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From Now On, Concession Is Out, Sharing Is In for Brazil Oil

Lula, Brazilian flag, Petrobras Brazil’s new rules for exploration and production of oil in the subsalt layer maintain the attractiveness to private companies, be they national or foreign. The statement was made in São Paulo, by the president of the Energy Research Company (EPE), an organization connected to the Ministry of Mines and Energy, Maurício Tolmasquim, in an interview to foreign correspondents in Brazil.

The laws that cover the reserves recently discovered, at great depths on the coast of Brazil, were sent recently by president Luiz Inácio Lula da Silva to the National Congress. If approved, the work in the subsalt layer should start being done under the regime of shared production between the government and companies, no longer through the system of concessions that is currently in place.

“The country cannot ignore international companies,” said Tolmasquim. The bill has been criticized for modifying the model of contracts and for guaranteeing to the state a very large participation in the business.

“It has been verified whether it complies with international interests, if it is attractive, and we have decided that it is,” he added. EPE helped in the elaboration of the bill presented by the government.

The executive admitted that “maybe” the concession model would be more attractive than shared production, but, in compensation, the contracts signed by the country up to now presented greater risk to private investors.

According to him, of the 31 wells already drilled in the subsalt layer, there was success in 87%. In the specific case of Santos Basin, on the southeastern coast of the country, there was success in 100% of the 13 wells drilled to date. “The global average of success is 15% to 20%,” he said.

Tolmasquim added that the value of oil companies is calculated according to the volume of reserves to which they have the right, and it is difficult to find new deposits with good production perspectives open to private exploration.

He said, for example, that in 1970, just 1% of the global reserves were in the hands of state-owned companies, whereas now this percentage is 77%. “And there is totally free access to just 7% of the global reserves,” he declared.

In this respect, the executive pointed out that private companies are “used to” working in a shared regime with governments. He said that in the 20 countries that have oil, 19.5% of the reserves are explored by state-owned companies alone, 17% by state-owned companies with service contracts granted to private companies, 26% by mixed contracts that involve shared exploration and other systems, 7.4% by shared operation alone, 8.7% by concessions to partnerships between state-owned and private companies and 15.8% by pure concessions.

Among the main producers, according to the president at EPE, just Canada, the United States and Brazil adopt the model of pure concession.

He pointed out that the new system, when approved, should only be used for future tenders of exploration blocks in the subsalt layer. For the contracts already tendered, in the subsalt layer and in areas above the salt layer, the concession system is still valid.

Tolmasquim pointed out that other factors in favor of Brazil are the democratic environment, respect to contracts, existence of light oil, low risk of finding nothing and regulations that, due to being new, are unknown to companies. The model used in Norway was one of the government’s main inspirations in the formulation of the bills and laws.

He said that if the subsalt regulations are approved by congress still this year, the first tenders should take place in the second half of 2010.

Shared production takes place in the following system: the part of production that is not used to cover the cost of investors is shared between the company hired and the Federal Government in the proportion defined in the auction.

The government may define a minimum percentage for itself, but effective participation will only be known at the time of the tender. The share that the companies are prepared to grant to the state should depend on the level of commercial viability of the bloc.

The presence of the government in the deal should be through a new state-owned company, Petrosal, to be created according to bills sent to the Congress. It should basically be in charge of inspecting the sharing as regards the business aspect, as in the legal area this attribution is to the National Petroleum, Natural Gas and Biofuel Agency (ANP).

The money collected with the sale of oil by the Union should be fully turned to a “social fund”, a kind of sovereign fund to invest in the fight against poverty, education, science and technology and environmental protection.

To obtain revenues, the fund is going to operate on the market, either in shares or participation, investing in enterprises or other activities in Brazil and abroad. “It should be an engine to the economic infrastructure of Brazil,” said the EPE president.

The objective of this fund is to avoid what happened in other countries that produce oil and spent their revenues with the commodity, not developing the local industry and not promoting distribution of income.

“Fortunately, the subsalt oil came at a moment in which Brazil already has a strong industry,” said Tolmasquim. The reserves already discovered in the subsalt layer are estimated at 14 billion barrels.

The presence of the state should also be through Petrobras, which will necessarily be the operator of all subsalt blocks and should invest at least 30% of the funds necessary to verbalize business. For such, the Union should expand the company’s capital by US$ 50 billion.

Public organizations should also have the right to the winner’s bonuses and royalties. Despite such government presence, according to the executive, the subsalt layer should be profitable for private companies with oil prices above US$ 35, and the price is currently much higher.

Brazil produces around 1.9 million barrels of oil a day, a volume that is close to the local demand. With the concessions that have already been made, according to Tolmasquim, the volume should rise to 3.5 million barrels a day between 2015 and 2017, with 1 million barrels being turned to exports.

This performance should be reached before subsalt production attaining full force, so a much higher volume is expected in the coming decade. The president at EPE guaranteed, however, that this should not unstimulate investment in renewable energies in the country.

Brazil is the global leader in the field and 46% of its energy matrix comes from renewable sources, mainly from hydroelectric power plants and from the use of biofuels. According to the executive, the National Energy Plan forecasts that by 2030 the sector’s share should continue at the same levels.

To give an idea, Tolmasquim stated that participation of renewable energies in the global energy matrix is 13% and, in the case of the countries in the Organization for Economic Co-operation and Development (OECD), just 6%.

According to him, in 2008 average global production of oil was 86 million barrels a day. Considering the areas in activity today alone, in 2030 this volume should drop to 31 million, being the demand 106 million barrels. To supply this level of consumption, apart from exploring new reserves, the world will have to invest in alternative sources and in the development of new technologies.

The executive believes that at least up to 2050 oil should still dominate the energy sector, but ethanol, for example, is highly competitive when considering a barrel of oil at US$ 40.

Anba

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