VZCZCXRO1340
RR RUEHRG
DE RUEHBR #0765/01 1681433
ZNR UUUUU ZZH
R 171433Z JUN 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 4506
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/USDOC WASHDC
INFO RUEHSO/AMCONSUL SAO PAULO 4213
RUEHRI/AMCONSUL RIO DE JANEIRO 7868
RUEHRG/AMCONSUL RECIFE 9658
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000765 
 
SENSITIVE 
 
SIPDIS 
 
NSC FOR DNSA MICHAEL FROMAN 
ENERGY DEPARTMENT FOR DEPSEC DANIEL PONEMAN, CAROLYN GAY, RHIA DAVIS 
AND GARY WARD 
COMMERCE DEPARTMENT FOR SECRETARY LOCKE 
DEPT FOR EEB WHA/EPSC WHA/BSC 
 
E.O. 12958: N/A 
TAGS: ENRG EINV PREL BR
SUBJECT: BRAZIL: NEW OIL REGIME ALMOST READY FOR PRIME TIME; ENERGY 
MINISTER OFFERS PREVIEW 
 
REFS: A) 07 Sao Paulo 899, B) Rio de Janeiro 91, C) Rio de Janeiro 
35, D) Rio de Janeiro 138, E) Rio de Janeiro 135, F) Rio de Janeiro 
159, G) Brasilia 910, H) Brasilia 1122, I) Rio de Janeiro 237, J) 
Rio de Janeiro 235, K) Rio de Janeiro 237, L) Rio de Janeiro 245, 
M)Rio 0014 
 
¶1. (SBU) SUMMARY: Brazil is poised to finally unveil its 
long-awaited proposal for a new oil regime to administer its ultra 
deepwater (also known as "pre-salt")oil reserves.  According to the 
Minister of Energy, the new proposed structure will include a small 
state-owned company under the auspices of the Ministry of Mines and 
Energy, to manage the auctions for pre-salt blocks in the Santos and 
Campos Basins.  The proposed legislation will contain safeguards to 
maintain Petrobras' market position but will remain open to 
international oil companies.   Ministry sources indicated that the 
proposal may be unveiled June 18 but there are still details to be 
resolved which could further delay the proposal.  News reports 
indicate that there will be a "bonus" payment required to the 
government to win the rights to a certain block and that bonus will 
be paid in oil, the proceeds from which will go into a social 
responsibility fund.  Lobao told the Ambassador that he is eager to 
visit the United States and Energy Secretary Chu and wants to see 
continue improved bilateral relations.  He also noted that Brazil is 
continuing to work towards making a deal with the Paraguayans over 
the contested contract terms of the binational Itaipu dam.  END 
SUMMARY 
 
¶2. (SBU)In a meeting with Ambassador Sobel on June 8, echoing 
Petrobras predictions, Lobao told the Ambassador that Brazil expects 
to more than double its daily production of oil when the pre-salt 
oil reserves in the Santos and Campos Basins come on line.  The 
current production is just under 2 million barrels per day and 
within 10 years it is expected to total to 6 million per day. 
 
¶3. (SBU)To manage these reserves, Lobao confirmed that the executive 
branch will propose a new state company, established along the lines 
of the model in Norway.  The completely government owned company 
will have approximately 100 employees and be attached to the 
Ministry of Mines and Energy.  It will be responsible for managing 
all of the pre-salt reserves, except for those already auctioned 
under the old system (whose existing contracts will continue to be 
managed by national oil regulator ANP).  He confirmed that Brazil 
will maintain its current two year exploration period for any 
concessions, after which period, if the block is not declared 
commercial, it will revert back to the government. 
 
¶4. (SBU) The proposed law will permit the GOB to assign blocks to a 
particular company when desired, a provision ostensibly open to any 
company but designed to apply to Petrobras. The provision will not 
require that Petrobras be involved in every block.  Lobao said the 
idea is to allow Petrobras to maintain its current position in the 
market.  "We don't want it to get smaller, we don't want it to get 
bigger."  Petrobras had advocated publically to develop a company to 
hold the pre-salt assets under Petrobras' umbrella, further 
strengthening Petrobras.  Press reports speculate that as a means of 
appeasing Petrobras, which lost the battle on the model, the current 
law will provide a provision to ensure Petrobras will not be 
weakened vis  vis the new company. 
 
