Pre-salt… Petrobras… Lula… These are all words we’ll get to hear a lot in the coming months, not only in Latin America, but in the whole world, so you’d better start getting used to them guys, and here’s where this little article comes in handy…
Today, Monday, August 31, Luiz Inacio Lula da Silva, President of Brazil and more popularly referred to as Lula, submitted to the Brazilian Congress a new proposed legislation for the regulation of the oil and gas industry in the country. The objective is to set a regulatory framework for the exploration and production of petroleum in Brazil’s pre-salt region (known as such because crude is trapped under salt as much as 5000 metres below the sea-bed), the largest discovery of oil and gas reserves in the Americas since Mexico’s Cantarell in 1976.
These are the main points of the proposed legislation:
1) Brazil’s state-controlled oil company (the gov’t currently disposes of 55% of the voting power for the company), Petroleo Brasileiro, aka Petrobras, will be the operator of all contracts for exploration and production of the pre-salt area.
2) Companies interested in contracts for exploration and production will be able to enter such through a joint venture. They can enter these directly with Petrobras or by means of a public bid. Either way, Petrobras will get a minimum interest of 30%, and could increase this share by entering the public bidding.
3) As for the partnership agreements described in point 2, the winner of the public bid will be the company that offers the highest percentage of profit coming from oil operations to the Brazilian gov’t. In this case, Petrobras will have to match the % offered by the winning bidder to the gov’t. In areas where Petrobras has the exclusivity, the % to be paid to the gov’t by Petrobras will be determined by the National Energy Policy Council of Brazil.
4) A new state-run company, to be called Petrosal, will be created to participate in operational committees, with voting rights and veto powers. The company will not be involved in upstream or day-to-day operations.
5) The Brazilian gov’t will transfer to Petrobras the oil and gas exploration activities in areas of the pre-salt layer that are not subject to concessions, limited to the maximum volume of 5 billion barrels of oil equivalent (BOE’s).
6) With the revenue it gets from the investing companies, the Brazilian gov’t will create a social fund to finance investments in science and technology.
What we don’t know yet:
1) How much will Petrobras have to pay to the gov’t for the transfer of rights over 5 B BOE’s (see point 5 above)? This is the biggest question for PETR4 BZ’s shareholders, since it will determine the eventual net cash flow to be made by the company out of the pre-salt area. Problem here is there’s a lot of geological uncertainty yet as to the final quantity of proved oil and gas reserves to be extracted from the region.
2) How will Petrobras finance the payment to the gov’t for the transfer of rights? Two alternatives come to mind: a capital injection by the gov’t, or an equity offering. Either way, exisiting shareholders’ earnings will be diluted.
Responses to questions 1 and 2, according to the Brazilian gov’t, will unfold sooner rather than later. Thing is, 2011 is a Presidential election year in the country so far more known for Pele and Ronaldo than for the pre-salt region, and several opposition parties have already said they will challenge Lula’s regulation in Congress.
Until the next update guys- Nick

Source:
Petrobras 6-K, issued 08/31/2009