VZCZCXRO5982
RR RUEHRG
DE RUEHRI #0335/01 2811821
ZNR UUUUU ZZH
R 081821Z OCT 09
FM AMCONSUL RIO DE JANEIRO
TO RUEHC/SECSTATE WASHDC 5125
INFO RUEHBR/AMEMBASSY BRASILIA 1406
RUEHSO/AMCONSUL SAO PAULO 5303
RUEHRG/AMCONSUL RECIFE 3543

UNCLAS SECTION 01 OF 02 RIO DE JANEIRO 000335 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPC, EB/ESC 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOE FOR ROSS RUSSELL, RHIA DAVIS 
USTR FOR KATE DUCKWORTH 
NSC FOR RACHEL WALSH AND LUIS ROSSELLO 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EINV PREL BR
 
SUBJECT: SEMINAR REVEALS WIDE SKEPTISM OVER PRE-SALT REGULATORY 
FRAMEWORK 
 
REFERENCE:  A. BRASILIA 1099 
    ¶B. RIO DE JANEIRO 288 
 
¶1. (SBU) SUMMARY:  In a conference entitled "Pre-salt Oil Risks and 
Opportunities," sponsored by Rio de Janeiro Federation of Industries 
(FIRJAN) on September 21, sitting and retired politicians, petroleum 
executives, and energy analysts debated the merits and deficiencies 
of the regulatory framework to develop the pre-salt oil reserves, 
released by the Brazilian government on August 31 (reftels).  Though 
the speakers' perspectives may not have been universal, one 
persistent theme emerged:  the conference participants believe that 
the newly proposed pre-salt regulatory regime will be more difficult 
to approve by the Brazilian Congress than the Brazilian Government 
expected.  End Summary. 
 
ROYALTIES 
 
¶2. (U) Paul Hartung (PMDB), the governor of Espirito Santo, stated 
Brazil's current concession model helped to both increase the rate 
of production of existing reserves and strengthen Petrobras. 
According to Hartung, the regulatory framework's proposal to extend 
royalties distribution to non-producing states and increase the 
federal government's share created a "war" between oil producing 
states, such as Rio de Janeiro, Espirito Santo, and Sao Paulo, and 
the rest of the country.  Hartung said he doubted the framework 
would win Congressional approval, due to the royalties issue.  The 
vice governor of Rio de Janeiro state, Luiz Fernando de Souza Pezao 
echoed Hartung's statements and called for the application of 
royalties on nuclear power generation.  He also thanked the forty 
six Rio de Janeiro federal deputies and three senators who are in 
favor of maintaining the current distribution of royalties. 
 
PRE-SALT AND PETROBRAS 
 
¶3. (U) Rio de Janeiro Senator Francisco Dornelles (PP) expressed 
doubts that Petrobras would have the financial resources to invest a 
minimum of 30 percent in the exploration of all blocks, as called 
for in the framework.  Dornelles expressed his "personal opinion" 
that others in his party would also oppose the framework.  Federal 
Deputy Arnaldo Chinaglia (PT - Sao Paulo), discounted this concern, 
however, stating it was unlikely that the GoB would not have 
assessed the volume of investment required - and Petrobras' ability 
to make such investments - prior to the announcement of the 
framework.  The President of FIRJAN's Energy Council and former 
President of Petrobras Armando Guedes said the new model would 
prejudice Petrobras by needlessly overextending the company.  "I do 
not think Petrobras' participation should be 100 percent," he said. 
"There has to be opportunities for subcontracting." 
 
¶4. (U) Jose Luiz Alqueres, president of the Rio de Janeiro 
Commercial Association, opined that Petrobras' role as chief 
operator under the framework would distort the oil and gas equipment 
market by stymieing competition, with negative consequences for 
Brazilian and foreign suppliers alike. 
 
PETROSAL 
 
¶5. (U) The President of the Brazilian Petroleum, Gas and Biofuels 
Institute (IBP), Joao Carlos De Luca, expressed concern over how the 
role of Petro-Sal, created under the framework, will affect foreign 
investment.  According to De Luca, Petrosal will have "total 
control" over the operational committees for any pre-salt 
exploration and production consortium, with rights to both a vote 
and a veto.  This control would give the government disproportionate 
control over any block's development. 
 
CREATION OF A SOVEREIGN FUND 
 
¶6. (U) On the regulatory framework's proposal to create a "Sovereign 
Fund" to capture oil profits for social programs, FIRJAN's Armando 
Guedes said it was necessary to establish targets for certain 
sectors and use pre-salt oil revenues to invest in increasing the 
overall competitiveness of the country.  He emphasized that part of 
this fund must be administered wisely in order to avoid "Dutch 
disease," a reference to the relationship between exploitation of 
natural resources and the decline of the manufacturing sector. 
 
¶7. (U) Rio de Janeiro State Deputy Glauco Lopes (PSDB) is in favor 
of the creation of a sovereign fund and cited the example of the 
town of Maca, which is a beneficiary of the resources of the 
royalties from oil exploration.  Thanks to royalties, Maca has made 
significant progress in the areas of education, health and 
 
RIO DE JAN 00000335  002 OF 002 
 
 
infrastructure, he said.  Energy specialist and Professor Edmar 
Almeida agreed with Lopes that it would be necessary to make 
investments in education and science/technology, but pointed out the 
need to save a large portion of the funds, as well. 
 
FUTURE PRODUCTION 
 
¶8. (U) Luiz Carlos Mendonga de Barros, former president of Brazilian 
development bank BNDES, predicted that pre-salt oil will not be 
exported.  His statement was based on a study conducted by his 
brother, Economist Jos Roberto Mendonga de Barros, which showed 
that if Brazil maintained a projected annual growth of 4.5 percent 
between 2010 and 2020, domestic consumption will require total 
output from the pre-salt reserves. 
 
COMMENT 
 
¶9. (SBU) Though the speakers' perspectives may not have been 
universal, one clear theme emerged:  the newly proposed pre-salt 
regulatory regime will be more difficult to approve in Congress than 
the Brazilian Government expected.  Embassy Poloff and Econoff 
conversations with members of Congress indicate that even the 
opposition believes the government already has the votes in the 
Chamber of Deputies to pass the four bills that constitute the 
government's proposed regulatory regime.  Passage will be much more 
difficult in the Senate, where the governing coalition faces a 
stronger, more united opposition bloc and will have to manage a thin 
majority that includes seven of the nine senators from Rio, Sao 
Paulo, and Espirito Santo.  The government's response to the 
concerns addressed by federal legislators from oil-producing states 
in the seminar will be crucial to the legislation's ultimate 
success.  Many of these concerns, among others, are finding their 
way into the Congressional debate, as evidenced by the over 800 
proposed amendments to the bills.  The real question seems to be 
what form the final product will take after all the political 
wrangling is over.  End Comment. 
 
¶10. (U) This cable has been coordinated with Embassy Brasilia.