Ryan,

Your writing is clear and direct. Although Neto appears to be a good source, your
research depends a bit heavily on it. The paper is a little light on citations in general. It
was important that you noticed and commented on the recent offshore discovery. A few
other comments are noted below.

You have a nice and casual but professional speaking manner. You seem very
comfortable talking about oil and gas issues, and that comes across well in your
presentation. Well done.
Steve

Paper: B
Presentation: B+

Historical Oil and Gas Discovery Brings

Investment Opportunities to Brazil

December 3, 2007

Ryan Vinson
Masters of Energy Policy & Law Studies
Sturm College of Law – University of Denver
Economy and Foreign Investment

Recent events including a historical oil discovery, as well as a highly volatile economy,
have lead to many changes in legislative policy relating to oil and gas; these changes are
essential to further the development of future investment opportunities.

From the middle of 1980’s to the middle of 1990’s, several Asian, African, and Latin
American countries have created more favorable laws for the participation of private and
foreign capital in their oil and gas sectors. Moreover, in those years, developed countries
have raised their investment in less developed countries, as a result of the absence of
domestic opportunities. The new investments were possible due to new technology
advancements that reduced exploratory costs and enhanced profits of oil corporations.
The interaction of international factors and the new regulatory policy became attractive to
investors in developing countries like Brazil.1

When the Brazilian Government passed the Petroleum Law of 1997 Brazil was able to
raise more than R$320 million in accepting bids for the exploration and drilling of these
blocks, greatly increasing FDI after the first bid in 1999.

The large inflow of FDI in 1999-2000 was partly due to the stability of the government,
the ability for foreign investors to get into the private sector, and the newly issued
Brazilian Real in 1999. After the adoption of the new currency the government
continued its path towards reduction in the economy by eliminating further barriers to
foreigners interested in investment opportunities by reducing their policing. The new
regulations and Brazilian Real were able to bring their GDP up to 11.4% in 2001, up
from a low of 6.5% in 1998.2

1
OTTO, J.M. (1998). “Global changes in mining laws, agreements and tax systems”. Resources Policy 24
(2), pp. 79-86.
2
Deloitte. "Brazilian Macro Economy." Brazil Oil and Gas (2006). <http://www.deloittetaxguides.com.br>.

2
Domestic oil production during the period of 1993 to 2003 increased on average 9% per
year. Net imports of oil reacted by dropping 12% a year. By increasing their domestic
oil production the Brazilians were able to reduce their importation of oil from $10 billion
in 1993 to $2.1 billion in 2003.

In spite of this, in 2003 FDI dropped from $16.6 billion in 2002 to $10.1 billion, marking
Brazil as the 9th most attractive market in 2003. Further drops in FDI continued in 2004
and put Brazil at its lowest level in the world markets as the 17th most attractive market. 3
Since then FDI has gone up significantly almost doubling in 2004 to $18.2 billion and
stabilizing in that range in the years following. During this time period the Brazilian Real
has been steadily gaining strength on the US dollar. [What is the current exchange rate?]
History and Background of Oil and Gas in Brazil

The birth of the commercial oil and gas industry in Brazil started in 1938, when President
Vargas created the National Petroleum Counsel – CNP, what today is called the National
Petroleum and Energy Council of Brazil - CNPE. CNPE is an organization directly
linked to the president of Brazil and its goal is to set up the guidelines for the
development of the Brazilian oil and gas industry, including price policies, priorities for
investments, geological studies, supplying and distribution policies, among others.

In 1953 Petroleo Brasileiro S.A (Petrobras), a state owned oil and gas company was
created to reduce foreign dependence on oil. Brazil imported the majority of its oil
before the creation of Petrobras. The state monopoly was set up due to the lack of private
capital and private companies’ unwillingness to undertake high risk activities. There were
also political resistances to open the sector to foreign firms. Petrobras, therefore, was the
manager of the Brazilian oil and gas monopoly. In the late 1950’s, Petrobras’ produced
about 3,000 barrels a day, which was insufficient to cover the increasing national
consumption. During this time period Petrobras only supplied 15% of the Country’s
demand. The remaining 85% was of course imported.

