Identifier
Created
Classification
Origin
09RIODEJANEIRO288
2009-08-27 15:15:00
CONFIDENTIAL
Consulate Rio De Janeiro
Cable title:  

RIO'S OIL PLAYERS REACT TO SPECULATION ON PRE-SALT

Tags:  BR ECON ENRG PREL 
pdf how-to read a cable
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PP RUEHRG
DE RUEHRI #0288/01 2391515
ZNY CCCCC ZZH
P 271515Z AUG 09
FM AMCONSUL RIO DE JANEIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 5063
INFO RUEHBR/AMEMBASSY BRASILIA PRIORITY 1356
RUEHRG/AMCONSUL RECIFE PRIORITY 3519
RUEHSO/AMCONSUL SAO PAULO PRIORITY 5279
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 RIO DE JANEIRO 000288 

SIPDIS

STATE FOR WHA/EPSC, MMCMANUS, BDUGGAN
NSC FOR RACHEL WALSH, LUIS ROSSELLO
FOR DOE GWARD, RDAVIS, LEINSTEIN, RROSS
STATE PASS USTR KDUCKWORTH
DOC FOR ADRISCOLL, LFUSSELL, MCAMERON

E.O. 12958: DECL: 08/26/2019
TAGS: BR ECON ENRG PREL
SUBJECT: RIO'S OIL PLAYERS REACT TO SPECULATION ON PRE-SALT
REGULATIONS

REF: BRASILIA 1021

Classified By: Consul General Dennis W. Hearne. Reasons 1.4 (b,d).

SUMMARY
-------

C O N F I D E N T I A L SECTION 01 OF 03 RIO DE JANEIRO 000288

SIPDIS

STATE FOR WHA/EPSC, MMCMANUS, BDUGGAN
NSC FOR RACHEL WALSH, LUIS ROSSELLO
FOR DOE GWARD, RDAVIS, LEINSTEIN, RROSS
STATE PASS USTR KDUCKWORTH
DOC FOR ADRISCOLL, LFUSSELL, MCAMERON

E.O. 12958: DECL: 08/26/2019
TAGS: BR ECON ENRG PREL
SUBJECT: RIO'S OIL PLAYERS REACT TO SPECULATION ON PRE-SALT
REGULATIONS

REF: BRASILIA 1021

Classified By: Consul General Dennis W. Hearne. Reasons 1.4 (b,d).

SUMMARY
--------------


1. (C) While the Government of Brazil (GOB) has yet to
publicize its regulatory framework for the exploration of
pre-salt reserves (reftel),Petrobras executives, petroleum
industry representatives, and Rio de Janeiro-based managers
of American oil firms have expressed concern over the main
provisions of the reform package reported in the press. In
reaction to the likelihood the new framework will mandate
Petrobras as the sole operator for all unlicensed blocks,
Petrobras and Brazilian Institute for Petroleum executives
argued the company does not have sufficient resources to
effectively carry out this role, which could lead to
subcontracting opportunities for other oil firms. While
petroleum companies praised the concession model under the
existing regime and opposed the likely shift to production
sharing contracts (PSC),some analysts argued PSC provisions
could potentially carry fiscally advantageous terms for
investors. The possibility of a new state company to own and
administer all pre-salt reserves is anathema to industry
representatives in Rio de Janeiro, although there appears to
be a sound legal justification for such an entity. Local
representatives of Chevron and Exxon Mobile are bracing for a
far more challenging operating environment, but both
companies will maintain an active presence in Brazil,
regardless of the changes the new reform package brings. End
Summary.

