Abstract

There are risks and opportunities in the three recently approved laws for pre-salt oil exploration and production in Brazil. These risks and opportunities are currently under discussion in the Brazilian Congress. These laws originated with four bills submitted in 2008, shortly after the 2007 oil discovery. “The discovery is considered to be one of the biggest oil discoveries in years outside of countries belonging to the Organization of Petroleum Exporting Countries (OPEC), comparable in size to the Kashagan oil field in Kazakhstan”(M.R. Oliveira, 2009). Following the oil discovery, a commission of Ministers and Officials of Brazilian public institutions was convened with the mission to submit to the Brazilian President, Luis Inácio Lula da Silva (President Lula), a report recommending a new legal regulatory framework. In August 2009, the proposed bills were sent to the President for review; they were then submitted to the Lower House and were subsequently approved. The most important of these three laws changes the existing concession arrangements into Product Sharing Agreements (PSA). The exploration of fossil fuels in the pre-salt layer will give Brazil the chance to access new revenues to battle the serious social problems that have been restraining the nation’s development. These social problems include the country’s high poverty level and its lack of education development. As President Lula has stated, the goal of such exploration is “… to make Brazil become richer, more developed, from the scientific point of view, from the educational point of view, from the point of view of social policies.” The risks rest in the country’s ability to create and enforce a legal framework that is able to both meet the nation’s public interest and at the same time offer the stability needed to attract foreign investment and foster competition in the market. Brazil has already proved that it knows how to create a good atmosphere for foreign investment. The country is now enjoying one of its best economic moments since its independence from Portugal in 1822. It is a democratic nation with a stable and predictable macroeconomic environment, and the government’s paper was recently classified as investment grade by all three of the main rating agencies. One of the challenges for the government is to not jeopardize the credibility and status that the Brazilian market and the Brazilian authorities have earned in the international community. The results of the present analysis lead us to the conclusion that the Brazilian government will be able to meet this challenge. Recent studies have indicated that Brazil has shown great improvements in its transparency. For example, when the Revenue Watch Institute recently ranked 41 countries in terms of the transparency of their resource revenue collection programs, it determined that Brazil, together with Norway and Russia, is a leader in this area (http://www.revenuewatch.org/our-work/issues/revenue-transparency).