Brazil's new oil framework: following in Chávez's footsteps?

President Luiz Inacio Lula da Silva hailed today as an 'Independence Day' for Brazil. Why? A controversial new plan to would give the government a 30-percent minimum stake in all future offshore oil projects.

By , Staff writer

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    Brazil's President Luiz Inacio Lula da Silva holds up a small oil barrel during a ceremony in Brasilia, Monday.
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Brazil caused ripples throughout the world in 2007 when it discovered the Western hemisphere's largest oil reserve in three decades. But since then, a new sense of nationalism has been unleashed in an oil industry that had been run by market forces.

As we reported in a three-part series on how Brazil has become a model for developing nations – well before it was discussed how much it would cost to tap its massive discovery that lies hundreds of kilometers offshore and under a 2,000-meter shelf of salt – politicians were already bickering over how the oil bonanza should be spent.

After much debate, today Brazilian President Luiz Inacio Lula da Silva unveiled new exploration rules in the subsalt region, according to a statement on the state-run oil company Petrobras's website.

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The framework will, among other things, introduce a production-sharing model from the current concession system, make Petrobras the operator of new offshore fields, and give it a 30 percent minimum stake in future subsalt projects. It also creates a state fund for oil revenues and creates a new state-run energy holding firm. The proposal still must be approved in both houses of Congress.

'The oil is ours'

President Lula da Silva called the proposal a new "Independence Day" for Brazil.

The tone suggests much about the political significance of the debate, says João Augusto de Castro Neves, a political analyst with the CAC consulting firm in Brasilia. Petrobras was born with the slogan "the oil is ours."

"Now they are saying, the deep-sea oil is ours," says Mr. Castro Neves. "People are scared that by establishing that old state control, there will be more inefficiency and corruption."

Petrobras is one of Brazil's greatest success stories. But this announcement has some worried that its gains could be undone if private companies invest less than they might have, due to concerns over too much government control. Many big oil companies will be wishing for the status quo. And Bloomberg News reports that Petrobras stock price fell the most in six months over concern that the new plans may include selling new shares to the government and other investors.

Following the populist path?

Is Brazil following in the footsteps of Venezuela and other left-leaning governments in Latin America that have moved toward greater control over the energy sector?

Many industry specialists say no.

Jorge Pinon, an energy researcher at the University of Miami and a former executive of Amoco in Latin America, says that big oil companies are not scared away from Brazil as they are in other countries where state energy companies, such as Venezuela's PDVSA, have taken more control,

"The state will have greater participation," says Mr. Pinon. "But you will not see companies running away from Brazil. ... That is what makes Petrobras different from PDVSA. PDVSA wanted more [state] participation, but also wanted control."

In fact, Pinon says that the new rules could help boost Petrobras's leadership role in the world.

"All international oil companies have a big comfort factor working with Petrobras," he says. "You know what you are getting into. You know they play by the rules. I don't think Petrobras has anything to lose [with the new rules]. It has a lot to gain."

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