In the light of international practice in the petroleum industry, which elements of a legal and regulatory framework would be appropriate for attracting investment in the development of the Brazilian pre-salt discoveries?

4 OTHER DRAFT BILLS

Compounding the block of draft bills that seek to alter the oil regulatory framework in Brazil are the capitalization of Petrobras and the creation of a social fund to which will be channelled the proceeds from the share in profit oil representing some political decisions that will greatly influence the economy and society in the near future.

4.1 Capitalization of Petrobras

Bill 5941/2009 brings with it two proposals for strengthening Petrobras. The first authorizes the Federal Government to cede to the company rights of unitization in areas adjacent to blocks already operated by the company, to a maximum of 5 billion barrels. The second authorizes the Government to increase its participation in the company.

Some reserves currently operated by the company spread out beyond the limits of its granted blocks. Since many of these areas have not been subject to unitization, the entitlement rights over such areas remain with the Union and this allows the Government to give any destination in a manner to follow national interests.

In the Brazilian Government opinion, against the scenario of the international credit crunch and the huge volume of resources required by Petrobras to operate competitively in the new areas of pre-salt oil, granting the company with these areas with low exploration risk and without more investments required enables the national oil company’s strengthener. According to Article 8 of the project, this authorization is valid for a period of twelve months, which means a secure source of revenue.

The other way to strengthen the company is the authorization given to the Government to subscribe to shares of the capital stock of Petrobras and to pay for them with public-security federal debt titles. Currently the Government shares are 32.2%, with the remaining shares owned by Brazilian and international investors, as the company is listed on both the São Paulo Stock Exchange and the New York Stock Exchange. This capital injection will significantly increase the Petrobras competitiveness in front of international oil companies, in an open and free market such as Brazil.

4.2 Social Fund

The creation of a social fund, which will use the profits arising from oil exploration in the pre-salt layer and strategic areas, represents a pro-active governmental position concerning the healthiness of the Brazilian economy.

This fund should not be confused with the Sovereign Fund ^[16] created last year by the Brazilian Government, which seeks to finance investments abroad, create public savings and protect the economy during economic downturns. Its resources are provided by the country's fiscal surpluses.

The social fund proposed by the Draft Bill 5940/2009 will receive signature bonus, royalties and profit oil provided by PSCs established in the development of pre-salt oil. According to its Article 1, the fund has the purpose of constituting a regular source of funding for the performance of projects and programmes in the area of fighting poverty and the development of education, culture, science and technology and environmental sustainability.

As occurred in Norway, where the creation of a sovereign fund to carry the billionaire revenue proceeds from the oil and gas industry has been fundamental to preserving the economy and to distributing resources rationally, Brazil seeks to solve first the problem of capital abundance in the economy, which can generate inflation. On the other hand, it seeks to mitigate perhaps its biggest problem: social inequality.

Allocating resources to combat poverty means rescuing a portion of the population from a situation of homelessness and even starvation. Investing in education and culture seeks to empower the members of the population and give them full citizenship rights, in a manner that means they do not need to rely more heavily on government resources to survive.

Investing in science and technology means a long-term decrease in the country's dependence on the primary export sector (commodities) and investing in projects of environmental sustainability is a way to internalize the negative externalities due to activities in the oil and gas production chain.

5 CONCLUSION

In light of international practice in the oil industry, as well as the observation of examples of successes and failures in other countries in an analogous situation, the Government seeks to create an enabling environment for the sustainable development of the country, which has hereafter a strategic asset of oil and gas.

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The change in the concession for the production-sharing regime only within the pre-salt area shows an appreciation of the country by the respecting of contracts at the same time as ensuring greater government revenues in developments of E & P in an area of low geological risk. The use of a modern instrument such as the PSC creates a horizon of stability, propitious to the international oil companies’ participation.

The creation of Petrosal, following the example of Petoro, will serve to provide greater agility and governance in the management of new projects. With the capitalization of Petrobras, which has the expertise to exploit oil and gas in deep areas, the international investor has a long-standing partner in the formation of consortia. Finally, the social fund provides redemption from some national illnesses, such as social inequity, and furthermore ensures economical stability. These factors therefore become attractiveness factors for international productive capital, which is averse not only to legal, economic and political risks but also to social risks.

In conclusion it is possible to say that the changes in the legal and regulatory framework in Brazil represent an advance in terms of balancing the justifiable national interest with the international investor’s confidence.

