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New regime sought by big hitter

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New regime sought by big hitter

By Jonathan Wheatley

Published: June 30 2008 03:00 | Last updated: June 30 2008 03:00

When news first broke late last year of the discovery of potentially massive deposits of oil and natural gas off the Brazilian coast, Dilma Rousseff, chief of staff to President Luiz Inácio Lula da Silva and a former energy minister, predicted Brazil would soon become “a new Saudi Arabia”. Others have described the new deep-water fields in Brazil’s south Atlantic as “the North Sea of the South”.

Petrobras, the governmentcontrolled oil company, has tried to avoid such hyperbole. “We can’t put any numbers [on the new fields],” says Sérgio Gabrielli, company president.

Up to this month, Petrobras had sunk two wells into one of the new fields, known as Tupi.

It was those wells that led to the first announcement of the discovery last year, when Petrobras said the Tupi field was likely to contain between 5bn and 8bn barrels of oil and natural gas equivalent – a huge increase on proven reserves of 14.4bn barrels.

Since then, Petrobras and its partners have concentrated their efforts on finding new deposits rather than evaluating those already found. The strike rate has been an extraordinary 100 per cent.

Seven wells have been sunk in the Santos basin off the coast of Rio de Janeiro and São Paulo states and two more are being sunk this month. So far, all have found high-quality light crude (unlike the heavy crude usually found in Brazil) and large amounts of natural gas.

While Petrobras insists that no figures can be released until exploration is complete, the government is working on the assumption that the new fields contain between 50bn and 70bn barrels of oil and natural gas equivalent – enough to put Brazil ahead of Russia in the league table of the world’s oilproducing nations.

Getting the new reserves to the surface will not be easy. They are under about 2,000 metres of sea water and a further 4,000m to 5,000m of rock. Adding to the difficulty is the fact that they are trapped under a shelf of salt 800km long and up to 200km wide – which is why they are known as the “pre-salt” fields. Pressure, temperatures and volatility in the salt shelf are all very high, making these among the world’s most inaccessible oilfields.

While such conditions present considerable obstacles, they can certainly be overcome, especially with world oil prices at current levels. A bigger risk facing oil companies wanting to work on the pre-salt fields is uncertainty over regulations governing the industry.

Under Brazil’s existing regulations, oil companies, often in partnership with Petrobras, buy concessions to look for oil in geographical blocks, sold once a year at auction by the ANP, the industry regulator. However, following the announcement of the Tupi discovery, all blocks situated over the salt shelf were removed from last November’s auction. They seem unlikely to return in future auctions. Mr Gabrielli is one of those who argues strongly for a change in the law. Allowing companies to buy concessions in the pre-salt fields, he says, would be like allowing them to buy “a winning lottery ticket”.

He argues that a new type of contract is needed to leave the government in charge of the pre-salt reserves. Others in government agree. “We are working on a new model to leave most of the new reserves in the control of the nation,” Guido Mantega, finance minister, told the FT recently.

How such a model would work is not yet clear. Many in the industry would like to stick with the present system and accept a higher level of royalty payments than under existing rules. Mr Gabrielli says this would not be fair, as new rates of royalties would have to apply to all contracts, including existing ones, which would hit Petrobras hardest, as it is the

largest player.

Mr Gabrielli argues instead for something similar to the “shared production” model used in some countries, where reserves remain the property of the nation and oil companies are allowed to keep a certain amount of the oil and gas they bring to the surface.

What worries many analysts about this model is that the government is likely to take decisions relating to production based on non-commercial considerations, such as the effect of production on inflation, the exchange rate and the price of oil itself.

No decision is expected on a new regime until at least the end of this year. There is plenty of time. Petrobras is working on the Tupi field in partnership with BG of the UK and Galp of Portugal. Eight other pre-salt fields are being explored by Petrobras and foreign companies including Repsol, Royal Dutch Shell, Norse Energy and El Paso.

These contracts alone hold out enormous promise – as recent sharp rises in the share prices of those involved have shown.

“We already have a very big challenge and a very busy schedule for the next 10 years,” Mr Gabrielli says. “It’s a huge programme.”

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