VZCZCXRO9666
RR RUEHRG
DE RUEHBR #0910/01 1851840
ZNR UUUUU ZZH
R 031840Z JUL 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 2059
INFO RUEHSO/AMCONSUL SAO PAULO 2376
RUEHRG/AMCONSUL RECIFE 8249
RUEHRI/AMCONSUL RIO DE JANEIRO 6381
RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 000910 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/BSC, WHA/EPSC AND GREG MANUEL 
STATE FOR EB/ESC BRIAN DUGGAN, U/S REUBEN JEFFREY 
USDOC FOR SECRETARY GUTIERREZ, 
USDOS FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOE FOR DEPUTY SECRETARY JEFF KUPFER/CAROLYN GAY/RHEA DAVIS 
 
E.O. 12958: N/A 
TAGS: PREL ENRG EPET EIND EINV BR
SUBJECT: OIL RESTRUCTURIN: AMBASSADOR TALKS TO ENERGY MINISTER LOBAO 
 
REF: A) RIO DE JANEIRO 138, B) RIO DE JANEIRO 135, C)RIO DE JANEIRO 
91, D) RIO DE JANEIRO 35, E) 07 SAO PAULO 0953 
 
Sensitive but unclassified, please protect accordingly. 
 
¶1. (U) SUMMARY:  As Brazil debates the revision of its oil 
exploration fee structure in light of its newly discovered presalt 
reserves, it is clear that the Ministry of Mines and Energy, tasked 
with making a recommendation to the President, will advise the 
formation of a new state entity to own the reserves and contract out 
to service providers in a production-sharing agreement.  In a 
meeting with the Ambassador, Minister of Mines and Energy Lobao 
shared his vision of the production sharing arrangement, dismissing 
concern over the amount of time that legislative change would take 
as overstated.  Lobao also expressed his interest in having U.S. 
companies involved in the exploitation of Brazil's oil reserves. 
Additionally he was enthusiastic about the opportunity to welcome 
high-level U.S. visitors to Brazil with the intention of developing 
closer bilateral ties.  END SUMMARY. 
 
¶2.  (SBU) The Ambassador and Econoff met with Minister of Mines and 
Energy Edison Lobao and his deputy, Secretary of Gas and Petroleum 
Jose Lima Netto, on June 26 to discuss the rapidly developing oil 
situation in Brazil and what it means for U.S.-Brazilian 
cooperation.  Lobao emphasized that the GOB still doesn't know 
exactly what the presalt reserves may hold, they are waiting for 
more information.  In the meantime, they have suspended further 
leasing activities in the presalt area to fully assess the 
situation.  Lobao indicated that he was aware of concerns around 
delaying the process but it was his assessment that neither domestic 
nor international companies are ready to exploit these reserves yet. 
 In fact, Petrobras has been limited in its ability to exploit some 
of the blocks it holds concessions for, even in the non-presalt 
area, and may soon be obliged by the concession agreement to return 
the noncommercialized blocks to the regulatory body, ANP to be 
reauctioned.  (Note: Concessions agreements provide 5 years for a 
block to be declared commercialized or be returned.) With the 
difficulty in accessing equipment (Ref B), Lobao does not believe 
that the delay is in fact hampering any would-be development. 
 
------------------------------- 
LEGISLATIVE CHANGES IN PLAY 
------------------------------- 
¶3.  (SBU) Lobao told the Ambassador that Brazil may move towards the 
creation of a new company that would own all the presalt reserves, 
as well as some other areas not already under contact, and would 
develop these areas through contracts with service providers. 
Although initially more circumspect in his comments, later in the 
meeting Lobao stated unequivocally that he intends to propose 
significant changes to Brazil's current legislation.  According to 
Lobao, all other countries that have enjoyed major finds had changed 
their legislation to benefit more directly from their reserves and 
he believes Brazil should do so as well.  In a subsequent meeting, 
Lima Netto told Econoff one of the primary examples currently under 
consideration is the Netherlands model, which would create a legal 
entity solely for the purpose of owning the rights and then contract 
out to exploration companies.  There is currently a working group in 
place within the ministry studying the legislation of other 
countries in order to develop a proposal for consideration by 
President Lula, who will make the ultimate decision.  Lobao welcomed 
Econoff's suggestion that U.S. Mines and Management Service 
officials who had visited Brazil in May might be available to 
provide insight into the U.S. regulations. 
 