Importing the majority of the country’s oil was successful until the 1970’s when the first
oil shock dramatically increased the price of oil. This oil shock sparked Petrobras in
dramatically increasing their efforts in domestic exploration and development. As a
result, during the mid 1970’s Brazil discovered the Campos basin which held about half
of Brazil’s proven oil and gas reserves, until November 2007 when Petrobras discovered
a massive oil and natural gas field in the Santos basin, which will be discussed later.

In 1995, the 1988 Federal Constitution of Brazil was amended4 to allow oil and gas
exploration activities to be performed by private foreign and domestic companies,
through concession from the federal government.

3
“Most Attractive Foreign Direct Investment Destinations." A.T. Kearney . 12 Oct 2004. A.T. Kearney,
Inc. 2 Dec 2007 <http://www.atkearney.com/main.taf?p=1,5,1,151>.
4
Constitutional Amendment 9 of November 9, 1995.

3
With enactment of Law 9478 of August 6, 1997, the above constitutional amendment was
regulated; Law 9478/97 further instituted the Brazilian Energy Policy Council – CNPE
and the Brazilian Petroleum Agency – ANP, as the regulatory bodies in charge with
monitoring the oil, gas, and energy sectors in Brazil.5

Political Environment

Brazil is a federative republic with twenty seven states and over fifty five hundred cities.
The current President is Luiz Inacio Lula da Silva (Lula). President Lula took office in
January 2003 and was re-elected for a second term in 2006. President Lula is the
country’s first elected socialist leader and is determined to fight Brazil’s widespread
poverty while co-operating with the business sector and international community.6

President Lula is known for being very pragmatic with issues and decisions that arise.
President Lula does not often make rash decisions and is not influenced by the decisions
that other South American countries make.

The country of Brazil faced a crisis in 2002 just before the election of President Lula, as
political and economic confidence dropped in fear of their next leader’s beliefs on
economic policy. After President Lula was elected he proved to the country and its
investors that he is determined to keep economic activity stable and active.

Since the middle of 1990’s, the Brazilian oil and gas industry has been undergoing deep
institutional changes, mainly in the exploration and production of crude oil and natural
gas. With the purpose of attracting the largest possible amount of investment in the
sector and to take advantage from the Brazilian basins, the federal government has begun
to design a new regulatory environment to the oil industry.

The core of the changes consist in allowing the private sector to undertake activities of
exploration, development, processing, production and import of oil and natural gas,
aiming to break the state monopoly over these activities, enhancing competition, and
increasing the role of the government from the revenues generated from foreign
investment. 7

5
Neto, Pinheiro,. "Oil and Gas in Latin America." Latin American Law . (1st Edition. 2000).
6
"Brazil."The Statesman's Yearbook 2008. 144th. 2007
7
VILHENA, F.C.A. (1997). “Brazil’s mineral policy”. Resources Policy 23 (1), pp. 45-50.

4
Government Agencies – Summary of Responsibilities8

Foreign Investors should be aware of four National Government Organizations (NGO’s)

[this might be confusing if you used this abbreviation elsewhere – most readers would see
it and think you meant nongovernmental organization] in Brazil. They include Ministry
of Mines and Energy, Brazil Energy Policy Council, Brazilian Petroleum Agency, and

• Ministry of Mines and Energy (MME) - is the governing body over CNPE and
ANP. The MME is the agency that ultimately receives all rents and royalties
from the ANP.

• Brazilian Energy Policy Council (CNPE) - sets the energy policy and guidelines
in place. CNPE is similar to that of the US Department of Energy (DOE). CNPE
is more of the legislative group in Brazil as related to energy policy and law.

CNPE is in charge of:

I. Promotion of the effective use of energy resources and guarantee of

supply of these resources throughout Brazil

II. Periodic review of the energy matrices for various regions throughout
Brazil.

III. Establishment of guidelines for importing/exporting of petroleum and

its derivatives.

IV. Guarantee of the functioning of the Brazilian Fuel Storage System and
fulfillment of the Annual Plan for Strategic Fuel Storage.

• Brazilian Petroleum Agency (ANP) – regulates and insures that the policies
CNPE puts in place are followed. ANP is more or less the “enforcer” of the laws
and policies that CNPE passes.

ANP performs the following activities:

I. Implementation of the Brazilian petroleum and natural gas policy.

Ensuring the supply in Brazil and protection of users and consumers.

