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  HOME | Brazil (Click here for more)

Brazil Tries to Maximize Offshore Oil Bonanza
Brazilian President Lula revealed the government's plans to make Brazil one of the top 10 oil producers in the world and develop what he believes are the world's 9th largest oil reserves, but his announcement of increased state control and further equity sales shook markets, causing Petrobras to lose $7 billion in value in one day.

BRASILIA – President Luiz Inacio Lula da Silva presented on Monday a proposed legal framework for the exploitation of vast oil and natural-gas reserves discovered off the South American nation’s southern Atlantic coast.

“The premise is that the oil and gas belong to the state, which is to say that they belong to the entire Brazilian people,” he told an audience of some 400 officials, lawmakers and businesspeople in Brasilia.

The president’s plan, which must be approved by Congress, calls for the new reserves to be exploited under a shared-production regime that makes oil giant Petrobras, which is publicly traded but state-controlled, the exclusive operator and guarantees the firm a stake of at least 30 percent in every contract awarded to private firms.

Lula defended the idea of extensive government involvement by citing last autumn’s global financial meltdown.

Thanks to the crisis, he said, “it was discovered that without state regulation, the god ‘market’ can end the world in a blink of the eyes.”

Work on the new legal architecture put forward Monday followed the discovery of the “pre-salt” oil reserves, so called because they are located under a thick layer of salt under the ocean floor.

The crude under the pre-salt layer could eventually lead to a nearly six-fold increase in Brazil’s current proven reserves of 14 billion barrels and transform the South American nation into a major oil power.

But extracting the oil and gas will be a challenge, given that the deposits lie at a depth of up to 7 kilometers (4.3 miles) below the ocean surface in a strip 800 kilometers long and 200 kilometers wide.

The president acknowledged Monday that the effort will require spending some $210 billion over the next decade, and admitted that no one has any “certainty about how much (petroleum) there is.”

He quickly added that he was confident Brazil would be joining the ranks of the world’s top 10 oil-producing nations.

If the most optimistic estimates are borne out, Brazil will find itself with oil reserves of nearly 100 billion barrels, the nine-largest in the world.

Lula said his proposal for the pre-salt deposits is meant to “ensure that the best part of the income generated remains in the hands of the Brazilian people.”

The initiative also calls for the creation of a new state enterprise, Petrosal, to oversee contracts and operations in the pre-salt area.

The Brazilian government’s income from the expected bonanza will go into a special fund to finance investment in education, science and technology, environmental protection and alleviating poverty, the president said.

Without mentioning any country by name, Lula said that unlike some oil powers, Brazil is a country “with a stable political regime, fully functioning institutions, peaceful, and with a sophisticated industrial base.”

Brazil will not export crude, he said, but will instead invest in refineries and other industrial facilities to become one of the world’s leading petrochemical hubs.

“Some poor countries that find a lot of oil continue being poor,” while “others fall into the temp
tation of fast money (and) bankrupt their industries and their economies,” the president said, vowing that Brazil will not make those mistakes.

One aspect of Lula’s program calls for Petrobras to issue new stock to raise money for expensive operations in the pre-salt zone, an announcement that caused the company’s shares to fall in Monday’s trading on the Sao Paulo’s exchange.


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