judicial risk would otherwise deter operators, because they typically offered international dispute settlement. In Brazil, he said, the model was redundant, especially as Petrobras would be the sole operator. He also doubted whether oil majors would want to join consortia as minority investors.

“They are oil companies, they like to take part,” he said. “This system has more appeal to pension funds.”

Crucially, though, PSAs would allow the government to control the rate of oil production and adjust it for political or economic reasons. Ms Rousseff said IOCs would naturally prefer no change but argued that the size of the pre-salt reserves – estimated at 50bn-100bn barrels or more – would attract investors under any regime. Anyway, she said, oil companies were drawn to Brazil by risk and reward, she added. “[They come] because they gain from technology transfer from Petrobras”.

The IOC executive rejects this. “Petrobras are good at what they do,” he said. “But they don’t have all the answers. No IOC does.”

There are also doubts over Petrobras’s ability to raise the finance needed to fund the early years of operation before oil begins to flow.

Ms Rousseff said Petrobras had proven its ability to borrow during the global crisis and that a government plan to capitalise the company, basically by giving it the first 5bn barrels to flow from PSAs, would help it to borrow more.

“If you are a bank, which company do you lend to?” she asks. “The one with the reserves … The idea that oil companies won’t invest … I don’t believe that for a minute.”

But Enrique Cera of IHS CERA, a firm of energy analysts, said: “Petrobras has been investing like crazy. Its ability to acquire more debt has been reduced substantially by the amount of investment it’s done recently. It can’t really borrow more.”

Whatever the outcome of the debate, the government wants it over quickly. Under emergency rules, Congress will have just three months to discuss the proposed changes.