PETROBRAS AS SOLE OPERATOR
--------------


2. (C) In reaction to the widely-accepted perception that the
new framework will mandate Petrobras as the sole operator for
all unlicensed blocks, Petrobras and Brazilian Institute for
Petroleum (IBP) executives in Rio de Janeiro contend the
company does not have sufficient resources to effectively
carry out this role. Fernando Jose Cunha, General Director
of Petrobras for Africa, Asia, and Euroasia, told Rio Econoff

on Monday August 17 that such a provision, along with the
strong likelihood Petrobras will also be guaranteed at least
a 30 percent share in every block, could deter potential
investors and partners. Alvaro Teixeira, General Director
for IBP, an industry association that represents Petrobras
and other petroleum companies operating in Brazil, called the
proposal a "bad idea," stating the GOB would first have to
recapitalize Petrobras. According to Gustavo Gattas, a
prominent energy analyst with UBS Pactual, Petrobras' lack of
resources will likely lead to extensive contracting for
pre-salt exploration and production operations. He explained
that some companies stand to benefit more than others from
this model, explaining many IOCs and oil services company
consider Petrobras to be one of the "harshest" contractors in
the world. "Some people are comfortable working with
Petrobras, others are not," he explained.


3. (C) Reaction by Rio de Janeiro-based representatives of
American oil companies to the possibility of Petrobras as the
sole operator is mixed. Exxon Mobile's External Relations
Director Carla Lacerda, told Rio FCS officer on August 10 the
proposed model constituted a reversion to Brazil's former
monopoly system. As the sole operator, she explained,
Petrobras would have more control over equipment purchases,
personnel, and technology selection, which, in turn, could
adversely affect U.S. equipment and service supply to Brazil.
Chevron's Director for Business Development and Government
Relations Patricia Pradal told Rio Econoff on August 21 that
she had doubts over the legality of such a provision. "The
Brazilian government will have to fight this out in the
courts or change the shareholder composition of Petrobras to
give the government a greater share," she explained. In
spite of that possibility, Pradal did not believe
non-operating partner status would necessarily be bad for
Chevron. She stated, "We are trying to maintain a lower
profile nowadays," adding, "We area already partnering with

RIO DE JAN 00000288 002 OF 003


Petrobras on five projects here."

MOVE FROM CONCESSION TO PRODUCTION SHARING CONTRACTS
-------------- --------------


4. (C) Although industry is opposed to the likely shift from
concession to production sharing contracts (PSCs) under the
new regime, PSC provisions could potentially carry fiscally
advantageous terms for investors. IBP's Teixeira and
Chevron's Pradal praised the concession model under the
existing regime, calling it "strong and stable." Pradal said
the shift from such a model to a PSC was a political move,
explaining "Everything the Brazilian government is trying to
get from a PSC, they could have done through concessions."
USB Pactual's Gattas offered a more favorable view on PSCs,
however, explaining the new model could erase the upfront
cash payments associated with current concession contracts.
The Tupi field, for example, required an upfront payment of
15 million Brazilian Reals (8 million USD). Gattas also
explained that new provisions could possibly allow companies
to recover a greater percentage of their investment within
the first years of production. "A quick pay back under a PSC
can be very attractive to many IOCs," he explained.

FORMATION OF NEW STATE COMPANY
--------------


5. (C) The likelihood of a new state company to own and
administer all pre-salt reserves is anathema to industry
representatives in Rio de Janeiro. Petrobras' Cunha stated
Petrobras never agreed with the concept of a new state
company. With Petrobras already at capacity, he did not know
how such a company would receive its financial and human
capital. "Will we be robbing Peter to pay Paul?," he asked
rhetorically. Chevron's Pradal said the GOB's motivation for
creating such a company was based on political jockeying,
stating, "The PMDB needs their own company." (Note: The PMDB,
the government's coalition partner, has reportedly been
negotiating with President Lula's PT party for seats on the
board of such a company, in exchange for political
concessions going into an election year. Energy Minister
Edison Lobao, who is a leading PMDB member, was a key
proponent of the new state entity. End note). According to
USB Pactual's Gattas, however, it makes legal sense for the
GOB to form a body to serve as a contract counterparty in
court disputes and PCS re-negotiations." IBP's Teixeira said
such a company will consist of less than 100 personnel, and
would receive technical support from the Ministry of Mines
and Energy.

