By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and George Bedoya
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Brazil: Government proposes a regulatory change for oil exploitation in the pre-sal area.
The massive oil discoveries in the pre-salt deposits located off Brazil's Atlantic coast are estimated to contain between 50 and 80 billion barrels. The deposit lies across 800 km more than seven thousand meters below water and a thick salt layer, The notable magnitude of the reserve lead President Luiz Ignacio Lula da Silva to propose significant changes to current oil sector legislation, in order to increase the government's role in developing these new findings, since–according to the government's proposal–these are oil wells with very high potential returns and almost no exploratory risks.
Four bills were created that seek to build a new framework to regulate exploration and exploitation activities in the pre-sal area. The first proposes to change the current concessions to production sharing agreements (PSA) in which state-owned company Petrobras would become the only operator, with a minimum stake of 30% in all future projects in the area.
The second bill creates a new wholly state-owned company called Petro-Sal. The main functions of this company would be to manage and monitor all PSAs signed by the Ministry of Energy and Mines.
The third relates to the creation of a Social Fund made up of resources from a combination of royalties, bonuses established in the contracts, earnings from production sales and interests payments generated by the fund itself. All these resources would be allocated to social projects, science, technology, education, culture and the environment, although no exact percentages for each item were established yet.
The fourth bill raises the possibility of capitalizing Petrobras, turning the Brazilian state into its main shareholder. At present, Petrobras is a mixed capital company in which the state holds management responsibilities, but only owns approximately 40% of its shares. This capitalization plan would be limited to an amount equal to 5 billion barrels of oil.
All these bills were sent to the National Congress on August 22, which has 90 days to review then and either approve or reject them.
But beyond the discussion that should take place within Congress, the new regulatory framework has generated strong reactions from various sectors of Brazilian politics. During the elaboration phase of the bills, the governments considered eliminating the priority that oil producing states have in revenue distribution according to the current legislation (Law 9.478 enacted in 1997 established they receive 40% of total oil revenues). This proposal immediately generated strong opposition from the governors of Rio de Janeiro, Sao Paulo and Espíritu Santo, which would receive the highest revenues from the pre-salt oil reserves. The government subsequently took this issue off the table.
Another aspect of the proposals criticized by opposition parties was the urgency assigned to passage of the bills, which could impede adequate congressional review. Some accused the government of trying to use the pre-sal issue to build an electoral campaign for Dilma Rousseff, likely candidate from the presidential party and currently a member of the cabinet. Approval of the Social Fund, whose resources would be distributed to poor citizens, could convince a significant portion of the population, thus giving Rousseff an edge over other candidates.
Mining and the Military: Legislative Changes in Peru and Chile
The constant ambushes against the military, the number of casualties and the recent downing of a helicopter in the Valley of the Apurimac and Ene Rivers (VRAE, which includes the regions of Pasco, Junin, Huancavelica, Ayacucho and Cusco, in the central and southern Andes of Peru), have exposed the lack of resources and equipment for Peruvian armed forces and police in these areas.
This worsening situation comes amid mounting Peruvian concerns over Chile's advantageous position in weapons and military power, which has sparked a nationwide debate over the budget planning process for Peru's defense sector.
One response by the Executive Branch has been to insist on the approval of Law Nº 3058/2008 which would redirect 5% of all revenues from future mining exploitation and sales to the National Police and Armed Forces in the VRAE area. These revenues, which are currently distributed among regional and local governments in producing areas, would be used to modernize military equipment and upgrade military forces. But, as expected, regional and local governments have expressed their disagreement with this proposal. There is no final word on the proposal, but an important question has now been raised for national debate: Should revenues from the extractive industries finance the armed forces in Peru?
During these same weeks, the Chilean government sent its Congress a bill to repeal the "Reserved Copper Law" and establish a new system to fund the armed forces. The Copper Law dates back to 1987, during the dictatorship of Augusto Pinochet. Since that time, the armed forces have received 10% of the revenue from copper sales by state-owned company CODELCO. This has enabled the Chilean armed forces to maintain and upgrade itself through the acquisition of cutting-edge equipment.
Through the proposed legislative change, Chile seeks to incorporate spending on military equipment and the related costs into the state budget. Future military purchases would be financed with resources that are considered to be part of the annual budget for the defense sector. In addition, CODELCO would start to operate like other public companies, paying its taxes and sending its surplus to the national treasury. Thus, the national budget would increase, and funding for the armed forces would now come out of the overall budget, instead of having its own separate source of funds.
These two measures aim in opposite directions. After arming and outfitting itself to gain an enormous advantage over its neighbors, Chile's military will no longer have prioritized access to copper revenues. Meanwhile, Peru's government is seeking more resources for its military by giving them priority in the allocation of mining revenues, at the expense of regional and local governments. It is interesting to note that, for implementation of both of these measures; the national governments have resorted to centralized reallocation of mining revenue for their defense budgets.
Some Latin American countries that depend greatly on revenues generated by hydrocarbons have recently changed their laws in response to constant changes in oil prices, among other motives. In October 2008, Mexico's state-owned oil company Petroleos Mexicanos (PEMEX) went through one of its most significant reforms since its nationalization in 1938.
PEMEX contributes just over 2% of the country's GDP, but the resources it generates are almost 40% of Mexico's national budget. Therefore it is considered the most important state-owned company for the Mexico's development.
However, PEMEX has not undertaken any new exploration or exploitation activities for some time now. By giving all its resources to the state to finance the public budget, it lost resources and technology for investment, which in turn has reduced its production margins in recent years. Moreover, much of the oil extracted was exported without creating any added value. Faced with this situation, the federal government promoted the so-called energy reform, through which the private sector could participate with their own resources and technology to explore new deposits.
The "reform" encouraged by President Felipe Calderon's administration sought to facilitate private sector participation in order to increase Mexican oil production. It resulted in five key initiatives: 1) a new Basic Law for PEMEX; 2) the reform of the Basic Law of the Federal Public Administration; 3) an initiative to establish a Petroleum Commission, which would be a decentralized agency of the Mexican Ministry of Energy with operational autonomy; 4) a decree amending and adding several provisions to the Regulatory Law of Constitutional Article 27; and 5) a decree amending and adding several provisions to the Law of the Energy Regulatory Commission.
The decrees that eventually made up the new framework for industry operation were the result of long and intense political negotiations. In sum, private companies were excluded from the activities of oil refining and distribution, but the possibility of service contracts negotiated with private companies to conduct exploration and mining was left open, though without granting them any ownership rights for hydrocarbon production or profits. The decrees also included the participation of Mexican citizens in the public company, through "citizen bonds" that would increase the company's funds.
However, nearly a year after the energy reform, these measures have not yet been fully implemented. PEMEX's current situation is not far from the circumstances described before 2008, with a poor production rate and a technical and financial breakdown. Meanwhile, President Calderon recently appointed Jose Suarez Coppel as CEO of PEMEX, replacing Jesus Reyes Heroles. This controversial appointment raises the possibility of "second generation reforms" or a new energy reform building on the one in 2008. Opposition groups single out Suarez Coppel as the party responsible for the financial collapse of PEMEX, say that his appointment signals an intention to ultimately privatize Pemex once and for all.
Sources: Perú 21, El Comercio (Peru), La República (Peru), Folha Online
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