II. Regulation of oil exploration services.

III. Drafting of public notices and organization of bids to concede

petroleum and natural gas exploration and production rights, as well
8
Neto, Pinheiro. "Oil and Gas in Latin America."Latin American Law . 1st Edition. 2000.

5
 as authorizing refining, processing, transport, and
importing/exporting of oil and gas.

IV. Monitoring of activities related to the oil industry and the

implementation of any sanctions.

V. Filing of proceedings to acquire land needed for activities related to

the production of oil.

VI. Oversee the adherence to conservation and the effective use of

petroleum, its derivatives and natural gas, in conjunction with the
preservation of the environment.

VII. Stimulation of research and adoption of new technologies for

exploration, production, refining, transportation and processing.

VIII. Organization, maintenance and disclosure of information on

Brazilian petroleum and natural gas reserves as well as data on the
oil industry.

IX. Regulation, authorization and monitoring of Brazilian fuel supply

activities.

X. Monitor and operate the Brazilian Fuel Storage System and adhere to
the Annual Plan for Strategic Fuel Storage.9

• The Central Bank of Brazil – (BACEN) - The Ministry of Finance created the
Central Bank of Brazil with Law 4595, on December 31, 1964. The BACEN was
created as an autonomous government entity to bring about stability to the
Brazilian currency and the Brazilian Financial System The purpose of BACEN is
to:

I. Ensure liquidity in the economy

II. Maintain Brazilian international reserves at adequate levels

III. Encourage savings for Brazilian investments

IV. Ensure the stability and promote the betterment of the Brazilian
Financial system.

Concession Contracts and Bid Procedure

9
Neto, Pinheiro. "Oil and Gas in Latin America."Latin American Law . 1st Edition. 2000.

6
The abolishment of Petrobras’ monopoly allowed foreign companies to invest in oil and
gas through a bidding process. ANP selects and defines the blocks that will be bid for
concession contracts. Foreign private, Brazilian, and state companies are all on equal
footing when bidding for a concession. The qualifications required for bids for
concession of exploration, development, and production rights are established on a case
by case basis by the ANP. ANP will publish a bid notice to inform the public of the
auction.

The bid public notice informs and outlines the following:

I. the blocks and duration of the concession for each operational phase

II. the minimum work and investment requirements

III. the minimum governmental participation

IV. Surface rights (floating, on, and under the ocean floor)

V. the technical and financial requirements and respective substantiating

documentation

VI. the legal liability for any expropriation and easements

VII. the criteria for consideration of the bid proposals

VIII. the time frame, place, and schedule for supply of the materials needed for
the interested parties to make their bid proposals

IX. Makes the draft concession agreement public10

The criteria for selection of the winning bid varies depending on public notice, due regard
for concepts of legality, impersonality, morality, publicity, and equal standing of the bid
participants. In summary, the company’s image and work program as a whole will be
taken into consideration with regard to each of the six stages of the bid process.

The six stages of the bid process are:

1) Prequalification – the ANP issues a preliminary notice before actual public

notice to inform possible investors of the technical, legal, and financial
requirements.

2) Qualification – the ANP receives and reviews the technical, financial, and
legal documents from bid participants. The investor should also send
participation fee to be considered.
10
Neto, Pinheiro. "Oil and Gas in Latin America."Latin American Law . 1st Edition. 2000.

7
 3) Public Notice Publication – Public notice will be published in the Official
Gazette of the Federal Executive and in widely circulated newspapers. It
will contain the information that was outlined previously.

4) Bid Award – Proposals are forwarded to the Bid Commission on the date
and time specified on public notice. Proposals should include the bond
amount that is stipulated in the preliminary notice. The bid amount and
amount of signing bonus submitted in the proposal will be considered only
as to the amounts that were outlined in the public notice. A tie will be
settled by drawing of lots.

5) Bid Ratification – The Bid Commission puts together a report of the final
bid results including justification of why rejected bids were not accepted.
The ANP board of directors will notify the winning participants to sign the
concession contract.

6) Concession Contract Execution – The winning participants enter into a

concession contract to explore, develop, and produce their respective
block(s). All winning bidders must turn in to the ANP the minimal
performance and financial guarantees for the exploration program.11
[This is a useful summary.]

