Cablegate: Seminar Reveals Wide Skeptism Over Pre-Salt Regulatory

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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.

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