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Viewing cable 06BRASILIA1178, U.S. OIL EXPLORATION/PRODUCTION FIRMS FIND BRAZILIAN

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Reference ID Created Released Classification Origin
06BRASILIA1178 2006-06-13 12:12 2011-07-11 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Brasilia
VZCZCXRO7085
RR RUEHRG
DE RUEHBR #1178/01 1641212
ZNR UUUUU ZZH
R 131212Z JUN 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5751
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 2264
RUEHRG/AMCONSUL RECIFE 4950
RUEHSO/AMCONSUL SAO PAULO 7180
RUEHBU/AMEMBASSY BUENOS AIRES 4077
RUEHAC/AMEMBASSY ASUNCION 5488
RUEHMN/AMEMBASSY MONTEVIDEO 6306
RUEHSG/AMEMBASSY SANTIAGO 5568
RUEHPE/AMEMBASSY LIMA 3037
RUEHCV/AMMBASSY CARACAS 3294
RUEHQT/AMEMBASSY QUITO 1864
RUEHLP/AMEMBASSY LA PAZ 4643
RUEHBO/AMEMBASSY BOGOTA 3793
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDO/USDOC WASHDC
UNCLAS SECTION 01 OF 03 BRASILIA 001178 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR 
TREASURY FOR OASIA 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD 
DOE FOR SLADISLAW 
 
E.O. 12958:  N/A 
TAGS: EPET ENRG EINV ECON PGOV ASEC BR
SUBJECT: U.S. OIL EXPLORATION/PRODUCTION FIRMS FIND BRAZILIAN 
IVESTMENT CLIMATE WANTING 
 
REF: 2005 RIO DE JANEIRO 1150 
 
This cable contains Business-Confidential Information. 
 
1.  (SBU) Summary.  During a series of June 5-6 meetings with U.S. 
firms involved in upstream petroleum sector operations, our 
interlocutors complained of Brazil's inadequate climae for foreign 
investment.  In separate meetings,Exxon-Mobil, Chevron, and El Paso 
recounted talesof Brazil's dysfunctional regulatory regime, high 
taxes, legal uncertainty, and tenuous security situation.  In 
addition, the difficulties of dealing with GOB agencies such as 
IBAMA (responsible for environmental permits) and Receita Federal 
(in charge of customs) complicated the picture.  Petrobras' 
dominance in all aspects of the ol sector, both upstream and 
downstream, meant that independent players, even well-funded ones, 
needed to tread lightly.  While doing business in Brazil was 
certainly easier than operating in Bolivia, we were told, in many 
ways the majors found investment conditions worse than those in 
Venezuela.  End Summary. 
 
----------------- 
ANP VS. PETROBRAS 
----------------- 
2.  (SBU)  Overall, Brazil's petroleum sector regulatory apparatus 
receivd mixed reviews.  El Paso's Brazil President, Eduardo Karrer, 
characterized ANP, the national petroleum regulatory agency, as 
well-intentioned but often lacking the necessary authority to set 
things right.  When the Director of ANP is close to the President, 
he said, the agency acts in a confident and decisive manner.  In 
contrast, when the ANP Director lacks political muscle, Petrobras, 
Brazil's oil and gas parastatal, tends to dictate the rules. 
Chevron's Tim Miller noted that even though his company often 
partners with Petrobras on the E&P side, it sometimes receives the 
thumb-screw treatment from the company's gas division.  Miller 
stated that in one off-shore field where Chevron had found gas 
reserves, Petrobras - which owned the only pipeline to the shore - 
had offered the company a mere 70 cents per million BTU for the gas, 
knowing full well that Chevron's only alternative was the risky 
gambit of re-injecting the gas into an underground reservoir. 
 
3.  (SBU)  Exxon-Mobil's Brazil President, John Knapp, was more 
charitable toward ANP;  he noted that the agency had conducted seven 
transparent auctions of oil/gas blocks during the past few years and 
described it as "competent and flexible."  (See reftel.)  The 
upcoming eigth round of auctions could be the most important yet, he 
declared.  Knapp acknowledged that Petrobras was like an 800-pound 
gorilla, but pointed out that in many ways it treated independent 
players more fairly than Statoil - Norway's respected petroleum 
parastatal - which had been known to eject private sector operators 
from exploration blocks.  Petrobras had never gone to such lengths, 
Knapp said, though its state-run status gave it access to key 
information about specific blocks which ensured that it always was 
able to purchase the most promising parcels. 
 