Royalty and Fee Structure

Pursuant to the rules established for each bid for petroleum-related blocks, the contracts
for exploration, development and production will be subject to payment of government
participation, as follows:

I. Signature bonds

II. Royalties

III. Special participation

IV. Payment for occupation or retention of area

As discussed earlier, payment of signature bonds are due at the time of submitting the bid
proposal. The amount of the signature bond is noted in the public notice document. The
bond is recoupable if the participant is not the winning bidder.

Royalties of 10% on the production of petroleum and/or natural gas will be paid monthly
by the concessionaire, in Brazilian currency, from the start of production for each field.
Royalties are split between the states, municipalities, and the Ministry of Energy.

11
Neto, Pinheiro. "Oil and Gas in Latin America."Latin American Law . 1st Edition. 2000.

8
The royalty can be reduced to 5% if there are great geological risks and/or lack of
information on seismic data.

The final public notice of the bid may set out the percentage of special participation
payments if necessary. The criteria for the special participation charge is based selected
if the field has high potential and/or substantial production in place. The special
participation percentage can range anywhere from 10 – 40 percent of the volume
produced. Payments must be made quarterly to the MME. The concessionaire may
deduct the following expenses: royalties, exploration costs, operating costs, depreciation,
and ancillary taxes.

The concessionaire must also make annual occupation/retention payments on the portion
of land/ocean that is absorbed. These payments are based on the amount of land/ocean
occupied and are noted in each concession contract. If there is an extension in the
concession agreement the retention payments will increase by a percentage decided by
the ANP. Royalties and payment for either occupation or retention of land are mandatory
payments. [citation?]

Tax Structure

The current Brazilian taxation system was introduced by the 1988 Constitution, which
granted power to Federal, State and Municipal Governments to collect taxes. Due to
several regulations enacted by each of these government entities, the Brazilian taxation
system is very complex. Its complexity leads to an environment in which taxpayers are
requested to comply with several regulations, as well as comprising tax collection and
reporting (accessory obligations).

Petroleum and gas activities in Brazil are not taxed differently from other economic
activities. Federal, state, and municipal taxes are levied on activities related to the oil and
gas industry.

The following taxes are levied on Brazilian oil and gas activities:
It is good that you list all of these types of taxes. If available, it would be good to include
tax rates.
I. income tax (IRPJ)

II. the tax on Distribution of Goods and Services (ICMS)

III. the import (II) and export (IE) duties

IV. the tax on Manufactured Products (IPI)

V. the Tax on Services (ISS)

9
VI. COFINS (the Social Insurance Contribution), PIS (the Profit-sharing Program), and
CSL ( the Contribution on Profits)

VII. Payroll charges12

Income tax (IRPJ) is a federal tax. Along general lines, it is levied at 15% per year on
taxable profits. The annual income tax surcharge is charged on any portion of the book
taxable profits that exceeds R$ 240.000,00 (10%) [$?]. There is no distinction made
between taxation of companies under Brazilian or offshore control, but the latter are
obligated to figure their income tax based on book taxable income.

The main tax regimen for petroleum exploration and production activities is abided to the
Temporary Admission of equipment into Brazil. Under the temporary admission
regimen, certain goods intended for production or other goods for rendering of services
are subject to the import (II) and export tax (IE) payments (in proportion to the duration
which the equipment will actually stay in Brazil). The term for concession of this special
tax structure will be stipulated in the lease, rental or loan agreement and may be extended
for a period equal to the original term. Tax paid will not be re-funded if Temporary
Admission rules are not followed.13

Currently, the goods listed below are exempt from Import Tax (II) and Manufactured
Products (IPI) payments under the Temporary Admission System:

I. Vessels for support of petroleum and/or natural gas exploration, drilling,

production and storage

II. Equipment for geological, geophysical and geodesic data gathering on petroleum
prospecting

III. Equipment for auxiliary services related to oil-well drilling and production

IV. Floating cranes used for offshore rigs for petroleum drilling or production

V. Risers for petroleum drilling and production

VI. Fixed units for petroleum exploration, drilling or production

VII. Floating production or storage units for petroleum or natural gas

VIII. Floating or semi submersible petroleum drilling or exploration units

12
Neto, Pinheiro. "Oil and Gas in Latin America."Latin American Law . 1st Edition. 2000.
13
Deloitte. "Upstream Taxation and Foreign Investment." Brazil Corporate Taxation (2006).
<http://www.deloittetaxguides.com.br>

