Grupo de Economia da Energia

Brazil: The Pre-salt and State control

In oil on 22/11/2010 at 00:34

By Ronaldo Bicalho

The ongoing changes in the institutional framework related to oil exploration in the Pre-salt includes an overview of the strategic role to be played by the Brazilian petroleum sector different from that one defined previously, both with respect to the newly global Brazilian insertion and supporting conditions of such insertion.

The core of this change is focused exactly on expansion of the State control over the exploitation of the Pre-salt resources, in order to achieve maximum benefits from such exploitation, under a long-term strategic perspective that transcends the boundaries of the oil industry.

Thus, changes related to the institutional framework of the Brazilian oil sector is not a merely discussion about the advantages and disadvantages of exploitation systems – concession agreement versus production sharing agreement -; advantages and disadvantages of Petrobras’ interest in all consortia; advantages and disadvantages of Transfer of Rights and Petrobras’ capitalization; advantages and disadvantages of establishing a new state-owned company; and so on.

In fact, there is a central axis supporting the institutional change based on the Brazilian state control concerning the exploitation of the country’s wealth. Indeed, the question under discussion is the level of such control and related costs and benefits. The question under discussion is the level of sovereignty wanted and to be exercised on this wealth. The question under discussion is the country that we want and what we are willing to do to develop it.

So the question under discussion is a development project in the country based on great potential of wealth represented by the Pre-salt. This project encompasses a certain development overview and strategic role of the State concerning such development.

It is not just about increasing the State’s interest in oil revenues, but providing State greater control over the process for generating this income. This means to increase State control not only over all oil production stages, but also on the destination of this oil and all connections made by oil industry in relation with other industries and services.

In this sense, the fundamental matter is not only to increase the benefits from the oil revenues per se, but also to maximize the number of benefits associated with entire oil chain, including those related to the creation of industrial dynamic based on production internalization called oilfield service provider industry.

The control required to achieve this wide range of benefits involves a set of mechanisms allowing strategic management of a set of main variables including: geological knowledge, technology qualification on deepwater production, selection of suppliers, progress for exploitation of resources and destination of the production.

In this context, the apparent conflict between the goals in order to hinder a greater control and to obtain a higher income by State is solved by the introduction of a strategic vision on the exploitation of the Pre-salt wealth. In this case, reaching the largest portion of income in the short term is not so relevant, and, according to this, sacrificing essential portion of control to achieve this goal; however, implementing an exploitation strategy control that allows reaching maximum benefits throughout such exploitation is quite relevant.

Therefore, it is all about controlling key aspects of the Pre-salt exploration for managing this process on a long-term strategic perspective, which in the particular case involves a time that comprises several generations in Brazil.

Under this view, major control does not imply the reduction of benefits obtained by the State; differently, major control by the State enables the greater achievement of such benefits in the long-term. In other words, it is all about to oppose a short-term view, which favors the higher income-earning nowadays, and a long-term vision that, even sacrificing apparent gains today, will allow obtaining a sustainable mean to earn significantly in the future.

This long-term strategic concept evidenced by the pursuit of expansion of the State control is manifested in some organizations and mechanisms that support the new institutional framework proposed. The most important aspects are listed below:

From concession agreement to production sharing agreement.

In a concession system, concessionaire controls the oil production and extraction. In the case of a production sharing system, this control and this ownership interfere greatly in State.

In the new system, Federal Government will participate directly on decision-making process related to each exploitation project and will acquire a significant portion of oil produced.

This government participation will take place directly under the Operating Committee specific to each project. This Committee will be responsible for managing the consortium that owns the rights to explore each deposit by establishing the exploitation plans and evaluation of the findings, by stating the commercial viability of each deposit and indicating the development plan, and by setting out the annual work and production programs, terms of unification, etc.

Government will be responsible for Operating Committee’s control, appointing half of its members plus the chairman, be entitled to a casting vote and veto power in decisions.

Therefore, the State control over production is occurring in the central locus of decisions, i.e., in the Operating Committee. Thus, changing the system will not only provide greater State interest in oil revenues, due to the reduction of exploration risk, but also to control production decision-making that will generate such income.

Therefore, the statement that the concession system, with minor changes, could achieve the same goals needs explanations. If the question represented the portion of income earned by the State, this statement would deserve some consideration, but if the intended goal is to control the generating process of this income, this statement would not prevail.

Petrobras as exclusive Pre-salt operator

As an operator, Petrobras will carry out the exploitation and production activities, providing the human and material resources to perform the activities. Besides having access to strategic information, Petrobras will have control over production, costs and development of technology, as well as relationships with suppliers of machinery, equipment and services.

Thus, the entire process of acquisition of geological knowledge, technological and industrial learning involving the Pre-salt, is then controlled by Petrobras.

In this sense, the Petrobras’ 30% interest in all consortia appears as a counterpart of the company in terms of its commitment to the exploitation and production activities, upon exclusivity exercise as Pre-salt operator.

The key issue here for the exercise of State’s control over the Pre-salt is not 30%, but the Petrobras’ exclusivity as operator in this field.

Petro-sal

Unlike some analysts think, “Petro-sal” (in fact, Pré-Sal Petróleo S.A) plays a key role in the mechanisms of State’s control proposed by the Government.

“Petro-sal” will represent the interests of the Federal Government in the production sharing agreements and will be present in the Operating Committees to establish the activities of consortia, with the right casting vote and veto power in decisions, being represented in these committees by half of its members plus the chairman.

Among its main responsibilities, there is representation of the interests of the Federal Government in the production sharing agreements, monitoring and auditing of costs and investments in production sharing agreements and contract management for the oil marketing of the Federal Government.

Thus, the nature of State’s control changes thoroughly with the establishment of such company. In the historical regime of monopoly, Federal Government granted the exercise to control the production to Petrobras; and in the concession system, implemented from 1998, Federal Government granted such control to companies obtaining concessions in auctions.

From the new institutional framework, State starts to exercise its control directly in the locus of the production decision, that is, the Operating Committee for each deposit. Thus, the State intends to extend its direct control over the group of companies that exploit the Pre-salt, including Petrobras itself.

Transfer of Rights Contract and Petrobras’ capitalization

Transfer of Rights Contract and Petrobras’ capitalization should be analyzed together. And it is not about make available to Petrobras a large volume (5 billion barrels) of reserves, with low risk and high productivity, which belongs to the Federal Government, but, before the capitalization process, increasing the Federal Government’s interest to constitute Petrobras’ capital.

Thus, the Brazilian government, on the one hand, strengthens the financial position of its own company to meet the investment required to the Pre-salt; on the other hand, it increases its interest in the same company, directing most of potential gains to the public coffers.

So, once again, enlargement of the control, as a way to enable access to the wide range of benefits from the exploitation of Pre-salt, appears as the structuring element for the institutional change proposal.

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