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Cablegate: Oil Restructurin: Ambassador Talks to Energy Minister Lobao

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

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