Lula Oil Rules to Stir ‘Intense Debate’ as Lawmakers Vow Delays

 Brazilian President Luiz Inacio Lula da Silva’s proposal for increasing government control over oil reserves will stir debate in Congress that could delay approval, opposition leaders said.

Lula attached an urgency clause to the bills that would require a vote within 90 days. Opposition parties began a filibuster in the lower house and are demanding the clause be removed, Gustavo Fruet, a deputy with the Social Democracy Party, Brazil’s biggest opposition party, said in an interview.

The plan would allow the government to keep a bigger portion of oil profits by having outside companies share crude drilled from so-called pre-salt fields with the state rather than the current model based on royalty payments. The area includes the Americas’ largest oil discovery since 1976.

“The opposition won’t give up on an intense debate,” Jose Agripino Maia, Senate leader for the opposition Democrats Party, said in an interview late yesterday in Brasilia. “We still have to evaluate what’s the better model for the Brazilians, if it’s the shared or the concession model.”

Petroleo Brasileiro SA, the state-controlled oil company, lost $7 billion of market value after Lula unveiled the rules on Aug. 31 on concern the government may increase its stake in the company and dilute minority holders through a planned share sale to boost capital. The state would give rights to explore 5 billion barrels of oil in exchange for securities while individual shareholders also would be able to buy equity, Chief Financial Officer Almir Barbassa said yesterday.

Preferred shares of Petrobras, as the Rio de Janeiro-based company is known, rose 22 centavos, or 0.7 percent, to 31.60 reais in Sao Paulo trading yesterday, while the common stock dropped 0.5 percent to 37.33 reais.

Fitch

Political risk for Petrobras would increase should minority shareholders decide not to maintain their stake, Fitch Ratings said yesterday. This decision will depend on the valuation of the government contribution, yet to be defined, the rating agency said.

Fitch said overall the company’s standing in the global oil and gas industry will be “strengthened” by the plan. Fitch rates Petrobras debt BBB, the second lowest investment-grade level, with a stable outlook.

The amount of Petrobras’ capital increase may be determined before Brazilian lawmakers approve the oil legislation dictating rules for exploring offshore fields, Barbassa said.

Estimates from Credit Suisse Group AG and Senator Romero Juca this week forecast the oil producer’s planned increase at between $20 billion and $50 billion. Barbassa said the final amount depends on a government assessment of the value of oil where the company will have the right to develop, which probably will be set in less than three months.

‘Unfounded Speculation’

“Any figure given for the 5 billion barrels of oil is an unfounded speculation,” Petrobras Chief Executive Officer Jose Sergio Gabrielli said yesterday at a press conference in Rio.

Petrobras may increase its $174.4 billion five-year investment plan by $10 billion to help explore so-called pre- salt fields, Barbassa said.

“We will also get more capital injection from minority shareholders,” Barbassa said at a press conference in Rio. “These funds will strengthen further our position to achieve this new challenge.”

Brazil is following countries from Venezuela to Russia in taking greater control of crude reserves after prices rose to a record $147.27 a barrel last year. The discovery of the pre-salt Tupi field was the largest since Mexico’s Cantarell.

Sole Operator

Petrobras will be the sole operator of all pre-salt oil fields, which include Tupi, Iara and Whales Park. The company also will hold a minimum 30 percent stake in all joint ventures set up to bid for licenses, according to a statement from the Lula’s office.

“Petrobras will continue to have privileged access to one of the most interesting growth areas in the global oil universe,” Frank McGann, an analyst at Bank of America Corp. in Buenos Aires, wrote this week in a note to investors.

Itau Unibanco Holding SA, Brazil’s largest non-government bank, raised its rating on Petrobras yesterday and said the company may “strengthen its dominant position” as the plan is held up in Congress. Itau’s Sao Paulo-based analyst Paula Kovarsky said the legislation proposed by Lula is “unapprovable.” Credit Suisse upgraded the company’s American depositary receipts last night to “outperform.”

The changes create “a new regulatory framework to strengthen Petrobras, to allow the government to become the owner of the petroleum,” Lula said Aug. 31. The proposal also includes the creation of a new state company called Petrosal to manage pre-salt fields.

The pre-salt area runs 800 kilometers (500 miles) along the coast from Espirito Santo to Santa Catarina states and has oil deposits beneath a layer of salt resting as deep as 3,000 meters (9,843 feet) beneath the ocean surface and another 5,000 meters below the seabed.

“We will continue to block the voting,” Rodrigo Maia, a lower-house deputy and president of the Democrats Party, said in an interview in Brasilia. “We understand that the matter was not discussed enough. It’s our duty to clarify it better because the proposal may push investors away.”