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Analysis: Brazil's new oil laws delayed

Along with uncertainty about just how much oil lies beneath the Atlantic off Brazil is the difficulty in retrieving it from beneath thousands of feet of water and salt deposits under the ocean floor.
by Carmen Gentile
Miami (UPI) Dec 16, 2008
Brazilian lawmakers are preparing to reform the country's oil laws following several promising offshore discoveries, though the ratification of the new law likely will not take place until the new year, according to officials and experts.

The Brazilian government is planning to introduce a legal framework to redefine terms for producers hoping to begin production on the pre-salt offshore discoveries that made international headlines over the last couple of years and could catapult the country into the world's Top 10 oil producers.

Analysts say oil companies hoping to purchase a block of the new discovery should expect higher taxes and other new regulations for new operations in Brazilian waters.

"The government is likely to propose moderate tax increases on existing concessions and adopt production sharing agreement (PSA) contracts for future E&P (exploration and production) on its pre-salt discoveries," read an analysis released this week by the Eurasia Consulting Group.

Though the current global economic downturn, coupled with falling oil prices, has not dissuaded international petroleum firms from jockeying for a share of the new offshore discoveries, the economic climate has delayed the process, read the report authored by Eurasia analysts Erasto Almeida and Christopher Garman.

Meanwhile, the political wrangling over future profits from the billions of barrels of oil thought to lie beneath the ocean off Brazil's shores is also contributing to the legislation's delay.

Since the first discovery of large offshore oil deposits in 2007, Brazilian lawmakers have begun seeking ways to spend what surely will amount to a multibillion-dollar windfall.

However, profits from what some experts say is a 55 billion-barrel reserve off the Brazilian coast are not guaranteed, considering that investment in the deepwater drilling is expected to surpass $100 billion.

Brazilian President Luiz Inacio Lula da Silva, a longtime champion of the left whose monetary policy has been somewhat conservative during his first six years in office, said the country's oil profits should be spent revamping Brazil's educational system, particularly for the country's vast poor populace.

A former union leader, Lula said earlier this year that Brazil's recent oil fortunes would help Brazil wipe out endemic poverty once and for all, a bold claim considering the South American country has one of the world's largest economic divides been the haves and have-nots.

Lula warned that the money must not be spent on "silly things," a direct reference to the recent frenzy of discussion among lawmakers in Brasilia on how to spend Brazil's future oil fortunes. Among the recently proposed expenditures is a fleet of nuclear submarines.

With full-scale production years away, talk of costly warships and the pricy revamping of an antiquated educational system is premature, analysts warn.

"All of the findings so far are probable. … They aren't proven yet," Jorge Pinon, energy fellow at the Center for Hemispheric Policy at the University of Miami, told United Press International.

Along with uncertainty about just how much oil lies beneath the Atlantic off Brazil is the difficulty in retrieving it from beneath thousands of feet of water and salt deposits under the ocean floor.

While the pre-salt findings at the much heralded Tupi field -- believed to hold somewhere between 5 billion and 8 billion barrels -- went online for the first time last week, the post-salt reserves are far deeper and could prove extremely difficult to access.

Though state-run Brazilian energy firm Petrobras is a world leader in offshore oil drilling, extracting oil from extreme depths is a difficult and costly endeavor, said Pinon.

"It's not that Brazil doesn't have the technological know-how -- the industry as a whole doesn't have the experience," he said. "It's a new geological frontier."

Others contend that Brazil's wealth of experience in deepwater drilling will allow it to make good on its projected timetable for production to begin in Tupi.

"As one of the industry's premier deepwater players, Petrobras absolutely has the ability to profitably develop recent huge discoveries," said Michael Lewis, an analyst with PFC Energy.

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