AMBASSADOR SOBEL MEETS WITH KEY ENERGY ENTITIES IN RIO

UNCLAS SECTION 01 OF 02 RIO DE JANEIRO 000165

SENSITIVE
SIPDIS

STATE FOR WHA/BSC, WHA/EPSC, EB/ENR
USDOE FOR SECRETARY BODMAN, CAROLYN GAY AND RHIA DAVIS
DHS FOR SECRETARY CHERTOFF

FROM AMBASSADOR SOBEL


E.O.: 12958: N/A
TAGS: ECON EINV ENRG PGOV PBTS MARR BR
SUBJECT: AMBASSADOR SOBEL MEETS WITH KEY ENERGY ENTITIES IN RIO

Ref(s): A) 08 RIO DE JAN 138; B) 08 RIO DE JAN 0044 and previous

Sensitive But Unclassified - Please handle accordingly.

This message has been approved by Ambassador Sobel.

SUMMARY
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1. (SBU) On June 6 Ambassador Sobel met with the two top executives
of the Brazilian Petroleum Institute (IBP),an association
representing the 71 energy companies operating in Brazil, and with
Petrobras' new International Director, Jorge Luiz Zelada. In both
meetings, discussions centered on the effects of the large oil and
gas discoveries off the Brazilian coast in the Santos basin - an
area measuring 800 km long and 200 km wide with an estimated
potential of more than 80 billion barrels of oil equivalent (boe).
The Ambassador explored opportunities for developing new bilateral
partnerships in light of upcoming visits by DHS Secretary Chertoff
and DoE Secretary Bodman. He also discussed the possibility of
developing a strategic partnership with Petrobras. End Summary.

IBP DISCUSSES SANTOS BASIN AND SOVEREIGNTY CONCERNS
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2. (SBU) On June 6, Ambassador Sobel met with IBP President Joco
Carlos de Luca and Executive Secretary Alvaro Alves Teixeira. They
explained that IBP's goal is to protect and develop the oil industry
in Brazil, while at the same time supporting and encouraging the
free market in Brazil. To that end, they occasionally find
themselves at odds with Petrobras, a majority shareholder in IBP, as
well as Petrobras's Exploration and Production (E&P) Director
Guilherme de Oliveira Estrella, who happens to be the Chair of IBP's
board. Their most recent disagreement has been over continuing
application of the concession model to E&P in the Santos Basin -
which IBP supports vs. development of a new production sharing model
where companies would pay royalties in oil vs. petrodollars (Ref A).
Royalties are currently at 65 percent, and the GoB is considering a
rate hike (which ANP supports). Petrobras, which controls 90
percent of E&P in Brazil is advocating for the production-sharing
model. IBP believes that adopting a new model would unnecessarily
delay ANP conducting new oil rounds, since any new model would have
to be approved by the Brazilian Congress.


3. (U) The Ambassador expressed interest in building a stronger
working partnership with Brazil to increase world energy security.
He inquired as to what public resources the United States could
offer to assist Brazil with oil and gas exploration of the pre-salt
areas of the new huge Santos basin off Brazil's coast, an area 800
kilometers long, extending from Santa Catarina to Esprito Santo and
200 kilometers wide. He also asked about opportunities for U.S.
companies.


4. (SBU) The IBP executives highlighted Brazil's concerns that the
United States is not a signatory to the UN convention recognizing
the 200 nautical mile economic zone. They also expressed concern
about the recent announcement of the reestablishment of the Fourth
Fleet headquartered in the U.S. Southern Command, which occurred at
about the same time as the Santos Basin reserves became public
knowledge. They explained that the GOB is very sensitive about
sovereignty and that the Fourth Fleet announcement "could not have
come at a worse time," causing a nationalist, protectionist reaction
in Brazil. There is concern that the United States could threaten
to use its considerable military assets to commandeer and exploit
Brazil's offshore assets. The IBP officials felt that an offer to
help Brazil develop a defense system to protect its "blue Amazon"
would further build on an already positive relationship that exists
between our two Presidents. Ambassador Sobel assured the IBP
officials that the United States does indeed recognize Brazil's
economic zone as extending 200 miles off Brazil's coastline. He
stated that he would seek guidance on this issue, and raise it with
DHS Secretary Chertoff and Defense Minister Nelson Jobim.