10
 IX. Remote control submarine vehicles for use in petroleum exploration, drilling or
production14

Payroll Deductions

Concessionaires pay the social security contribution at 20% of the value of the
contribution paid out or credited in any way at all to their employees.
Employers must pay into the FGTS (Unemployment Guarantee Fund) fund 8% of the
salary paid to employees. This payment is made to benefit the employee if he/she is
terminated without reasonable cause or in specific cases set out by law.
Along with the social security contribution and the Unemployment Guarantee Fund)
(FGTS) these charges can increase payroll coasts by between 28 to 35 % of the gross
revenue.15

Bilateral Tax Treaties

Up to date, Brazil and the United States have not agreed to a bilateral tax treaty.
Although, Brazil and the United States signed a Tax Information Exchange Agreement
(TIEA) on March 20, 2007. The agreement is the first step towards producing a more in-
depth bilateral tax system. The United States and Brazil are using the TIEA to facilitate
the sharing of tax information to help produce a greater understanding of each others tax
laws. There are areas where the United States and Brazil collide on tax issues that will
need to be negotiated in order to make the journey forward in signing a complete tax
treaty. Until a bilateral tax treaty is agreed upon both the US and Brazil will be burden
with more taxes.

Converting Currency

There are few restrictions on converting or transferring funds associated with an

investment. Foreign investors may freely convert Brazilian currency in the unified
foreign exchange market wherein buy-sell rates are determined by market forces. All
foreign exchange transactions, including identifying data, must be reported to the Central
Bank. Foreign-exchange transactions on the current account have been fully liberalized in
practice.

Labor Laws and Regulations

14
Neto, Pinheiro. "Oil and Gas in Latin America."Latin American Law . 1st Edition. 2000.
15
Deloitte. "Upstream Taxation and Foreign Investment." Brazil Corporate Taxation (2006).
<http://www.deloittetaxguides.com.br>

11
Brazilian legislation does not establish any obligations as to use of local manpower for
exploration and production of oil and gas. However, Brazilian companies, including those
in the oil industry must maintain two-thirds proportion for Brazilian employees against
one-third for expatriates. [Would this ever pose a problem?]

The labor code in Brazil is highly detailed and relatively generous to employees in the
Oil and Gas sector; workers are guaranteed 30 days of annual leave, an annual bonus
equal to one month’s salary, and severance pay in the case of dismissal without cause.
Brazil also has a system of labor courts that are charged with resolving routine cases
involving unfair dismissal, working conditions, salary disputes, and other grievances.
Currently, over 2.5 million dispute cases are in the labor court system, where they may
remain unresolved for years. The Brazilian government is attempting to reduce this
backlog and increase the efficiency of the labor courts through recent initiatives to
expedite legal procedures and increase the number of claims that are resolved before
reaching the courts.16

Foreign Trade Zones

The federal government has granted tax benefits for certain free trade zones. The most
prominent of these is the Manaus Free Trade Zone, in Amazonas State, which has
attracted significant foreign investment, including U.S. companies. Most of the free trade
zones aim to attract investment in North and Northeast Brazil. However, most foreign
investment is concentrated in the more industrialized southern part of Brazil.17

Expropriation

There have not been any expropriation actions in Brazil in the recent past or any signs
that the current Government is contemplating such actions. In 1999, a state government
in Brazil sought and obtained a court ruling canceling contractual obligations, signed by
the prior state government, associated with the partial privatization of a state electricity
company. The U.S. investors are appealing the court ruling.

In 2003, a newly inaugurated government in another state refused to honor a number of

contracts the previous state government had signed with a range of Brazilian and foreign
investors; the parties involved continue to negotiate these contract disputes and have had
recourse to local courts. Some claims regarding land expropriations by state agencies

16
"Labor Law in Brazil." www.lexuniversal.com. 17 June 2002. 4 Dec 2007 [date?]
<http://www.lexuniversal.com/en/articles/908>.
17
"Free Trade Zones - Brazil." www.kishtpc.com. KTPC. 3 Dec 2007 <http://www.kishtpc.com/Free-
En/free_brazil.htm>.

