Proposals For A New Petroleum Regime In Brazil

Ever since the announcement of the Tupi discovery in November

2007, the eyes of the international oil industry have been firmly

fixed on Brazil. This mega-field of 5 to 8 billion barrels of oil

opened up an entirely new petroleum province, dubbed the

"pre-salt" because its reserves are located beneath a

thick layer of salt offshore Brazil. The pre-salt is widely

expected to contain 50 to 100 billion barrels of oil, and promises

to transform Brazil into one of the world's leading petroleum

producing nations.

The Brazilian Government responded quickly to the Tupi discovery

by withdrawing a number of blocks in the pre-salt region from its

ninth licensing round which was held in December 2007. Shortly

afterwards, it announced a major review of Brazil's petroleum

licensing regime. After almost two years of deliberations,

President Lula announced on 31 August 2009 his Government's

proposals for major changes to the country's petroleum

laws.

It was decided early on that Brazil would not seek to

renegotiate existing petroleum concessions, even in the most

prolific regions. The new regime will only apply to unlicensed

acreage in the pre-salt region and other areas that may be

classified as strategic by the Federal Government.

The Government has put forward a suite of four proposals:

Use of production sharing contracts (PSCs), rather than the

existing concessionary regime, in the pre-salt and other strategic

areas. Petrobras, the State controlled oil company, will be granted

operatorship and a participating interest of at least 30% in all

PSCs.

Creation of a new State oil company, dubbed Petro-Sal, to

manage the State's interests in the PSCs and the hydrocarbons

produced.

Grant of certain unlicensed pre-salt acreage to Petrobras in

consideration for the State's subscription for additional

Petrobras shares.

Creation of a federal social fund to manage the nation's

revenues from PSCs.

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Ever since the announcement of the Tupi discovery in November

2007, the eyes of the international oil industry have been firmly

fixed on Brazil. This mega-field of 5 to 8 billion barrels of oil

opened up an entirely new petroleum province, dubbed the

"pre-salt" because its reserves are located beneath a

thick layer of salt offshore Brazil. The pre-salt is widely

expected to contain 50 to 100 billion barrels of oil, and promises

to transform Brazil into one of the world's leading petroleum

producing nations.

The Brazilian Government responded quickly to the Tupi discovery

by withdrawing a number of blocks in the pre-salt region from its

ninth licensing round which was held in December 2007. Shortly

afterwards, it announced a major review of Brazil's petroleum

licensing regime. After almost two years of deliberations,

President Lula announced on 31 August 2009 his Government's

proposals for major changes to the country's petroleum

laws.

It was decided early on that Brazil would not seek to

renegotiate existing petroleum concessions, even in the most

prolific regions. The new regime will only apply to unlicensed

acreage in the pre-salt region and other areas that may be

classified as strategic by the Federal Government.

The Government has put forward a suite of four proposals:

Use of production sharing contracts (PSCs), rather than the

existing concessionary regime, in the pre-salt and other strategic

areas. Petrobras, the State controlled oil company, will be granted

operatorship and a participating interest of at least 30% in all

PSCs.

Creation of a new State oil company, dubbed Petro-Sal, to

manage the State's interests in the PSCs and the hydrocarbons

produced.

Grant of certain unlicensed pre-salt acreage to Petrobras in

consideration for the State's subscription for additional

Petrobras shares.

Creation of a federal social fund to manage the nation's

revenues from PSCs.

Production Sharing Contracts

Brazil will adopt a production sharing model for the pre-salt

and strategic areas whereby oil companies, referred to as the

"Contractor", are granted the rights to explore for,

develop and produce petroleum reserves, at their cost. The costs

that the Contractor incurs are reimbursed by the State through an

entitlement to production, referred to as "cost oil". The

PSC stipulates a maximum percentage of total production that may be

characterised as cost oil, although, if a development is

successful...