5. In response to the Ambassador's inquiry about the commercial
viability of extracting oil from the Santos Basin given the
complexity (and expense) of drilling in the pre-salt area, the IBP
representatives pointed out that the large potential finds announced
in Tupi (5-8 billion barrels of oil equivalent) and Carioca (33
billion barrels of oil equivalent) represent a small sampling of the
oil and gas reserves that may lie in the pre-salt area, which is
2000 to 3000 meters (6,000-10,000 feet) below sea level and could
yield more than 80 billion boe - a find that would rival the North
Sea and secure Brazil's place in the global arena as a major energy

RIO DE JAN 00000165 002 OF 002


producer. Given Brazil's leadership in ultra-deep E&P technology,
it could easily handle depths of that magnitude; however,
exploration in the pre-salt area may strain Brazil's exploration
capabilities. They also noted that while the intellectual capital
for E&P lies with U.S. companies, DoE technology would be of
considerable value to Brazil.


6. (U) The Ambassador offered to explore the idea of a visit by DoE
technical experts to assess what resources DoE might be able to
offer in support of Brazil's expressed desire to explore the Santos
Basin, and to prepare for Secretary Bodman's visit.

PETROBRAS PLANS TO BECOME A GLOBAL ENERGY SUPPLIER
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7. (U) Ambassador Sobel and Denis Bovin, a member of the President's
Intelligence Advisory Board, met with Petrobras' new International
Operations Director Jorge Zelada to discuss what role the USG might
play in supporting Petrobras' E&P and distribution of oil and gas
discoveries in the Santos Basin, and Petrobras' investment in the
United States. Zelada explained that Petrobras is seeking to
strengthen its position as a global energy supplier. Its board is
currently determining how to best achieve that goal given challenges
presented by geology, technological limits and resource
restrictions, and should have a revised five-year plan by the end of

2008.


8. (U) Every year, the Petrobras board conducts a mid-year
assessment. This year, the board is reconsidering resource
allocations between domestic and international operations for the
next five years. According to Zelada, the discoveries in the Santos
Basin will affect how and where Petrobras invests abroad. He
asserted that Petrobras will continue to grow as a global energy
company, but may have to refocus and refine some of its
international activities. It is prioritizing West Africa, the Gulf
of Mexico, Nigeria, and Angola.


9. (SBU) Responding to the Ambassador's concerns with Petrobras'
activities in the Iran and the Caspian, Zelada explained that
Petrobras understood and was sensitive to those concerns. He echoed
Samir Awad's assertions (Ref B) that Petrobras was unlikely to renew
or seek new contracts in Iran.


10. (U) Zelada went on to affirm that the US$5 billion Petrobras has
invested in the United States (out of US$15 billion internationally)
is likely to increase and will be part of an overall integrated
refining strategy. (Note: Petrobras produces mainly heavy crude and
must import light crude for refining. End Note). Petrobras is
adapting its refineries to work more with light crude to address a
production surplus in Brazil. Zelada said that Petrobras is trying
to acquire the other 50 percent of the Pasadena refinery in Houston
to alleviate refining pressure in Brazil and referred to the new
Pernambuco refinery, which is a joint venture between Petrobras and
PDVSA, Venezuela's state-owned oil company.


11. (U) Ambassador suggested that when in Washington, Petrobras
executives meet with Senator Lugar, and that they meet with
Secretary Chertoff and Secretary Bodman during their visits to
Brazil. The Ambassador also offered to look into the possibility of
bringing in USG resources and technology to complement Petrobras'
efforts.

COMMENT
--------------


12. (U) Comment: The recent discoveries in the Santos Basin have
created a golden opportunity for the United States to deepen its
strategic relationship with Brazil's public and private sector to
ensure global energy security. To the extent that we can, we should
encourage U.S. resources to support Brazil's E&P efforts in the
Santos Basin. No doubt key officials in the Brazilian government
and Petrobras board would appreciate the offers of technological
support and partnership to allay fears of the United States not
respecting Brazil's sovereignty. Such a partnership could also
offer additional strategic benefits in terms of joint E&P efforts
around the globe. Additionally, positive engagement in this dynamic
area at the early stages of exploration could reap benefits both in
terms of enhancing U.S. energy security, as well as continuing to
improve the bilateral relationship through cooperation in an area of
mutual interest.

MARTINEZ