"Petrobras will be gradually nationalized and it will be in the center of E&P developments in the pre-salt area"

- Friday, September 4, 2009

The Brazilian government finally announced this week the new regulatory model for the exploration and production of oil in the country's offshore pre-salt area – considered the biggest oil and gas discovery in recent times.

The new framework is now in the hands of a divided congress that is supposed to ratify or reject President Luiz Inácio Lula da Silva's proposals in about three months.

Under the proposed regulation, the country will adopt a so-called production sharing system which determines that all oil output will belong to the federal government, and participating companies will receive a fixed share of the revenues.

Brazilian state-run energy giant Petrobras will be the sole operator of all blocks within the pre-salt cluster.

The framework also creates a new public company called Petro-Sal, which will manage contract agreements and administration.

Some critics say the strengthening of Petrobras might scare away the crucial presence of foreign companies, which could represent a risk in developing such challenging oil fields.

The government's announcement that it wants to capitalize Petrobras and that it might increase its stake at the federal energy company has also raised some eyebrows, as Latin American countries have a past record of swinging from state to private ownership as they please.

To shed light on these matters, BNamericas has spoke to Ildo Sauer, a former director of energy and gas at Petrobras.

BNamericas: Do you think Brazil needed a new E&P framework for the pre-salt oil reserves?

Sauer: This has clearly become a political issue. The pre-salt area can be explored under any system. What happens is that in any country where there is a significant discovery of vast natural resources, like this, there is a tendency for the political interests to takeover. It's natural politicians will want to secure for society the higher value of that discovery.

But Lula's government has wanted to shift the current concession system into a production sharing one since 2002. It hasn't been done partly due to the government's fear of a negative market reaction and also because the exploration risks in the post-salt areas are higher. The pre-salt layer wasn't known yet.

Now it's a new situation. Exploratory risks are lower. A huge amount of drilled wells are successful, so it's a different situation. But we don't know yet if there is 50bn or even 100bn barrels there, waiting to be explored and produced.

BNamericas: So why couldn't the current E&P concession system just be kept?

Sauer: Essentially, what is being disputed here is the economic surplus. Billions of dollars are involved in the pre-salt cluster. We're talking about a potential giant treasure. I have been saying that it's quite difficult to define a whole new E&P system without knowing exactly the volume of the pre-salt reserves.

The government should, as a first step, have hired Petrobras to conclude evaluations in the area. Then a development plan should be developed.

In a later stage, the government should then propose the creation of a social wealth fund to develop education, jobs, etc. It seems to me that the order of priorities is a bit mistaken.

As I said, the pre-salt could be developed under any system, but we still don't know a lot about it.

BNamericas: The private sector has been complaining it hasn't been listened to during discussions for the new E&P framework. Do you agree?

Sauer: Nobody has been listened to. The government has basically cloistered itself. Only some ministers and regulatory agencies were invited to take part in the one-year-long debate.

In my view, the private sector's main role will not be in the pre-salt oil production. It will be concentrated on equipment and service supplies. Petrobras will be involved solely in the exploration and production. The private sector will also have a fundamental role in preparing a skilled workforce.

BNamericas: Do you think it was necessary to create a new federal oil company to manage the pre-salt cluster? Couldn't hydrocarbons regulator ANP do it?

Sauer: I don't think it was necessary. The government had first said it would create a new state-run company that would have been operational, similar to Petrobras. This idea was withdrawn.

Now what has been called a company [Petro-Sal] is really a government body, some kind of regulator, not a real company. This role can be undertaken by any other government agency like ANP, for example. But for that, ANP would have to be reformed as it is now outdated.

In my view, it makes no sense to have both Petro-Sal and ANP. It makes no sense to have different fields in the same area with some exploring the pre-salt and others the post-salt, the first being overseen by Petro-Sal and the latter by the ANP.

BNamericas: Some critics say this new E&P framework is a step back, a way of going back to the monopoly oil era. What's your view on that?

Sauer: I don't know if it's a step back, that's what the discussion is about at the moment. In most parts of the world, the biggest oil reserves are in the hands of state and federal companies, like in Saudi Arabia, Russia and Kuwait.

Exploratory risks are relatively low, the economic surpluses guaranteed, so it will naturally become a political issue. The state will inevitably get its hands on it.

In my opinion, what's going to happen is a bigger participation of the government in pre-salt projects. Petrobras will be gradually nationalized and it will be in the center of E&P developments in the pre-salt area.

BNamericas: So would you consider as nationalization the government plan to capitalize Petrobras and eventually increase its stake in it?

Sauer: It will inevitably happen. This is an old request from certain groups within Brazilian society.

It's shaping up through different ways: through the government buying Petrobras shares, injecting money into it and other initiatives we might see soon. We're going to see a lot of changes.

BNamericas: Will the fact that Petrobras is going to be the sole operator of all pre-salt cluster blocks scare away foreign companies?

Sauer: Yes, I believe foreign companies will hold back for a simple reason: Petrobras is the one that holds the appropriate technology for the task. The federal energy group also has sound financing options. So the role for foreign firms is getting small. Therefore, the appetite of foreign companies tends to diminish in proportion.

BNamericas: What would be the perfect pre-salt E&P framework in your opinion?

Sauer: There is no perfect option, I think. Everything would be clearer and make more sense if the government had better mapped out the pre-salt oil reserves, as I suggested. Both systems have their pros and cons. But one thing I believe will be unstoppable is the nationalization of Petrobras. The transformation of the Brazilian oil sector has just begun.

AboutIldo Sauer

Ildo Sauer is a former director of gas and energy at Petrobras. He is a professor at Universidade de São Paulo (USP) and a has a PhD in nuclear engineering from the Massachusetts Institute of Technology.