12
many years ago have been judged by courts in US citizens' favor. There are individuals
who have yet to be compensated because the states have appealed these decisions.18

Treaties, Conventions, and Dispute Resolution

Brazil is not a member of the International Center for the Settlement of Investment
Disputes (ICSID). The ICSID is an international group that arbitrates cases at a neutral
site between its member states. Although, Brazil is a member of the New York
Convention of 1958 on the recognition and enforcement of foreign arbitration awards.
As well as the 1975 Inter-American Convention on International Commercial Arbitration
and the 1979 Inter-American Convention on Extraterritorial Validity of Foreign
Judgments and Arbitral Awards. However, under Brazilian law Articles 413 and 484, all
foreign judgments are subject to examination by the Federal Supreme Court before they
become enforceable. As in the case of many countries any judgments that the nation’s
court deems offensive to their country will not be enforced.19

Latin American countries (such as Brazil) have traditionally abided by the Calvo
Doctrine in the area of settling disputes between foreigners and Latin American nationals.
It holds that disputes are settled only before local courts and puts foreigners on a no more
than equal footing. This gave way to the Calvo clause being put in contracts between
countries and state-owned companies with foreign investors. To prevent international
arbitration of disputes Latin American countries implemented legislation that the state’s
party would also be on equal footing, thus keeping the dispute in the state’s borders.20

These conventions that have been ratified by Brazil only set formalities on the arbitration
process and do not have the power to enforce any decisions on the nation state. These
judgments still must be reviewed by the Brazilian Supreme Court before becoming valid.
If Brazil was to ratify the ICSID they would lose their ability to examine foreign
arbitration judgment. It specifically states “Each Contracting State shall recognize an
award rendered pursuant to this Convention as binding and enforce the pecuniary
obligations imposed by that award within its territories as if it were a final judgment of a
court in that State. A Contracting State with a federal constitution may enforce such an
award in or through its federal courts and may provide that such courts shall treat the
award as if it were a final judgment of the courts of a constituent state.” 21 ICSID is the
only treaty that takes the power to void an arbitration decision out of the hands of state.
18
"Doing Business in Brazil." 2003. Pinhiero Netos Advadgados. 2 Dec 2007 <http://www.brazilian-
consulate.org/secom/incs/DoingBusinessinBrazil.pdf>.
19
U.S. Commercial Services, "Chapter 6: Investment Climate."Brazil Country Commercial Guide. 2007.
20
Cremandes, Bernardo. "Disputes Arising Out of Foreign Direct Investment in Latin America: A New
Look at the Calvo Doctrine and Other Jurisdictional Issues." Dispute Resolution Journal (2004) 30
November 2007 <http://findarticles.com/p/articles/mi_qa3923/is_200405/ai_n9377090>.
21
http://www.worldbank.org/icsid/basicdoc/basicdoc-2003.htm. November 2007. The World Bank Group.
3 Dec 2007 <http://www.worldbank.org/icsid/basicdoc/basicdoc-2003.htm/article 54>.

13
More than 180 arbitration cases have been held by the ICSID, only three cases have been
disputed and none over turned.

With the specifics of the ICSID arbitration process and enforcement as it pertains to
Brazilian law, the Brazilian government officials have delayed ratification of 17 Bilateral
Investment treaties (BITs) with countries requesting either arbitration by ICSID or an
arbitration panel set up by the United Nations Rules for International Commercial Law.22

In 2002 it was reported23 that Brazil was the larges recipient of FDI in the region. In an
effort to promote investor confidence and still be able to settle disputes under Brazilian
law, Brazil joined the Convention on Combating Bribery of Foreign Public Officials in
International Disputes in 2002. Holding their public officials accountable for unlawful
rulings and hoping to further increase investor confidence if a disagreement were to
surface investors will get a fair arbitration hearing.

Tupi Oil Discovery

On November 8, 2007 the largest oil reserve found in ultra deep water was discovered
155 miles off the coast of Brazil. The Tupi field was discovered in the Santos Basin24 by
Petrobras and is estimated to hold any where from 5 to 8 billion barrels of oil and natural
gas (28° API). Up until now Brazil has mostly produced heavy crude from its Campos
basin. This discovery significantly increases Brazil’s oil reserves upwards of 40% and
will boost its global rankings to make it one of the world’s leading exporters. Brazil will
leapfrog from 17th to in-between 5th - 8th as top oil exporting countries. That will place
Brazil somewhere between Nigeria and Venezuela. This discovery will also bring about
uncertainties pertaining to the notion that the majority of usable oil has already been
discovered (Peak Oil25).