¶5. (SBU) In a later conversation, Jose Lima Neto, Undersecretary for 
Petroleum, Natural Gas and Renewable Energy at the Ministry of Mines 
and Energy, confirmed to Econoff that there will likely be a 
provision for the GOB to designate certain blocks for Petrobras, 
similar to what is done by many countries in the region, while other 
blocks are put out for bid via service contracts.  Lima Neto, who 
has been tasked with leading the effort to build the new model, 
indicated that any concerns that this provision would lead to a 
monopoly power for Petrobras would be misplaced.  "It would be 
impossible" for Petrobras to try to control the entire area since 
the resources needs are too great to permit one company to dominate. 
 
 
¶6. (SBU) Lima Neto has portrayed the government's relationship with 
Petrobras as a somewhat wary one.  While recognizing the tremendous 
economic contribution Petrobras makes to Brazil, many, including 
apparently President Lula, are concerned about having any one entity 
in Brazil gain too much power.  GOB contacts say Lula has quipped 
that he's the third most powerful person in Brazil after Petrobras' 
 
BRASILIA 00000765  002 OF 003 
 
 
CEO Sergio Gabrielli and Luciano Coutinho, head of national 
development bank BNDES.  A recent report by the Brazilian newspaper 
Valor highlights the fact that the majority of the proceeds from 
Petrobras' gains go to private investors, many of them foreign; 
which only serves to increase the government's determination not to 
over benefit Petrobras through the pre-salt reserves. 
 
¶7. (SBU)Lima Neto stressed that the new structure would remain open 
to international companies and that all prior contracts would still 
be honored. He said, "we're talking about the future, not the past," 
indicating that Brazil is remaining careful not to violate any of 
its existing contractual obligations.  He did not discuss how the 
government planned to handle unitization of blocks which border 
blocks previously concessioned under the old system.  According to 
Lima Neto, Brazil's primary reason for developing a new state-owned 
company to manage the reserves is to allow Brazil a greater hand in 
controlling the pace of exploration and production, especially in 
the face of fluctuating oil prices. 
 
¶8. (SBU) Lima Neto confirmed that the government is working to 
announce the new structure for the pre-salt oil reserves on June 18. 
 However, he said, there is no guarantee they will achieve agreement 
on the final model by that time.  The issue of how to structure the 
"government take" of the revenues is still very much at issue. 
According to Lima Neto, some of the top options still in play are a 
royalty structure or a possible federal tax, or a combination of 
both. 
 
¶9. (U) While government sources are guarded in discussing some of 
the details of the new structure, pending finalization of the 
proposal and approval by President Lula, news reports continue to 
speculate.  Recent reports from news daily Valor suggest the 
proposal will be sent to Congress in August by the Lula 
administration via three separate bills.  The first will create the 
new state company to manage the pre-salt reserves and the second 
will establish a "social responsibility fund" to use the pre-salt 
revenues to invest in areas such as education, health, and housing. 
The third bill will alter the previous 1997 Petroleum Law to allow 
for a mixed system with a new service contract model for the 
uncontracted pre-salt reserves, in which the competition will be 
determined largely by which bidder offers the government the largest 
share of revenue in the form of a bonus, starting from a fixed 
minimum bid, and maintaining the old system for areas currently 
under contract and those unexplored areas deemed to have less 
potential than the pre-salt blocks. 
 
¶10. (U)Valor reports that payments to the national treasury from the 
concessions will be paid in oil. It also reports that despite 
requests from Finance Minister Guido Mantega for a higher bonus 
payment to be directed towards current accounts in the Federal 
operating Budget, Minister Lobao won out with a bonus payment that 
will be "minimal and fixed."   The bonus amount will reportedly be 
fixed in a decree rather than as part of the law, in order to allow 
the government to adapt it if needed, depending on any new 
discoveries as well as the difficulty and pace of exploration. 
 