¶4.  (SBU) In response to the Ambassador's question about the 
possibility of an extended delay in oil production that would be 
necessitated by a change in legislation, Lobao opined that the 
process did not have to be a long drawn out one, as many who oppose 
the change have suggested (Ref A).  Lobao stated that there were 
legislative options the President could use to quickly push through 
legislation.  (Note: indeed there are a few fast-track options 
available to the President, including issuing a provisional measure, 
which has the force of law immediately and must be voted on by 
congress after 45 days.)  Lobao said "we have the ability to, and we 
must, do this quickly." His plan is to propose the bill this year 
with the intention of having the new legislation in place by the 
beginning of 2009. 
 
------------------------------ 
"Petrol is a Government Issue" 
------------------------------ 
 
BRASILIA 00000910  002 OF 002 
 
 
¶5.  Particularly in light of the possible creation of a new state 
oil company, the Ambassador expressed his concern that U.S. oil 
companies in Brazil have focused too much of their energies in 
building relationships with Petrobras in Rio.  Secretary Lima Netto 
confirmed that the U.S. oil companies had not been frequent visitors 
to the Ministry, though the Ministry has been in contact with all of 
the major players in the industry and is looking to meet their 
concerns while serving the needs of Brazil.  Lima Netto acknowledged 
the importance of Petrobras, but emphasized that "petrol is a 
government issue," important for the good of the country, not the 
just the success of Petrobras.  Lima Netto further welcomed the idea 
of future exchanges and was visibly excited when the Ambassador 
mentioned the possible visit of DOC Secretary Gutierrez.  Lobao 
suggested that not only would such a visit be welcome, but it would 
be particularly useful if the Secretary were able to bring with him 
a delegation of U.S. oil companies.  They both responded positively 
to the ambassador's idea that FCS might be instrumental in helping 
to identify U.S. companies - small, medium, and large - with the 
type of capabilities Brazil needs both onshore and off, but who are 
not currently active in the country. 
 
----------------------------- 
Continuing to build relations 
----------------------------- 
¶6.  (SBU) Lobao was interested in the Ambassador's suggestion that 
collaboration with U.S. research labs might be an additional area of 
bilateral cooperation in the non-oil arena.  He indicated interest 
in contacting the Brazilian military about possibly participating in 
their upcoming meeting with DHS Secretary Chertoff, particularly as 
it relates to Coast Guard and military discussions on pipeline 
security.  He also expressed his willingness to receive Department 
of State U/S for Economic Affairs Reuben Jeffery and DOE Acting 
Deputy Secretary Jeff Kupfer on their upcoming travels, concurring 
with the Ambassador that it is important to continue building strong 
bilateral ties during this era of energy expansion in Brazil. 
 
¶7.  (SBU) COMMENT: The debate over the future of Brazil's oil regime 
is becoming more and more complex.  While U.S. oil companies (and 
the international oil community writ large) prefer the inevitable 
change in regimes to be based on the current concession structure, 
with an increase in the royalty percentage that goes to the 
government, while Petrobras, which stands to lose the most through 
an increase in royalties, has been pushing for a production-sharing 
agreement.  Although the regulatory body ANP has voiced its 
preference for maintaining the current concession structure with 
increases, it is clear that its supervisory Ministry has something 
else in mind.  Changes in the royalty structure would not require 
legislation changes, so the fact that Lobao had so clearly voiced 
his plan on how to proceed with legislation means that he for one 
foresees the creation of a new company. 
 
¶8.  (SBU) As with so many things in Brazil, this may come down to 
Dilma.  Dilma Rouseff, as former energy minister and current 
Chairman of the Board of Petrobras, as well as Presidential Chief of 
Staff and Lula's preferred successor, may well be the one to make 
the final decision on the government's position.  The question of 
how to maximize return for Petrobras but make the most of the 
country's reserves for Brazil will be one she must weigh carefully 
as she fulfills her current responsibilities and weighs them against 
her future aspirations. 
 
SOBEL