Wall Street Journal - 1 Sep 09

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305

(Copied 13 Jan 10)

Brazil Claims Stake in Oil Find

President Declares 'Independence' With New Plan to Dominate Industry

September 1, 2009

A Petrobras platform located off the coast of Brazil. President da Silva called for the country's "independence day" in a radio address on Monday. - Associated Press

SÃO PAULO -- Brazilian President Luiz Inácio Lula da Silva announced government plans to play a far bigger role in exploiting newly discovered oil reserves, a bid to grab a bigger share of the profits and fund an ambitious development agenda.

Calling it an "independence day" for Brazil, Mr. da Silva said in a radio address Monday that his goal was to "make Brazil become richer, more developed, from the scientific point of view, from the educational point of view, from the point of view of social policies. All of this because of oil."

To make good on his promise, Mr. da Silva will need to succeed where generations of Latin governments from Mexico to Bolivia have failed: Turning vast natural resource wealth into an engine of development. Brazil, with some of the world's biggest stores of iron ore and silver, has among the world's widest rich-poor divides. With the new oil discoveries, "God has given us another chance," Mr. da Silva said recently.

In addition, because the new fields lie miles beneath water, rock and shifting salt, they pose a new technological challenge that will require collaboration to overcome. Brazil may not attract the help it needs unless it offers partners more lucrative terms.

Under the proposal, which must be approved by Congress, Brazil's state-run oil firm Petroleo Brasileiro SA, or Petrobras, will be guaranteed a dominant role exploring and producing crude in plentiful offshore fields believed to stretch along 500 miles of Atlantic coastline. Brazil says the find holds up to 50 billion barrels of hydrocarbons, enough to lift Brazil into the major leagues of oil-producing nations.

That would make Brazil the latest in a string of oil-producing nations from Ecuador to Russia to relegate the world's major oil firms to supporting roles in oil production. Under the proposed rules, such firms will participate as business partners of Petrobras, rather than as owners of concessions to exploit individual fields as is the case today.

To guarantee a bigger draw for public coffers, the federal government will become an automatic shareholder in new wells, receiving a share of the profits and direct ownership of a portion of the oil. Profits are to be funneled to a special investment fund bound by law to invest in development projects. Brazil will create a new company, to be called Petrosal, to oversee production in the region.

Brazilian officials say the government's bigger role reflects Brazil's rising technical and financial capacities, as well as relatively low risk in finding high-quality crude in the fields. Some Brazilian oil officials have taken to calling the drilling risk as "near zero" -- a strong claim even in an era of relatively reliable geological imaging and other exploration technologies.

"The realities of Brazil's energy reserves have changed profoundly as have the risk-reward ratios," Minister of Mines and Energy Edison Lobao said.

Shares of Petrobras fell Monday, in part on concern that the government will take a bigger ownership stake in the company.

The first field discovered in 2007, called Tupi, has between five billion and eight billion barrels, making it the biggest single Western Hemisphere find in at least three decades.

Some observers question Brazil's basic assumption that recovering the oil is a sure thing. BG Group PLC of the U.K., one of the oil firms with a pre-existing concession to develop offshore Brazilian fields, said last month that it failed to find hydrocarbons at its Corcovado-2 well. That followed Exxon Mobil Corp.'s July announcement that it had hit a dry well. Brazil has said most of the test wells drilled by Petrobras have hit oil.

Congressional debate over the plan will be heated. Some opposition congressmen said a bigger state role will create opportunities for corruption. Mr. da Silva, however, commands majority support in Congress.