Bovespa 04/09/2009.

Brazil: Reactions to a Proposed Energy Law

Brazil: Reactions to a Proposed Energy Law September 1, 2009 | 1938 GMT Summary Brazilian President Luiz Inacio Lula da Silva submitted a proposal for a new oil law to the country's legislature. The proposal favors state-run energy company Petroleo Brasileiro SA (Petrobras) and shows that Brazil intends to protect its national interests when it comes to deepwater oil exploration and development. Analysis After a government review that began in 2007, Brazilian President Luiz Inacio Lula da Silva on Aug. 31 unveiled a much-anticipated proposal for a new oil law that will govern the exploration and development of the country's massive deep-sea pre-salt oil reserves. The new regulatory framework was highly anticipated as Brazil's pre-salt reserves — oil deposits located in the sea bed under thick layers of salt — are estimated to contain anywhere from 14 to 100 billion barrels of oil and could turn Brazil into a major oil exporter in coming years. Stock prices in Brazil's state-run energy company Petroleo Brasileiro SA (Petrobras) plummeted on the release of the proposal, with the company losing 3.6 percent of its market value (about $7 billion) on Aug. 31 alone (though that was mitigated by a 1.4 percent rebound on Sept. 1). Although Brasilia might not actually pass the new energy law until next year, it is clear that Brazil sees its pre-salt oil reserves as a strategic national asset that needs to be protected by the state, even at the risk of slowing the influx of foreign capital and technology that the country is trying to attract to boost the reserves' development. The most obvious aspect of the proposed law is its (fully expected) favoritism toward Petrobras, one of the world's up-and-coming energy companies and a majority state-owned enterprise. Petrobras would operate all of Brazil's pre-salt oil development projects. The government, through the National Petroleum Agency, would have the option of awarding a contract solely to Petrobras or asking for public bids to bring in other companies to share in projects. In public bids, companies would join in production-sharing agreements with the government rather than only acquiring concessions and paying royalties on revenues, as they did previously. This is meant to ensure that Petrobras gains knowledge and experience from outsiders who may bring better technology and expertise to the table when they sign on to a production agreement. Petrobras would be guaranteed a minimum 30 percent stake in any consortium (though this does not apply to pre-existing contracts). Contracts will be awarded to foreign companies that promise to preserve the greatest share of "profit oil" — a field's production minus the equivalent of costs — for the Brazilian government. The proposal is surprisingly candid about the role of what is, in effect, bribery in companies' bids for contracts, stating that the National Energy Policy Council will assess "subscription bonuses" (which are not required but are no doubt encouraged by the law) on an ad hoc basis. The Brazilian government will also have the option of handing over to Petrobras certain areas that have not yet been opened to concession to other bidders. Petrobras and the government will work out the specifics of which geographical areas will be eligible and determine their value and the price that Petrobras will pay to have rights to the area transferred to it. Since Petrobras will be doing a lot of costly and technologically demanding oil production in these deep pre-salt layers, it will need to raise a lot of capital. The government has claimed it will inject around $50 billion into Petrobras upon passage of the new energy law. Moreover, the proposed law allows for Petrobras to issue new shares to get funding, while not calling for the restructuring or reorganization of the company. This preserves shareholders' right to maintain or up their stakes and the government's right to increase its stake, while ensuring that stock increases will not be used to squeeze out foreign investors for arbitrary or political purposes. The proposal contains a nationalist streak that grants the government great scope for intervention in the development of these strategic reserves. In particular, the law would give birth to a new state-operated company — called Petrosal — that would have a representative, with full rights to vote and veto, on the board of any energy consortium doing business in Brazil's pre-salt deposits. Because this company will not be allowed to invest in projects or take part in upstream development, it will not bring capital or technology or expertise to energy development projects. It will simply be an arbitrary government actor with the ability to put roadblocks along the way for energy producers as it sees fit. Da Silva submitted the proposal to Congress with much fanfare, calling for it to be put on a "fast track" toward approval. But the proposal, published on the Petrobras Web site, must still go through the legislative process, and it must do so amid the politically charged atmosphere ahead of general elections in October 2010. Nevertheless, it reflects a years-long review by a commission consisting of several government ministries, and thus gives a good indication of what direction Brazil's government wants to take in making energy sector regulations that are in line with its strategic interests.

John F. Mauldin johnmauldin@investorsinsight.com

Estimate Distances with Your Arm and This Rule of Thumb [MacGyver Tip]

Estimate Distances with Your Arm and This Rule of Thumb [MacGyver Tip]: "

Quick anatomy lesson: the distance between your eyes is one-tenth the length of your arm. This is important, because it helps you estimate the distance between yourself and any object of reasonably known size to a rather accurate degree.

Let's begin this with a confession: I can't estimate distances worth a darn. 100 ft, 300 ft, 20 m, I can't really do it. Thankfully with this trick, we can get pretty accurate distance estimates with only the tiniest bit of math, a general idea of the size of the object you're estimating distance from, and an arm.

Basically, all you need to do to estimate a distance using this classic method is hold your arm out and stare at your thumb with an eye closed. Silly, yes, but it makes sense, because you'll switch which eye you look through and sort out how far the object appears to have 'jumped' to the side:

How far did it move? (Be sure to sight the same edge of your thumb when you switch eyes.) Let's say it jumped about five times the width of the barn, or about 500 feet. Now multiply that figure by the handy constant 10 (the ratio of the length of your arm to the distance between your eyes), and you get the distance between you and the barn — 5,000 feet, or about one mile.

Easy enough, and from a few quick tests with known distances, it appears to be accurate enough for ballpark figures.

The Old Farmer's Almanac has been around for as long as we recall, but it is still a great source for MacGyver-style tricks, even if this particular one requires no pens, matchboxes, or staples. Take a look at the link for more details on this estimation 'rule' and others and be sure to stop in the comments to share your oldie-but-goodie sort of tricks. Thanks, TechTalk WRLR 98.3FM!

How to Easily Estimate Distances [Almanac]

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August 31, 2009 Stock Market Recap

August 31, 2009 Stock Market Recap: "

The day started of fin promising fashion for the bears as the indices gapped down in sympathy with a big drop in the Chinese market. But the bears were not able to capitalize on that early weakness. The market just meandered sideways for the rest of the session. There was minimal technical damage done to the indices today. I've made some minor downgrades to the short-term trends in the trend table but I don't think the bulls need to sweat as long as the March trendlines hold. Absent any big news I'm not expecting much out of the market this week, ahead of Labor Day, except possibly on Friday after the payroll data.

Trend Table

Downgrades to the short-term trends today...

Trend	Nasdaq	S&P 500	Russell 2000
Long-Term	Up	Up	Up
Intermediate	Up	Up	Up
Short-term	Lat(-)	Lat(-)	Down(-)

(+) Indicates an upward reclassification today

(-) Indicates a downward reclassification today

Lat Indicates a Lateral trend

*** I'm simply using the indices' relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.

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