On February 24, 2016, the Brazilian Senate approved a bill that
would relieve Petrobras of two statutory burdens that industry
players view as significant obstacles both to Petrobras and to the
development of Brazil's pre-salt oil and gas reserves.
By a 40 to 26 margin, the Senate voted to cancel the requirements
that Petrobras be the operator and hold at least a 30 percent
working interest in all pre-salt fields. Although the bill faces
stiff opposition in Brazil's Congress and from some elements of
the executive branch, the Senate's action offers hope as, in
the midst of the political and economic crises that have shaken the
country's foundations, powerful and influential voices are
calling for Petrobras to focus on the short-term profitability that
it desperately needs, while allowing private investment to take the
lead in developing Brazil's pre-salt reserves.
Law 12.351, enacted in 2010, exerted government control over
Brazil's pre-salt fields, widely considered to be the crown
jewels of the country's oil and gas reserves, by mandating a
weighty role for Petrobras in any pre-salt development. Even during
the halcyon days of $70 crude oil, the industry questioned
Petrobras's ability to finance 30 percent of the development of
the pre-salt sector and muster the resources necessary to
effectively and efficiently operate extremely capital-intensive,
labor-intensive, and technologically challenging ultra-deepwater
drilling more than 300 miles off the coast of Brazil.
Now, with crude oil prices struggling at historical lows and the
Lava Jato scandal ensnaring the highest levels of
Petrobras's management and Brazil's political and corporate
elite, and in the face of shrinking budgets and revenues, Petrobras
simply does not appear to have the financial resources to make the
significant long-term investment necessary to lead the development
of the pre-salt fields in a meaningful way.
For these reasons, the oil and gas industry has hailed the
Brazilian Senate's bill as a pragmatic and necessary move that
will allow private investors to develop the country's pre-salt
resources under the existing production-sharing contract regime,
while giving Petrobras the breathing space to right its finances
and address the fallout from the Lava Jato scandal.
The Senate's bill stopped short of entirely removing Petrobras
from the pre-salt play. Through revisions to the original proposed
bill, Petrobras will still have a 30-day right of first refusal to
elect to operate and hold a minimum 30 percent working interest in
any pre-salt fields. Although the first refusal right is designed
to protect Petrobras's options, especially if the company's
financial picture brightens, there are some concerns that
Petrobras's failure to exercise its first refusal rights for
any particular pre-salt field might be viewed by the market as a
qualitatively negative endorsement of that field.
It is also unlikely that the Senate's bill will clear the
Brazilian Congress and President Dilma Rousseff without significant
political opposition. The bill was initially introduced by Senator
José Serra of the opposition PSDB Party, while the PT Party,
in power in Brazil since 2002, has forcefully defended
Petrobras's central role in the pre-salt developments and, in
fact, authored the 2010 legislation. Turning the Senate's bill
into law will not be easy, and it may require some PT politicians
to reconsider their preference for the Brazilian government,
through Petrobras, to be the primary developer of Brazil's oil
and gas resources. Nonetheless, the bill marks hope that some
measure of relief may be in sight for Petrobras and for
Brazil's pre-salt potential.
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