The Brazilian 2010 oil regulatory framework and its crowding-out investment effects

Abstract

Investment is an essential variable in the oil sector. It is even more important in the vast Brazilian pre-salt domains, where the technological requirements are high and sophisticated. The Brazilian National Oil Company, Petrobras, is facing severe financial limitations to undertake these disbursements. Other oil companies will therefore have to be significantly engaged in the endeavour, which reinforces further the importance of attracting investments in Brazil. Yet this article shows that the governance architecture established in the 2010 Brazilian oil framework will deter investments in several ways, giving rise to agency problems among entities and moral hazard situations because of contractual legal liabilities. There are some credible indications that the government of President Lula overestimated the attractiveness of the Brazilian pre-salt oil discoveries and their capacity to draw investments when proposing the 2010 changes. Little attention was given to the careful examination of how the framework would affect investors, under the assumption that the favourable geological conditions would be sufficiently attractive in themselves. Even though the 2010 reforms have brought some minor advancements and there have been some signs that the government has been recently attempting to mitigate some of the problems examined in this article, that is not enough.