Brazil oil law overhaul faces early resistance

Brazilian President Luiz Inacio Lula da Siva still faces a long battle to change oil laws meant to boost state control over vast sub-salt fields as his initial proposals face criticism even before they reach Congress.
Lula is expected in the coming weeks to send Congress a proposed overhaul of oil laws meant to increase state control over billions of barrels of crude in undersea deposits that have drawn the attention of the world’s biggest energy companies.

But even Lula’s cabinet members appear to be struggling to smooth over key differences, while potential losers from the changes, including politicians facing cuts in oil revenues, are insisting on watering down key portions of the legislation.

A continuing ethics scandal in Congress promises to drag the process out even further after the presentation of a draft bill.

“Given the confused situation in Congress, I think it’s going to be very difficult to approve changes in the regulatory framework before the end of Lula’s term (in 2010),” said Adriano Pires of the Brazilian Infrastructure Center, a consulting group.

On Wednesday, Lula met with advisors and cabinet members to discuss the possible reforms, which have already been delayed for months.

A source familiar with his proposals told Reuters that he will seek to make state oil company Petrobras (PETR4.SA)(PBR.N) the only operator of new sub-salt projects and advance a plan for the government to provide the company with new capital.

But Energy Minister Edison Lobao told reporters after Wednesday’s meeting that presidential advisors are still struggling for consensus over what to propose to Congress.

“The president listened … and asked many questions and said he would carefully read the bills,” Lobao said, according to the newspaper O Globo. “There were many differences.”

SHARE DILUTION?

Lula wants to move from a concession system to a production sharing model for oil contracts, create a state fund for oil revenues and boost the participation of Petrobras in new sub-salt projects.

The biggest sticking point appears to be the state development fund because it would move revenues currently slated for governors and mayors into the hands of the central government.

The governor of Rio de Janeiro State, one of the largest recipients of oil royalties and taxes, last month slammed the plan in a newspaper editorial despite being a Lula ally.

A tentative plan — in discussion for months — for the government to give Petrobras rights to unexplored oil fields in exchange for newly issued company shares will also face an uphill battle, said independent energy consultant Francois Moreau.

“They’re going to issue new shares based on access to new oil fields, but what’s the value of this oil? How much oil is there? At what price will it sell?” said Moreau, adding investors will likely consider the move a dilution.

“If they do it, they’re going to be facing a shareholder riot.”
The government, which has promised not to change any existing oil contracts, controls some 55 percent of Petrobras’ voting shares but only 32 percent of total market capitalization.

Petrobras has created partnerships with companies, including Britain’s BG (BG.L), Portugal’s Galp (GALP.LS) and U.S. giant Exxon Mobil (XOM.N), to develop sub-salt fields.