------------------- 
LEGAL UNCERTAINTIES 
------------------- 
4.  (SBU)  Knapp noted that the rules governing the auction of 
oil/gas blocks were subject to endless changes.  For instance, the 
sixth auction round, he said, could have been even more successful 
in attracting investors if ANP had not made local content such a key 
component of bid evaluation.  Seeking to correct this mistake, in 
the seventh round ANP then changed the rules to make local content 
merely a tiebreaker if there happened to be identical bids - but 
then required that firms use a minimum percentage of local rigs (of 
which there are virtually none) when conducting E&P operations. 
Even more frustrating, Knapp continued, is the lack of clarity in 
the regulation of natural gas.  Currently, there are three bills in 
 
BRASILIA 00001178  002 OF 003 
 
 
Congress purporting to establish a new regulatory regime for natural 
gas, but none is adequate from the company's point of view as each 
would allow Petrobras to keep its monopoly on pipeline operations 
for a number of years. 
 
5.  (SBU)  Chevron's Miller complained of the ongoing legal 
uncertainty raised by Rio State's efforts to collect valued added 
taxes on imported E&P rigs and well-head production.  The state 
statutes establishing these taxes (Lei Valentin and Lei Noel, 
respectively) on their face appear to conflict with Brazilian 
constitutional provisions making off-shore petroleum resources 
subject to the sole jurisdiction of the federal government, he said. 
 However, litigation is still working its way though the Rio State 
court system and the judiciary had issued conflicting decisions. 
Meanwhile, Rio State government officials were trying to shore up 
the legislative basis for these taxes just in case the courts ruled 
against them.  Payment of these taxes, Miller declared, negatively 
affected the bottom line of all companies in the sector. 
 
6.  (SBU) Karrer was more upbeat, possibly because El Paso had just 
settled two multi-million dollar investment disputes with joint 
venture partners (one with Petrobras and the other with the State of 
Parana) involving gas-fired thermoelectric plants.  Having 
confronted the lack of transparency on the electricity generation 
side, El Paso was divesting itself of its gas-fired power plants and 
planning to concentrate on relatively more "secure" E&P activities. 
 
 
--------------- 
IBAMA NIGHTMARE 
--------------- 
7.  (SBU) IBAMA, the Brazilian agency responsible for issue 
environmental permits, came in for the harshest criticism from our 
interlocutors.  Miller stated that a Shell-operated project (40% 
Shell, 40% Petrobras, and 20% Chevron) was currently on hold 
awaiting the issuance of an IBAMA permit.  Shell had obtained an 
injunction compelling the agency to issue the required permit, he 
said, but because IBAMA workers were on strike there was no one 
available upon which to serve the injunction papers. Meanwhile, 
Shell was losing US$250,000 per day as its drilling rig sat idle. 
In a separate field where Chevron was the operator, in partnership 
with Petrobras, because of IBAMA delays Chevron just received its 
permit this year - though the company had scheduled exploration 
activity to begin in 2005.  Although Shell/Chevron had prevailed 
upon its joint venture partner Petrobras to help grease the skids 
for both these projects, even the vaunted Petrobras could not get 
IBAMA to move in a timely manner. 
 
8.  (SBU) The IBAMA bottleneck not only adversely affects the 
majors, but smaller players as well.  The U.S. firm EMGS had hoped 
to bring its environmentally friendly electromagnetic survey 
technology to Brazil (less ecological disruption compared to 
traditional seismic surveys) but after several months of 
frustrating, fruitless, and expensive waiting it left for more 
profitable shores. 
 
9.  (SBU) Chevron, Exxon, and El Paso all understood the challenges 
facing IBAMA, noting that inadequate staffing, low salaries, and 
unclear framework statutes combined to make the agency's job 
difficult.  The constant turnover in agency personnel meant that 
industry had to educate staffers every three years or so regarding 
their needs and concerns.  Brazilian law was such that should an 
IBAMA employee mistakenly issue a permit, our interlocutors 
observed, that person could be held legally liable if something went 
wrong.  Under such circumstances, Knapp pointed out, it was natural 
for staffers to push issues up to higher levels within the agency 
rather than making decisions themselves. 
 
 
BRASILIA 00001178  003 OF 003 
 
 
---------------------------- 
CUSTOMS AND LACK OF SECURITY 
---------------------------- 
10.  (SBU)  All three firms complained about the difficulty of 
clearing key equipment - like drilling rigs - through customs. 
Frequent strikes and unending paperwork made import/export 
procedures a challenge.  The added liability of doing business in 
Rio de Janeiro, the country's de facto petroleum capital, only 
increased their headaches.  The recurrent violence and constant 
threat of kidnap made it hard to attract expatriates to work there. 
Putting the best face he could on the situation, one company manager 
pointed out that at least the situation was better than that in 
Bolivia - though, despite all of President Chavez's antics, it was 
worse than that in Venezuela. 
 
Chicola