Primary Sources

National Legislation

Draft Bill No. 5938/2009, Chamber of Deputies of Brazil (published in the Official Gazette of the Union on September 01, 2009).

Draft Bill No. 5939/2007, Chamber of Deputies of Brazil (published in the Official Gazette of the Union on September 01, 2009).

Draft Bill No. 5940/2009, Chamber of Deputies of Brazil (published in the Official Gazette of the Union on September 01, 2009).

Draft Bill No. 5941/2009, Chamber of Deputies of Brazil (published in the Official Gazette of the Union on September 01, 2009).

Law No. 10/2004, Republic of Angola (published in the Official Gazette on November 12, 2004).

Law No.11.887/2008, Federative Republic of Brazil, (published in the Official Gazette on December 26, 2008).

Secondary Sources

Books

Bain, C. and Tozzini, F., Regimes Jurídico-Regulatórios e Contratuais de E&P de Petróleo – Relatório I (Brasília, Brasil: BNDES, 2009).

Bain, C. and Tozzini, F., Regimes Jurídico-Regulatórios e Contratuais de E&P de Petróleo – Relatório Consolidado (Brasília, Brasil: BNDES, 2009).

Articles

Abrantes, D., US eyeing Brazil's changing oil rules and international activities. in World Oil Magazine (Sep 2009), (Houston, USA: Gulf Publishing Company, 2009).

Encarnação, G., State Petroleum Monopoly Revisited. at http://ecen.com/eee35/petroleum_monopoly.htm (last visited on November 22^th, 2009).

Other Sources

Newspaper and Magazine Articles

Forero, J., Brazil girds for massive offshore oil extraction, The Washington Post, 7 December 2009.

Radowitz, B., Brazil Pre-Salt Layer Oil Find Encouraging. at http://www.rigzone.com/news/article.asp?a_id=44086 (last visited on November 22^th, 2009)

Internet Sites

Ministry of Petroleum and Energy, Petoro AS, at http://www.regjeringen.no/en/dep/oed/The-Ministey/Associated-offices-and-agencies/Petoro-AS.html?id=449186 (last visited 25 Jan. 2010)

Petoro, Organization, at http://www.petoro.no/organisation/category181.html (last visited 10 Jan. 2010)

Notas

1. Radowitz, B., Brazil Pre-Salt Layer Oil Find Encouraging. at http://www.rigzone.com/news/article.asp?a_id=44086 (last visited on November 22^th, 2009)
2. Abrantes, D., US eyeing Brazil's changing oil rules and international activities. World Oil, Sep2009, Vol. 230 Issue 9, p8-8, 1p.
3. Encarnação, G., State Petroleum Monopoly Revisited. at http://ecen.com/eee35/petroleum_monopoly.htm (last visited on November 22^th, 2009)
4. Bain, C. and Tozzini, F., Regimes Jurídico-Regulatórios e Contratuais de E&P de Petróleo – Relatório I, 1^st ed., 248, (Brazil, Brasília: BNDES, Jun. 2009)
5. Law Nº 10/2004, 2004 (entered into force 12 Nov. 2004)
6. Id.
7. Bain, C. and Tozzini, F., Op. cit., p 289.
8. Bain, C. and Tozzini, F., Regimes Jurídico-Regulatórios e Contratuais de E&P de Petróleo – Relatório Consolidado, 1^st ed., 54, (Brazil, Brasília: BNDES, Jun. 2009)
9. Forero, J., Brazil girds for massive offshore oil extraction, The Washington Post, December 7, 2009.
10. Art. 2, IV and V, Draft Bill No. 5938/2009, Chamber of Deputies of Brazil (published in the Official Gazette of the Union on September 01, 2009).
11. Bain, C. and Tozzini, F., Op. cit., p 204.
12. Petoro, Organization, at http://www.petoro.no/organisation/category181.html (last visited 10 Jan. 2010)
13. Ministry of Petroleum and Energy, Petoro AS, at http://www.regjeringen.no/en/dep/oed/The-Ministey/Associated-offices-and-agencies/Petoro-AS.html?id=449186 (last visited 25 Jan. 2010)
14. Art. 2^nd , Draft Bill No. 5939/2007, Chamber of Deputies of Brazil (published in the Official Gazette of the Union on September 01, 2009).
15. Art. 4^th, I, Id.
16. Law No.11.887/2008, Brazilian Sovereign Fund, Federal Republic of Brazil, Dec 24, 2008 (entered into force 26 Dec. 2008)