Petrobras is among the world’s leading and most experienced deep-water drillers due to
the fact that most of Brazil’s oil reserves are located in the deep waters of the Atlantic
Ocean. The first well drilled in the Tupi field cost Petrobras $240 million to drill and
took two years of development. The wells now drilled in Tupi take only 60 days and cost
roughly one million per day. The Tupi field is located at a total depth of around 4.5
miles, with 17,000 feet having to be drilled through rock, sand, and a massive 6,600 foot
salt layer. Petrobras estimates that they will need to acquire 100 deep water drilling rigs
to develop the field efficiently.

22
U.S. Commercial Services, "Chapter 6: Investment Climate."Brazil Country Commercial Guide. 2007.
23
U.S. Commercial Services, "Chapter 6: Investment Climate."Brazil Country Commercial Guide. 2007.
24
See Appendix A
25
Referring to Hubbert’s Peak Theory

14
The drilling of the Tupi field produces many difficulties, such as the extreme engineering
challenges related to drilling at in the ultra deep waters and large costs associated with
them. Petrobras already plans on spending over $112 billion over the next five years in
addition to the Tupi project. It is estimated that it will take 6 years before Brazil can
begin commercial distribution, starting at a test-phase production level of 100,000 barrels
of oil a day. With the high cost of oil today the development of these deep-water reserves
becomes possible. However any fluctuations down in the price of oil could inhibit
Petrobras’ plans on further development. According to Matthew Shaw a Latin America
energy analyst for the consulting firm Wood Mackenzie, the Tupi field could cost any
where from $50 to $100 billion to develop.

This new discovery is good news for Texas based companies like Transocean that lead
the world in the production of offshore drilling rigs that are capable of drilling through
salt layers and down to depths of over 30,000 feet. With only 40 or so of these deep-
water offshore drilling rigs in the world against the amount of oil reserves in the field,
Brazil and Petrobras will need help from many experienced drilling experts and engineers
to develop Tupi in a timely manner.26 Coincidently, Brazil will need to work with private
companies in the U.S. since that is, in fact, where Brazil will get its ultra deep water rigs.
Brazil will need several of these rigs which can range in price of more than $1 billon
each.

In an act to reap the benefits, nations have already begun talks with Brazil. For example,
Saudi Arabia has pledged to help Brazil develop Tupi with their government run oil
company Saudi Aramco and help simplify the visas needed by Brazilians to enter Saudi
Arabia. In order to further influence the Brazilian government Saudi Arabia discussed
the opportunity to increase agriculture exports to their country to help the economy of
Brazil.27

The discovery poses many questions for the Brazilian government pertaining to how they
are to best develop and take advantage of their new found oil riches. A day after this
discovery the Brazilian National Council for Energy Policies removed 41 oil exploration
blocks from its original amount 312 that were up for auction. Furthermore the Brazilian
government now has to make a decision on how they are going to deal with foreign
private companies. Brazilian President, Luiz Inácio Lula de Silva reported that this “puts
Brazil in a highly privileged situation. Very soon Brazil is going to join OPEC.” 28 ANP
has already begun drafting a new bill to change the oil laws with speculation on what the
new bill will have attached to it pertaining to sub-salt layers and private companies.

26
Schneyer, Joshua. "Brazil, the New Oil Superpower." Business Week 19 November 2007 1-2. November
29, 2007 <http://www.businessweek.com/bwdaily/dnflash/content/nov2007/db20071115_045316.htm>.
27
Sarruf, Marina. "Saudi Aramco is at the disposal of Petrobras." www.anba.com.br. 13 November 2007.
ANBA. 3 Dec 2007 <http://www.anba.com.br/ingles/noticia.php?id=16527>.
28
"Petrobras’ Major New Oil Discovery Could Add Up to 8 Billion Barrels to Brazil’s Reserves."
www.greencarcongress.com. 11 November 2007. 3 Dec 2007
<http://www.greencarcongress.com/2007/11/petrobras-major.html>.

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In conclusion, continuation of Brazil’s open policy on foreign petroleum investment and
continuing rise in petroleum reserves, ultimately brings more stability to inflation which
provides a sound environment that is critical to the success of foreign and domestic
investments.

APPENDIX A

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Source: ANP

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