VZCZCXRO0138
RR RUEHWEB
DE RUEHRI #0288/01 2901826
ZNR UUUUU ZZH
R 161826Z OCT 08
FM AMCONSUL RIO DE JANEIRO
TO RUEHC/SECSTATE WASHDC 4668
INFO RUEHBR/AMEMBASSY BRASILIA 0999
RUEHSO/AMCONSUL SAO PAULO 5196
RUEHRG/AMCONSUL RECIFE 3466
RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 02 RIO DE JANEIRO 000288 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/BSC, WHA/EPSC, EB/ESC 
 
E.O. 12958: N/A 
TAGS: ENRG ETTC EPET EINV PREL BR
SUBJECT: U/S JEFFERY DISCUSSES OIL AND GAS DEVELOPMENTS IN BRAZIL 
 
RIO DE JAN 00000288  001.3 OF 002 
 
 
SENSITIVE BUT UNCLASSIFIED, PLEASE PROTECT ACCORDINGLY 
 
¶1.  (U) Summary.  U/S Jeffery visited Rio de Janeiro on October 2, 
2008 as part of his trip to Brazil.  Accompanied by WHA PDAS Craig 
Kelly and Special Energy Advisor Greg Manuel, U/S Jeffery met with 
representatives from the U.S. oil and gas industry, industry 
association IBP (Brazilian Institute for Petroleum, Natural Gas and 
Biofuels), and state-controlled oil company Petrobras to learn about 
developments in Brazil's oil and gas sector and discuss how the U.S. 
and Brazil can foster a closer working relationship on energy 
issues.  Industry as a whole, including U.S. firms and Petrobras, 
expressed excitement about upstream opportunities in Brazil and were 
hopeful that the Government of Brazil will reform the regulatory 
framework in a way that can increase government revenue while still 
respecting contracts and encouraging competition.  U/S Jeffery also 
met later that evening in Brasilia for a dinner with Mines and 
Energy Minister Edison Lobao where the talk centered on the promise 
of pre-salt reserves and ensuring openness to international oil 
companies.  End Summary. 
 
U.S. Oil & Gas Industry 
 
¶2.  (SBU) Country managers for U.S. firms Anadarko, Chevron, Devon, 
and Exxon emphasized to U/S Jeffery that their companies remain 
interested in building material, sustainable, upstream businesses in 
Brazil.  They said that entering and staying in the Brazilian market 
hasn't been easy in the ten years since the industry opened up, but 
that recent discoveries - particularly in deepwater and 
ultra-deepwater (including pre-salt) areas - have changed the game 
and made upstream opportunities in Brazil very attractive relative 
to many other parts of the world.  Industry was generally positive 
about transparency and regulation in Brazil so far, but expressed 
concern over the nationalistic tone of the current GoB debate on 
regulatory reform for offshore oil and gas contracts.  They thanked 
Amb. Sobel and the U.S. Mission for their active advocacy over the 
past few months and asked U/S Jeffery to continue to press for 
contract stability with GoB interlocutors in Brasilia.  At dinner 
that night with Mines and Energy Minister Edison Lobao in Brasilia, 
Jeffery noted that the U.S. oil companies had conveyed how happy 
they were with the current transparent operating structure in 
Brazil.  Lobao responded that the GOB would continue to operate 
transparently because the international oil community requires it 
and "we need the capital" that outside involvement brings. 
 
¶3.  (SBU) In particular, U.S. industry is seeking to maintain the 
royalty/tax regime with no change in special participation rate for 
contracts already in place.  Contract sanctity is of special concern 
on the pre-salt blocks which have already been leased in previous 
licensing auctions.  Anadarko recently became the first 
non-Petrobras operator to strike oil in Brazil's pre-salt area, and 
Exxon and Hess are set to begin drilling their highly anticipated 
pre-salt block this month.  (Note:  Before the meeting with U/S 
Jeffery, Exxon expressed additional concern that some elements 
within the Brazilian government might attempt "creeping 
expropriation" if contracts were not adequately grandfathered.  End 
Note.)  It was noted that the pre-salt opportunities are too big for 
just one company to handle and that, even if the GoB wanted to save 
the whole pre-salt area for Petrobras or a new state-owned company, 
the financing and investment challenges would be overwhelming. 
 
