U/S JEFFERY DISCUSSES OIL AND GAS DEVELOPMENTS IN BRAZIL

UNCLAS SECTION 01 OF 02 RIO DE JANEIRO 000288

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TAGS: ENRG ETTC EPET EINV PREL BR
SUBJECT: U/S JEFFERY DISCUSSES OIL AND GAS DEVELOPMENTS IN BRAZIL

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1. (U) Summary. U/S Jeffery visited Rio de Janeiro on October 2,
2008 as part of his trip to Brazil. Accompanied by WHA PDAS Craig
Kelly and Special Energy Advisor Greg Manuel, U/S Jeffery met with
representatives from the U.S. oil and gas industry, industry
association IBP (Brazilian Institute for Petroleum, Natural Gas and
Biofuels),and state-controlled oil company Petrobras to learn about
developments in Brazil's oil and gas sector and discuss how the U.S.
and Brazil can foster a closer working relationship on energy
issues. Industry as a whole, including U.S. firms and Petrobras,
expressed excitement about upstream opportunities in Brazil and were
hopeful that the Government of Brazil will reform the regulatory
framework in a way that can increase government revenue while still
respecting contracts and encouraging competition. U/S Jeffery also
met later that evening in Brasilia for a dinner with Mines and
Energy Minister Edison Lobao where the talk centered on the promise
of pre-salt reserves and ensuring openness to international oil
companies. End Summary.

U.S. Oil & Gas Industry


2. (SBU) Country managers for U.S. firms Anadarko, Chevron, Devon,
and Exxon emphasized to U/S Jeffery that their companies remain
interested in building material, sustainable, upstream businesses in
Brazil. They said that entering and staying in the Brazilian market
hasn't been easy in the ten years since the industry opened up, but
that recent discoveries - particularly in deepwater and
ultra-deepwater (including pre-salt) areas - have changed the game
and made upstream opportunities in Brazil very attractive relative
to many other parts of the world. Industry was generally positive
about transparency and regulation in Brazil so far, but expressed
concern over the nationalistic tone of the current GoB debate on
regulatory reform for offshore oil and gas contracts. They thanked
Amb. Sobel and the U.S. Mission for their active advocacy over the
past few months and asked U/S Jeffery to continue to press for
contract stability with GoB interlocutors in Brasilia. At dinner
that night with Mines and Energy Minister Edison Lobao in Brasilia,
Jeffery noted that the U.S. oil companies had conveyed how happy
they were with the current transparent operating structure in
Brazil. Lobao responded that the GOB would continue to operate
transparently because the international oil community requires it
and "we need the capital" that outside involvement brings.


3. (SBU) In particular, U.S. industry is seeking to maintain the
royalty/tax regime with no change in special participation rate for
contracts already in place. Contract sanctity is of special concern
on the pre-salt blocks which have already been leased in previous
licensing auctions. Anadarko recently became the first
non-Petrobras operator to strike oil in Brazil's pre-salt area, and
Exxon and Hess are set to begin drilling their highly anticipated
pre-salt block this month. (Note: Before the meeting with U/S
Jeffery, Exxon expressed additional concern that some elements
within the Brazilian government might attempt "creeping
expropriation" if contracts were not adequately grandfathered. End
Note.) It was noted that the pre-salt opportunities are too big for
just one company to handle and that, even if the GoB wanted to save
the whole pre-salt area for Petrobras or a new state-owned company,
the financing and investment challenges would be overwhelming.

IBP - Brazilian Institute for Petroleum, Natural Gas and Biofuels


4. (SBU) The Brazilian Institute for Petroleum, Natural Gas and
Biofuels (IBP),Brazil's umbrella industry association for domestic
and international oil & gas firms, briefed U/S Jeffery on the latest
developments in the regulatory reform debate. Shortly following the
discovery of oil in the pre-salt area, the debate was thick with
emotion and produced some unfortunate nationalistic comments, IBP
President Joao Carlos Franca de Luca said. But now, he said, the
discussion between government and industry has become much more
reasonable and IBP is optimistic that Brazil will maintain a good
regulatory framework and preserve a competitive environment. He
said that this is a "complicated moment" but that "good sense will
prevail."


5. (SBU) IBP believes that some version of the Norwegian regulatory
model is the most likely outcome, with a small non-operational
state-owned company owning and managing the oil reserves through
competitively bid partnerships with international oil companies.
Noting the unfortunate coincidence of the timing of the U.S.
announcement of the Fourth Fleet and discovery of pre-salt oil in
Brazil, De Luca suggested to U/S Jeffery that the USG focus on
bilateral cooperation from a technical rather than political
perspective. The key to making certain elements of the GoB

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comfortable with a closer energy relationship with the U.S. will be
to show how U.S. companies can complement (rather than compete with)
Petrobras' knowledge and skills.

Petrobras


6. (SBU) Samir Awad, Petrobras' Global Manager for Business
Development, welcomed U/S Jeffery to Petrobras Headquarters and told
him that the pre-salt discoveries are having a major impact on the
company's business strategy. International operations, which Awad
oversees, will be scaled back in order to concentrate resources on
domestic opportunities. Overall, international operations make up
around 10 percent of Petrobras' operating budget but this figure
will go down to 5 percent or even 3 percent, Awad said. Petrobras
will likely pull out completely from countries such as Libya, India,
Tanzania, and Pakistan. The only countries that Petrobras is not
considering scaling back investment are the United States,
Argentina, Nigeria, and Angola. The United States is by far the
most important country in Petrobras' international portfolio,
accounting for 75 percent of the international divisions' budget.
By coincidence, Awad said, Petrobras' most attractive upstream
opportunities are right in its own backyard in Brazil. He compared
the pre-salt opportunities in Brazil to those in Saudi Arabia and
Mexico but said that those markets are not as open as in Brazil.
Noting the current GoB debate on regulatory reform, he expressed
optimism that Brazil would come up with a solution that doesn't hurt
the investment climate for Petrobras or other international
companies.


7. (SBU) Later that night in Brasilia, MME Minister Lobao also
shared with U/S Jeffery how essential he believed the involvement of
foreign oil companies was for the future development of the pre-salt
resources in Brazil. He noted that he had recommended to Petrobras
and ANP that they work together to study how they can best work
together with U.S. industry to manage the resources that he believes
will eventually finance a "Marshall Plan" to address Brazil's
domestic education woes.


8. (SBU) While at Petrobras, U/S Jeffery and Amb. Sobel also had a
short, private meeting with the company's Chief Financial Officer
Almir Barbassa.


9. (U) This message was cleared/coordinated with Embassy Brasilia
and the delegation.

MARTINEZ