 
RUMINATING ON THE RELATIONSHIP 
 
¶11. (SBU) In his conversation with the Ambassador, Lobao referenced 
comments by Minister of Strategic Planning Mangabera Unger that 
there are no two countries more alike that the U.S. and Brazil - but 
the governments don't know it yet.  Lobao agreed.  He said we need 
to put the two countries side by side for the long haul, for the 
good of our countries and the good of humanity.  He said it's a 
shame that President Lula can't continue doing the work has he has 
undertaken to move down this path,(Note: President Lula's mandate is 
limited to two consecutive terms, the second of which will end in 
2010) but Lobao expressed his hope that Lula's Chief of Staff and 
possible preferred successor, Dilma Rouseff would be able to 
continue that struggle, possibly holding the line until Lula could 
return in 2014.  (Note: Lobao did not indicate any knowledge of 
plans to this effect but expressed his hope that it could happen). 
Lobao opined that renewable energy was one avenue to pursue the 
continued development of the bilateral relationship. 
 
¶12.  (SBU) In that vein, Lobao said he had been impressed by Energy 
Secretary Chu at the G8 Energy Ministers' meeting in Rome and would 
 
BRASILIA 00000765  003 OF 003 
 
 
like to visit him soon, with Ambassador Sobel accompanying him. 
They discussed the possibility of the week of July 20th on the 
margins of the CEO forum in Washington.  Ambassador Sobel suggested 
that Deputy Secretary Marcio Zimmermann consider traveling in 
advance of a Lobao trip to help set up technical discussions. (NOTE: 
Zimmermann has since confirmed his intention to travel to the United 
States the week of July 6 - 10.) 
 
¶13.  (SBU)While cautioning Lobao not to forget the possibilities for 
cooperation in the area of fossil fuels, the Ambassador also 
conveyed DOE suggestions for some areas in which the GOB could take 
a leadership role in the hemisphere: renewable energies, 
diversifying the energy matrix, rural electrification, and 
cooperating with Peru's proposed center of energy efficiency. 
 
ITAIPU 
 
¶14.  (SBU) When asked about ongoing negotiations with Paraguay over 
disputed contract terms on the binational dam, Itaipu, Lobao, 
exhibiting some irritaion, noted that although Paraguay wasn't 
entitled to it, Brazil was looking to find a solution to help 
Paraguay.  (NOTE: Paraguayn President Lago has made renegotiating 
the below-market contract prices Brazil pays for energy from the dam 
a central goal of his adminstration, wile Brazil has firmly insisted 
on the sancity of contract terms though it is willing to explore 
other options to mitigate the situation.)  Because Paraguay 
currently does not use all of the energy it is entitled to from the 
Itaipu dam, Brazil has proposed that Paraguay increase its usage of 
Itaipu energy, allowing it to decrease the use of energy from two of 
its national dams.  Paraguay would then be permitted to sell the 
energy from the other two dams on the free market in Brazil.  This 
would enable them to use the Itaipu energy at a rate of $21 per 
Megawatt and sell their excess energy at a rate of $50/MW.  Brazil 
is also offering US$500 million to finance the transmission lines 
necessary for Paraguay to put this scheme in place, along with other 
unspecified energy assistance in the range of $1 - 2 billion. 
 
 
¶15.  (SBU) COMMENT:  While some details remain to be decided in the 
proposed new regulatory structure governing the promising pre-salt 
oil reserves, the government has again made clear that it will honor 
all existing contracts and the new system will be open to 
international oil companies as well as national ones.  The time 
Brazil has taken in developing thse regulations demonstrates the 
GOB's determination to develop a regime that can pass Congress and 
will stand the test of time.  Much of the delay in putting forward a 
new model has been attributed to the fact that every time a new 
proposal is developed, it has to be thoroughly vetted by lawyers. 
Based on the actions and statements of Brazilian officials, it seems 
certain that Brazil will continue to welcome and encourage the 
participation of outside firms in the development of this 
potentially enourmous and resource-intensive national asset. 
Similarly, the Ministry of Mines and Energy is very favorably 
inclined to working with the U.S. in multiple areas of the energy 
sector; the upcoming trips by Lobao and Zimmermann to the U.S. offer 
excellent oportunities to capitalize on those desires.  END COMMENT 
 
SOBEL