IBP - Brazilian Institute for Petroleum, Natural Gas and Biofuels 
 
¶4.  (SBU) The Brazilian Institute for Petroleum, Natural Gas and 
Biofuels (IBP), Brazil's umbrella industry association for domestic 
and international oil & gas firms, briefed U/S Jeffery on the latest 
developments in the regulatory reform debate.  Shortly following the 
discovery of oil in the pre-salt area, the debate was thick with 
emotion and produced some unfortunate nationalistic comments, IBP 
President Joao Carlos Franca de Luca said.  But now, he said, the 
discussion between government and industry has become much more 
reasonable and IBP is optimistic that Brazil will maintain a good 
regulatory framework and preserve a competitive environment.  He 
said that this is a "complicated moment" but that "good sense will 
prevail." 
 
¶5.  (SBU) IBP believes that some version of the Norwegian regulatory 
model is the most likely outcome, with a small non-operational 
state-owned company owning and managing the oil reserves through 
competitively bid partnerships with international oil companies. 
Noting the unfortunate coincidence of the timing of the U.S. 
announcement of the Fourth Fleet and discovery of pre-salt oil in 
Brazil, De Luca suggested to U/S Jeffery that the USG focus on 
bilateral cooperation from a technical rather than political 
perspective.   The key to making certain elements of the GoB 
 
RIO DE JAN 00000288  002.3 OF 002 
 
 
comfortable with a closer energy relationship with the U.S. will be 
to show how U.S. companies can complement (rather than compete with) 
Petrobras' knowledge and skills. 
 
Petrobras 
 
¶6.  (SBU) Samir Awad, Petrobras' Global Manager for Business 
Development, welcomed U/S Jeffery to Petrobras Headquarters and told 
him that the pre-salt discoveries are having a major impact on the 
company's business strategy.  International operations, which Awad 
oversees, will be scaled back in order to concentrate resources on 
domestic opportunities.  Overall, international operations make up 
around 10 percent of Petrobras' operating budget but this figure 
will go down to 5 percent or even 3 percent, Awad said.  Petrobras 
will likely pull out completely from countries such as Libya, India, 
Tanzania, and Pakistan.  The only countries that Petrobras is not 
considering scaling back investment are the United States, 
Argentina, Nigeria, and Angola.  The United States is by far the 
most important country in Petrobras' international portfolio, 
accounting for 75 percent of the international divisions' budget. 
By coincidence, Awad said, Petrobras' most attractive upstream 
opportunities are right in its own backyard in Brazil.  He compared 
the pre-salt opportunities in Brazil to those in Saudi Arabia and 
Mexico but said that those markets are not as open as in Brazil. 
Noting the current GoB debate on regulatory reform, he expressed 
optimism that Brazil would come up with a solution that doesn't hurt 
the investment climate for Petrobras or other international 
companies. 
 
¶7.  (SBU) Later that night in Brasilia, MME Minister Lobao also 
shared with U/S Jeffery how essential he believed the involvement of 
foreign oil companies was for the future development of the pre-salt 
resources in Brazil. He noted that he had recommended to Petrobras 
and ANP that they work together to study how they can best work 
together with U.S. industry to manage the resources that he believes 
will eventually finance a "Marshall Plan" to address Brazil's 
domestic education woes. 
 
¶8.  (SBU) While at Petrobras, U/S Jeffery and Amb. Sobel also had a 
short, private meeting with the company's Chief Financial Officer 
Almir Barbassa. 
 
¶9.  (U) This message was cleared/coordinated with Embassy Brasilia 
and the delegation. 
 
MARTINEZ