The Chargé in Brazil (Key) to the Secretary of State
350. Following is full text of memorandum handed President Dutra and Secretary General FonOff (Deptel 235, March 23 and Embtel 337, March 261).
A cursory review of the draft petroleum law suggests the following brief, and necessarily incomplete, observations:
- The limitations imposed on foreign capital participation in enterprises devoted to the refining of petroleum and the specialized transportation thereof (Article 6) could only serve to discourage the entry of such capital into Brazil for investment in these activities.
- Concession titles are not guaranteed to their grantees for their full terms, conditioned only upon grantees compliance with definite [Page 360] obligations. On the contrary, concessionaires may be divested of their rights at any time: to wit, Articles 7 and 15.
- There is no assurance of guaranteed continuity between the several phases of development conditioned only upon compliance with all defined legal obligations. For example, compliance with the obligations for exploration activities does not automatically guarantee the right to enter into the next phase, to wit, exploitation activities. Likewise, compliance with all legal obligations relative to exploitation activities does not give the concessionaire the right to enter into refining and transportation activities (see Articles 54, 60 and 66).
- The essential right to export once the demands of the internal market are met, is not assured but is subject to quota and is greatly circumscribed by numerous and vague conditions viz Articles 68, 69, 70 and 71.
- Therefore it is proposed requesting the companies to submit call for information that may not always be obtainable at certain stages of development and are of a nature that would tend to retard, if not completely interrupt, continuous and orderly development.
- The calculation of royalties, values of concessions, damages, et cetera are not set out clearly in the draft law. Specification of these matters in detail would avoid confusion and minimize misunderstandings.
- The proposed limitations on the size of holdings in a country as large as Brazil would result in small, restricted operations of a high unit cost. Considerably enlarged concession areas are essential to the achievement of development on a reasonable cost basis.
- The wide discretionary powers to be invested in the national petroleum council would place, for all practical purposes, private management in a subordinate position vis-à-vis the council and would seriously detract from the efficiency of such management.
- The constitutionality of several important provisions of the proposed oil law would appear to be open to question, for instance, Articles 2, 6 and 58. Furthermore, there are many other provisions that are so vague and indefinite in their scope and application that it is doubtful if any private company would feel justified in making sizeable investments until they are clarified and reduced to specific terms.
- Many provisions of the law would appear to seriously militate against the undertaking of petroleum operations by small indi-dependent operators.
It would be most helpful if Department could forward soonest comment on specific provisions draft petroleum law as President Dutra has expressed interest in receiving any additional information that it may be possible to furnish.
Embassy appreciates merits Curtis Hoover2 recommendations but has refrained from suggesting that they be followed in view opposition they have encountered in certain official and Congressional circles.