Economics of oil regulation and the Brazilian reform: some issues

Abstract

This paper reviews the economic fundamentals for regulation in the oil industry, with a focus on the current regulatory proposal for the Brazilian oil industry. The observed exploration and production (E&P) contracts foresee much of the characteristics of the optimal contract, with a remuneration structure that combines upfront with future payments to mitigate uncertainty and incentivize exploratory efforts. In Brazil, despite slow market deconcentration since 1997's liberalization, the current oil regulation is in general consistent with an optimal regulatory response. From an economic standpoint, the 2009's new regulatory proposal prompted by the major oil discoveries offshore in Brazil reduces the power of incentive schemes with respect to exploratory and cost-reducing efforts while the changes in the net risk of the E&P offshore activities are not so clear.