Monday, 12th July 2010 by Amy Stillman

The Brazilian government′s decision to delay approval of the Oil Law reform bill until after the October presidential elections could have a huge impact on Brazil′s oil future, according to some of the country′s oil & gas lawyers.

The move "may change everything," says Vieira, Rezende, Barbosa e Guerreiro Advogados partner Daniela Ribeiro Davila.

Ribeiro points out that the new law - which would replace the current concession system with production-sharing contracts (PSCs) to give the government greater control over Brazil′s pre-salt reserves - is much less likely to be enacted after the elections than it would have been before the congressional decision.

"Private investors would prefer the current concession regime to the PSC regime, so as to preserve the rules and risk-allocation criteria as opposed to concentrating even more power with the government and its governmental entities," says Machado, Meyer, Sendacz e Opice Advogados partner Jose Virgilio Lopes Enei.

"The delay could mean, under a different government, that the PSC regime could be eventually reevaluated and perhaps aborted," he adds.

The congressional decision is also expected to hold up regulations and other preparatory steps for new bidding rounds in the un-leased blocks, which is considered a setback for oil companies hoping to tap into Brazil′s vast pre-salt reserves.

"The feeling is that the PSC regime is better than nothing," says Virgilio. "If the government will not carry out new bidding rounds under the concession regime, investors would rather have the PSC regime approved as soon as is practical."

The reform, proposed by Brazil′s president Luiz Inácio Lula da Silva in August last year, was due to be voted in Congress when it was delayed because of intense debate surrounding the proposed change to royalty distribution. The reform would see royalties from oil production delivered equally among all of Brazil′s states, while currently royalty revenue is concentrated in the oil producing states of Rio de Janeiro, São Paulo and Espírito Santo.

Some lawyers believe that the decision to delay was a tactical move by the government, as approval of the law could negatively impact the government′s popularity in the upcoming presidential election on 3 October. Voters may shift toward supporting the opposition in protest of the change to royalty distribution.

"The problem is that the government wanted to change the regime and ended up with a federative [states and municipalities] problem because of the amendment regarding royalties distribution," explains Ribeiro.

Over the weekend, conservative presidential candidate José Serra, the former governer of oil-rich São Paulo, announced that he will back the oil-producing states. If Serra is elected the proposal for oil reform will be shelved. However, if Lula′s chosen successor Dilma Rousseff, a former energy minister, wins the election she is likely to approve the reform by November or December this year.

The Oil Law reform is targeted at Brazil′s pre-salt reserves, so called because the oil lies 2,000 metres beneath the water and another 5,000 metres below the seabed under a layer of rock, sand and salt. Up to 50 billion barrels of oil are believed to be contained within the pre-salt basin, and the find has been dubbed "Brazil′s second independence" by Lula, as the reserves are expected to provide a major boost to the Brazilian economy.

If approved, the reform bill will make state-run oil company Petrobras the sole operator in the pre-salt exploration blocks and the national oil company will hold a 30 per cent stake in all new contracts for oil production and exploration in the pre-salt basin.

(Latin Lawyer 12.07.2010)

(Notícia na Íntegra)