Brazil Oil: New legislation update

Brazil’s President Luiz Inacio Lula da Silva has proposed new legislation aimed at governing the development of his country’s potentially enormous reserves of oil in the offshore presalt layer, about 270 km off Brazil. As the President put it: “The subsalt oil fields are a gift from God—wealth which, if properly managed, can drive major transformations in Brazil, improving living conditions for our people.” Lula also reiterated that Brazil does not want to be a “mere exporter of crude oil” and that the plan also aims to establish a powerful petrochemical industry to refine the oil into derivatives in order to export value-added products like gasoline. The development model, which must be ratified by Brazil’s Congress, includes: a new production-sharing system for contracts; a new public company for presalt contract agreement and administration; and a new social fund for investment in education and mitigating poverty in Brazil.

The new development model involves Brazil’s move from a concession model to a production-sharing system for the award of new contracts. Brazil’s Minister of Mines and Energy Edison Lobao said the proposed production-sharing system reflects a change in Brazil’s standing from an oil importer to a self-sufficient global energy producer.

The government's new model also includes the creation of a public company responsible for controlling and monitoring the cost of E&P of presalt and the administration of sharing contracts. This company will represent the country in the consortia and operating committees to be created for directly managing different sharing contracts and monitoring all activities in E&P. The presalt development model will establish a social fund that will set up a means to direct revenues from presalt exploration toward investment in poverty reduction, in education and in science and technology. The new social fund will take the form of a public savings account that receives income from various sources such as royalties, signature, bonuses, and commercial revenues from petroleum and gas, originated in production sharing, and resources from activities such as mining.