Oil Finds Prompt Brazil to Change Rules

Following news of another potentially massive offshore oil find, Brazil’s government is likely to change the rules for its oil sector sometime this year, joining a long list of countries that have used high oil prices as an excuse to raise the amount of revenue the government gets from the oil industry.

Currently, Brazil charges a lower tax and royalty rate than many other oil producers — a legacy from the late 1990s when the country was a net oil importer and wanted to attract companies to explore and find new deposits. But Brazil is now a net oil exporter, and appears to have made two major discoveries in recent years that could turn the country into a major oil exporter.
As in any country, the oil bonanza is likely to become a political issue over how much the government should take for spending and how much it should leave to the private sector. That is an even bigger issue when oil prices are so high. Venezuela just this week announced a new “windfall” tax when oil prices are above $70 and $100 dollars a barrel.

The Brazilian government of President Luiz Inacio Lula da Silva is studying the best way to change the rules for the oil sector, Mines and Energy Minister Edison Lobao said recently. Other officials say there is a consensus that the government needs to raise its take from the industry. What is unresolved is how.

The change will affect Petrobras, as the state firm is called, as well as international firms operating offshore such as Norway’s StatoilHydro ASA (STO), Exxon-Mobil Corp. (XOM), BG Group Plc. (BRGYY), and Portugal’s Galp Energia (GALP.LB).

Private companies say the Brazilian government has every right to raise its take after recent discoveries, but they hope the government doesn’t go too far. Brazil is one of the few promising frontiers in global oil exploration. Both recent discoveries lie in an area known as the “pre-salt area” — in very deep water and below some 5,000 meters of sand, rocks and salt – that is believed to be rich in oil but difficult and costly to reach.

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