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“This oil is ours, it belongs to the people, not Petrobras or Shell…”

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Lula May Increase Brazil’s Oil Take as Tupi Spurs Rules Review 

By Jeb Blount

Lula is examining how Brazil and producers will share revenue from offshore deposits that may hold more than $6 trillion of oil at current prices. Lula said the Tupi discovery and nearby prospects will at least triple Brazil’s crude reserves, and he wants the wealth to be shared nationwide.

“This oil is ours, it belongs to the people, not Petrobras or Shell,” Lula said in a June 26 interview in Brasilia, referring to state-controlled Petroleo Brasileiro SA and Royal Dutch Shell Plc of The Hague. “The wealth is not for the few, it’s for the many.”

Brazil would join oil-rich nations demanding a bigger piece of record profits after petroleum prices tripled in four years. State-controlled Petrobras is calling for agreements like those used by Nigeria to take ownership stakes rather than selling concessions. Unions that helped bring Lula to power in 2003 are lobbying lawmakers to nationalize the industry, a decade after opening it to competition.

“There is a lot of pressure to change the rules to give the state more power,” said Adriano Pires, head of the Brazil Infrastructure Center and a former industry regulator. “There’s a lot at stake, and not only money. The question is, does Brazil want to be like Nigeria or Norway?”

`State Secret’

Lula wouldn’t elaborate in the interview. He said the changes being considered for the so-called pre-salt fields around Tupi are a “state secret.”

Brazil, like Norway and the U.S., auctions exploration and production licenses. Companies own the oil they produce and can sell it where they choose. Petrobras, Reading, England-based BG Group Plc and Lisbon-based Galp Energia SGPS SA own Tupi, the largest oil discovery in the Americas since Mexico’s Cantarell field.

In Senate testimony last month, Petrobras Chief Executive Officer Jose Sergio Gabrielli said the government should use production-sharing contracts. The size of the discoveries and limited risks for producers make greater state control essential, he said.

Such agreements don’t always lead to the best result, said Ken Medlock, a Rice University economics professor and resident scholar at the James A. Baker III Institute for Public Policy in Houston.

Producer Incentives

Oil companies require incentives under production sharing, and contracts often aren’t as transparent as concession auctions, Medlock said. “One of the dangers in changing the rules is that you may leave billions of dollars on the table,” he said.

After Rio de Janeiro-based Petrobras said in November that Tupi may hold 8 billion barrels of recoverable oil, Brazil removed nearby blocks from an auction scheduled for that month, saying the exploration risks and potential rewards had changed.

Tupi and other prospects may hold as much as 50 billion barrels of oil, according to Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd.

Production-sharing agreements may allow Brazil to get oil deposits developed quickly by dealing with a small group of experienced producers, Wells said.

Brazil’s Oilworkers Confederation, part of the union movement that backed Lula, wants a return to monopoly status for Petrobras and state control of the oil industry.

`Last Resort’

“We realize we probably aren’t going to get what we want, but we know the congress and will push for major changes to the country’s oil law,” said Helio Seidel, national coordinator of the confederation. Short of nationalization, he said, the union favors production sharing as “a last resort.”

Brazil has increased oil output by more than 80 percent since opening the industry to competition in 1998, transforming the country into an exporter.Petrobras‘s market value climbed to 400 billion reais ($250 billion), sixth-largest in the world. Its shares jumped 49 percent in the past year, seven times the gain by major U.S. oil producers.

“I don’t know why people want to meddle so much with something that has worked so well,” said Ivan Simoes, head of exploration and production at the Brazilian Petroleum Institute.

Rules changes would “threaten to reduce investment just as we need more,” Simoes said. His trade group supports a plan to double maximum royalties on large fields to 80 percent, a move that would avoid a legislative process that could put the future of Brazilian oil in doubt for years.

Brazil has tried for more than three years to complete a law governing natural gas, said Rodolpho Tourinho, an adviser to the Sao Paulo Federation of Industry.

“I have faith in Brazil that it won’t do the wrong thing,” said Tourinho, who was energy minister and chairman of Petrobras from 1999 to 2001. “Therules we have will need to be good for years and years to come, well beyond this government.”

To contact the reporter on this story: Jeb Blount in Rio de Janeiro at[email protected].

Last Updated: July 9, 2008 00:00 EDT

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