Renowned Brazilian Petro Veteran Provides Insight on Pre-Salt Oil Reserves

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Q&A with Luiz Antonio Maia Espínola de Lemos of TozziniFreire Advogados sheds light on the issues surrounding the pre-salt discoveries, and discusses challenges facing the Brazilian government in managing these resources. Mr. Lemos is a partner with TozziniFreire, Brazil's largest law firm, and was formerly at the Petrobras Group as General Counsel of a major gas subsidiary.

Since the discovery of potentially massive oil reserves in the "pre-salt" region off the coast of Brazil, the Brazilian government has been grappling with how to structure and regulate exploration, drilling, and the potential for a large influx of foreign investment.

The find, estimated at between 50 to 100 billion barrels, has major implications for the United States, which is looking to move away from its dependence on Middle Eastern oil. It also holds great potential for international oil companies searching for new reserves to satisfy growing global energy demands.

The Brazilian government has commissioned a task force whose members are the Brazilian Minister of Mines and Energy, the Minister of Planning, the Secretariat of State, the Minister of Finance, the President of Petrobras, the National Agency of Petroleum and Biofuels (ANP) and the Brazilian National Development Bank called BNDES. The Brazilian government is expected to promulgate new regulations which will open the pre-salt territory for more comprehensive exploration.

In the following Q&A, Luiz Antonio Maia Espínola de Lemos sheds light on the issues surrounding the pre-salt discoveries, and discusses challenges facing the Brazilian government in managing these resources. Mr. Lemos is a partner with TozziniFreire, Brazil's largest law firm, and was formerly at the Petrobras Group as General Counsel of a major gas subsidiary.

The Pre-Salt Region is located in the offshore area and is expected to range at least from Espírito Santo to Santa Catarina State, measuring 800 kilometers (497 miles) in length and 200 kilometers (124 miles) width, approximately 170 miles off the coast of Brazil in the Atlantic Ocean. The region is named 'pre-salt' because its oil is held beneath deep and ultra-deep waters, around 3,000 meters of sand and rock, and an additional layer of salt that, in places, reaches thicknesses of over 2,000 meters, making extraction challenging and costly. However, the main director of the Brazilian Petroleum National Agency (ANP) Haroldo Lima stated that the exploration of the pre-salt region would remain profitable even with a barrel price around US$ 35.

Brazil is already developing the technology to drill and recover oil from this region, but as more is discovered about the sheer size of this find it is becoming clear that foreign companies will also play a very important role in exploration, drilling, the development infrastructure, capital and human resources to fully realize the potential of this region. Indeed, foreign companies have already begun to play an important role by assisting in the drilling. Companies such as Anadarko, StatoilHydro, Exxon, Devon Energy, Galp, BG Group (as well as Brazil's own Petrobras) currently have a presence in the region; other companies, such as Shell, are projected to begin drilling in 2009.

When the pre-salt discoveries were first made, international companies moved quickly to secure positions in the region. However, more research and exploration soon revealed the magnitude of the find was much larger than previously thought, and the Brazilian government decided to drastically reduce the number of site auctions in the region until a comprehensive strategy to manage and regulate these resources is in place. In other words, as those discoveries showed up to be far larger than originally expected, the Brazilian Government realized it was important to develop a comprehensive strategy in order to fully develop these new reserves and, at the same time, guarantee that such windfall wealth would serve as much as possible to the welfare of the Brazilian people. As an example of the above mentioned reduction, the government withdrew forty one pre-salt sites from the auctions in the 9th Bid Round in 2007.

The task force is expected to report back to the Brazilian government by the beginning of the year; shortly thereafter it is expected the government will issue new regulations.

Still in early 2009 we will have a clearer picture, but at this point in time two potential scenarios have been discussed. The first plan, suggested by President Luiz Inácio Lula da Silva and Energy Minister of Mines and Energy Edison Lobão, sees the government creating a state-run company that would manage the development of the oil reserves in the pre-salt region through partnerships with any firm, including Petrobras, in exploring the pre-salt areas that have yet to be auctioned. The second plan focuses on raising mining taxes and oil royalties to provide more income from the find. Either change is likely to need ratification by Brazil's Senate. The Brazilian Government plans to invest additional funds acquired from those oil revenues in education and social development. Another goal of the future legislation is to develop the local industry related to the oil & gas sector, as well as create conditions for Brazil to become self sufficient with respect to human resources expertise and technology.

About TozziniFreire Advogados
TozziniFreire Advogados is a full service law firm, engaged in a multidisciplinary legal practice since its foundation in Sao Paulo in 1976. The firm has offices throughout Brazil, including Rio de Janeiro, as well as a representative office in New York. In addition, the firm provides its clients with comprehensive integrated services through strategic alliances with foreign law firms and other non-legal services providers.

About Luiz Antonio Maia Espínola de Lemos
Mr. Lemos is the leading partner in the Corporate, Oil and Gas practices at TozziniFreire. Prior to joining the firm he served as Assistant to the Vice President of a Petrobras Gas subsidiary, and later General Counsel. He is the President of the Natural Gas and Biofuels Commission and Member of the Oil Commission of the Brazilian Bar Association of Rio de Janeiro, and he is the author of numerous publications regarding oil and gas regulation in Brazil.

John Dinsmore
Hellerman Baretz Communications


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