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Brazil New-Found Oil Will Fund Education and Anti-Poverty Programs

Brazilian new-found oil The president of Brazil, Luiz Inácio Lula da Silva, announced today, August 31st, a new development model for the exploration and production of oil in Brazil's offshore "pre-salt" region, which includes the largest oil discovery in the Americas in three decades and the biggest estimated oil and natural gas volume under evaluation worldwide. 

The model, which still needs to be ratified by the Brazilian National Congress in order to be enacted, includes a new production sharing system for contracts, a new public company for pre-salt contract agreement and administration, and a new social fund for investment in education and mitigating poverty in Brazil.

Minister of Mines and Energy, Edison Lobão, states that the production sharing system introduced in the new development model reflects a change in Brazil's standing from an oil importer to a self-sufficient global energy producer.

"With the discovery of the pre-salt oil fields in 2007, the realities of Brazil's energy reserves have changed profoundly as have the risk-reward ratios," he stated.

"In 1997, when Brazil adopted a concession model, the level of risk for exploration was much higher with much lower profitability than currently estimated for the pre-salt play. As an oil importer, the country sought investments.

Today, the Brazilian economy is sound and well-balanced; the country has a diversified industry and is self-sufficient in petroleum. For strategic reserves with low risk and high profitability, as is the case in the pre-salt area, the production sharing system is more suitable."

The Brazilian government believes that the profit sharing system will continue to offer excellent investment opportunities to external parties.

"The pre-salt layer is profitable, Petrobras is a globally reputable partner and investors can benefit from the production of Brazil's oil reserves, profiting from this market," remarked Minister Lobão.

The pre-salt region refers to an 800 kilometers (500 miles) long area, approximately 270 kilometers (170 miles) off the coast of Brazil in the Atlantic Ocean. The region is referred to as "pre-salt" because its oil is located beneath thick layers of rock and salt over 7 kilometers (21,000 feet) below the sea surface, or 5 kilometers below the sea bottom.  Specialists estimate that it holds more than 50 billion barrels of oil equivalent.

The first tenet of the new development model involves Brazil's shift from a concession model to a production sharing system for the award of new contracts.

Under this system, Brazil's state-controlled oil company, Petrobras, will be the operator of all contracts for exploration and production of the Pre-salt layer. Interested parties can seek contracts through a partnership agreement. 

The shared contracts may be entered into directly with Petrobras or by means of an open bidding, and Petrobras will receive a minimum participation of 30% of the costs incurred and profits obtained in the business. In addition, the National Treasury will become a partner of the companies investing in the exploration, sharing the profits and receiving part of the oil.

The production sharing system will apply to new contracts signed for fields in approximately 72% of the pre-salt currently interpreted area. Previously awarded contracts – which involve roughly 28% of the pre-salt region – will remain unchanged.

The government's new model also includes the creation of a public company responsible for controlling and monitoring the cost of exploration and production of pre-salt and the administration of sharing contracts.

This company will represent the country in the consortia and operating committees to be created for directly managing different sharing contracts and monitoring all activities in exploration and production (E&P).

"We have evaluated global best practices to determine a model that would balance our resource wealth with our economic stability and the social development of our citizens.  We believe this new model will promote the responsible development of the Brazilian economy and maintain our status as a trusted partner in the global economy," stated Minister Dilma Rousseff, Chief of Staff of the Brazilian government.

Finally, the new pre-salt development model will establish a New Social Fund (NSF) that will set up a stable and consistent means to direct revenues from pre-salt exploration towards investments in poverty reduction, education, and science and technology.

The fund will have the form of a public savings account that receives income from various sources, such as royalties, signings, bonuses and commercial revenues from petroleum and natural gas, originated in production sharing, and resources from activities such as mining.

"The primary objective of this new system is to ensure that Brazil maintains the steady rate of socially inclusive economic growth that we've experienced in the past five years. As our economy has developed, we have put active social policies in place to lift citizens out of poverty and strengthen the middle class with aggressive investments in education, and a strong stance against violence by combining social initiatives with crime prevention.  The establishment of this new social fund reflects a measured, long-term view to our future," added Minister Dilma Rousseff.

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