Brazil and the future of oil in the Americas
Attention in the run-up to Brazil’s inaugural pre-salt auction has been strikingly dissimilar to the tectonic-shifting announcements of the pre-salt several years ago, Arthur writes. Yet with a mix of emerging market and European players, the list of bidders is perhaps a reflection of the nature of exploration and production in the Americas today.
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There was also a concern about the apparent straitjacket that has been placed on Petrobras by requiring the national oil company to be the sole operator and own a minimum 30% stake in all pre-salt projects.Skip to next paragraph
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Long known as Petrosaurus for its less than agile ways, the evolution at the company since the 1997 Petroleum Law forced it to compete and partner with international firms has been remarkable. But under the new framework, the government is demanding an awful lot from their star.
The local content requirements of the regulatory model have also raised concerns – in the exploration phase 37% of equipment, goods, and services must be sourced domestically, a number that rises to 55% in the development phase. (Related article: Iran's Rouhani May Be Driving Oil Markets Now)
Despite this seemingly endless litany of concerns, the opportunity the pre-salt presents is not a trifling one. When the Tupi (now Lula) field was discovered in 2007, it set off exuberance in the international oil and gas business. And with good reason: the discovery was easily the largest in the hemisphere in several decades. Today, oil majors and participants in the international E&P milieu are increasingly hard pressed to find opportunities of the magnitude of the pre-salt.
Indeed, across Latin America there is no bidding underway that compares to the pre-salt. Not in much-heralded Colombia, nor in Ecuador, Venezuela, or Argentina, and not yet in Mexico.
But it is also clear that the upcoming bid round represents an important test for Brazil. Investors not only need the technical capacity and financial resources to compete but will be making a statement about the “above ground” challenges in Brazil. These include the production sharing agreements and local content rules, as well as complex tax laws and the political and institutional environment that has contributed to the stagnation and decline in Brazil’s crude production in recent years.
That said, this first step is still a promising one. Whether this new set of players can bring about a return to the pre-salt’s halcyon days, however, is far less clear.
Jeremy M. Martin is the director of the Energy Program at the Institute of the Americas at the University of California, San Diego. The institute is a nonprofit inter-American organization focused on economic development in the Western Hemisphere. Martin can be reached at firstname.lastname@example.org and Twitter@jermartinioa.
Alexis Arthur is energy policy associate at the Institute of the Americas. She regularly writes and tweets on energy and natural resources policy in the U.S. and Latin America. On the side, Alexis writes about Australia-Latin America relations. She can be reached at email@example.com or via Twitter@IOA_Energy
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