UNITIZATION AND LOCAL CONTENT
--------------


6. (C) There is mixed reaction over whether unitization and
local content requirements will be included in the new
framework. While some industry players have speculated the
regulations will address unitization, a term of art in the
petroleum industry for the process of distributing unlicensed
blocks that share reservoirs with licensed blocks already
under concession, Nelson Narciso Filho, Director for the
Brazilian National Petroleum Regulatory Agency (ANP) stated
the new regime will not address the unitization issue (Note:
ANP is responsible for administering unitization. End Note).
"We should not touch unitization until after the new
regulations are in place," he said. While the Ministry of
Mines and Energy Undersecretary for Oil, Natural Gas, and
Renewables told Brasilia Econoff that the new regulations
will provide for a flat local content requirement for all
blocks (reftel),as opposed to local content factoring into
bidding criteria under the concession system, USB Pactual's
Gattas doubted this would be the case. (Note: At the July 20
CEO Forum, an attendee of Presidential Chief of Staff Dilma
Rousseff's meeting with the Brazilian CEOs told Brasilia
Econoff that an increase in local content requirements would
be part of the new pre-salt regulations. End Note). Gattas
explained local content requirements are already too high for
the Brazilian equipment companies. "Everyone is fully
contracted right now," he stated, "And this could go
overboard." He argued such requirements would not be

RIO DE JAN 00000288 003 OF 003


addressed in the law, but rather handled through individual
contracts, perhaps based on the precedence of the first PSC
to fall under the new framework.

AMERICAN OIL COMPANIES: 'WE WILL STAY'
--------------


7. (C) Although Rio de Janeiro-based representatives of
Chevron and Exxon Mobile are bracing for a far more
challenging operating environment, both companies will
maintain an active presence in Brazil, regardless of the
changes the new reform package brings. According to Exxon
Mobile's Lacerda, the Brazilian market remains attractive,
especially considering declining access to reserves, world
wide. Chevron's Padral conceded her company will be
"struggling" in the coming years, but said existing
investments and her company's long-term goals here will keep
Chevron engaged. "The rules can always improve later on,"
she said. Both Lacerda and Padral stated their companies were
accustomed to PSCs world-wide and would enter into them here,
given competitive and transparent terms.

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


8. (C) Petroleum actors and insiders in Rio de Janeiro
uniformly view the pre-salt reform as pre-election
politicking by the Lula Administration. Given the fact that
the GOB has not yet publicly released details of the new
regulatory framework, however, industry is tempering its
reaction to the actual terms of the framework until after its
announcement in Brasilia on August 31. Ultimately, the pace
of production the GOB subsequently sets for the pre-salt
reserves could influence the IOC's ability to develop these
fields more than the actual terms that govern how they do so.

9. (C) Even once the announcement of the government's vision
of a new regulatory framework is made next week, it will
still be a government proposal that needs the approval of the
Congress. Given the highly politicized nature of
Congressional debate as Brazil anticipates the coming
election year, a bill as important as this one will not face
an easy road to approval. The final product will likely be
substantially different than the details that have been
leaked. For example, press reports varied leading up to the
announcement, from Minister Lobao indicating that the
distribution of royalties to states and municipalities will
be omitted from the August 31 proposal so that the issue does
not hold up passage of the rest of the legislation, to other
reports that the GOB, under pressure from oil producing
states, will in fact include royalties in the new framework,
in a formulation closer to the current scheme. Such a
decision which would almost certainly create disappointment
and controversy among the non-oil producing states. Sources
at the Ministry of Mines and Energy confirm that it is still
unclear how this issue will be handled vis-a-vis the August
31 announcement. While this element of the new regime is not
one that has concerned industry thus far, it is clearly one
of the biggest headaches for the government and likely to
produce the toughest battles for the government. The fact
that this very issue already prompted the delay of the
previously planned August 19 announcement, and government
consultations with affected state and local leaders in the
interim do not appear to have brought them any closer to a
resolution, is likely just a harbinger of the difficulties
that lie ahead for this part of the new regulatory regime.
Post will continue to closely monitor and report on
developments. End Comment.


10. (U) This cable has been coordinated with Embassy
Brasilia.
HEARNE