The pre-salt oil and gas areas in Brazil – first production-sharing regime bidding round

November 2013 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES

Financier Worldwide Magazine

In November 2007, Petrobras made one of the most important announcements in its history: the discovery of a giant oil reservoir, located in the so called Tupi field, a region defined as pre-salt area, which consists of prospective oil reserves located under an extensive layer of salt. After that discovery, many others have been made within the pre-salt area, which triggered a change in the Brazilian oil and gas upstream regulatory regime.

This area presents a technological challenge since the reserves are located about 7000 metres below the water surface, crossing a salt barrier. In order to reach the oil, it is necessary to penetrate about 2km below the seabed. The estimated volumes of recoverable oil and gas of the pre‐salt rocks would significantly increase Brazil’s petroleum reserves.

After Tupi’s discovery, the government decided to remove prime pre-salt blocks just a few weeks before the licensing round held in 2007, cancel future bidding rounds and discuss another regulatory regime to govern the blocks located in the pre-salt area. From the government’s perspective, the concession regime – at that time the only one governing the exploration of the oil and gas blocks in Brazil – would not be sufficient to maximise and capture the potential income from the pre‐salt blocks.

As a consequence of the pre-salt discoveries, after some years of internal discussion in the Congress, on 2010 a new Federal Law was enacted adopting a new regulatory framework, based on Production Sharing Agreements (PSAs). A special company was incorporated to manage the exploration of oil in the pre‐salt area, named Pré-Sal Petróleo S.A. (PPSA) – a federal public company, in the form of a closed capital corporation linked to the Ministry of Mines and Energy, with initial capital of R$50m (approximately US$22m) – preserving the concession system for areas not under the pre-salt region and exceptionally for the pre-salt blocks that have already been granted.

The PSA is a contract between a state oil company (NOC) and an oil company (IOC) by which the IOC undertakes all costs and risks related to exploration and production. This system introduces the ‘profit oil’ concept, which represents the total produced by a given field, minus the costs and expenses related to producing oil. Another concept is the ‘cost oil’, which corresponds to the costs and investments the contractor makes to undertake the oil research and prospecting activities.

The IOC is entitled to a share of the production in order to recover all costs incurred during the exploratory phase. This share is referred to as ‘cost oil’; forthwith, the balance of production is regarded as ‘profit oil’ and shared in a pre-determined percentage.

PPSA will not carry any regulatory risk or cost, nor will it make investments, but it will have seats on the operating committees that will manage the activities to be carried out by the consortia and will have both the right to cast the tie-breaking vote and decision veto powers. Therefore, PPSA will not be responsible for carrying out the activities related to the exploration, production and marketing of oil and gas in pre-salt, but rather will manage sharing contracts and financially represent the Federal Government in the consortium formed under the PSA.

Petrobras will be the sole operator of all blocks explored under the PSA system and will be in charge of the exploration and production activities, as well as providing the critical resources such as technology, personnel and materials.

Pursuant to the current legislation, specifically for the pre-salt blocks, the Federal Government has two options: either contract Petrobras directly to explore and produce in the pre-salt, or attract bids to contract companies to work under the shared production system. Whenever it decides to hold the bid, the criteria for the winner is simple: the entity that offers the highest ‘profit oil’ percentage to the Federal Government wins. Nonetheless, in any case, Petrobras will be the operator and hold a minimum stake of 30 percent in the consortia formed to explore the blocks.

Thus, Petrobras will be guaranteed a minimum 30 percent stake in each area that is bid for, and may also play a part in the bidding processes with the aim of increasing its stakes. Considering that the winner of the bid will be the player that offers the highest ‘profit oil’ percentage to the Union, Petrobras will have to abide with whatever the winning bidder offers.

If there is a direct contract with Petrobras, the National Energy Policy Council (CNPE) will determine the Federal Government’s profit oil share. The CNPE will define the payment of a subscription bonus (which is not a bid evaluation criterion) on a case by case basis, and royalties will be incurred pursuant to the terms of the specific law.

The first bidding round for the pre-salt areas under the PSA regime will be held in late October, and is only for one area called Libra, located at the Santos Basin. For this bid, there is a fixed signing bonus of R$15bn. Payment of the participation fee of R$2,067,400 (approximately US$915,954) was compulsory for each individual company, even if they put forward an offer as part of a consortium, and was one of the requirements for qualification. The ANP forecast a volume for Libra that may vary from 8 bi to 12 bi recoverable barrels of oil, which makes the Libra field the most productive in Brazil to date.

Eleven companies, includingPetrobras, paid the participation fee for the first bidding round. It is interesting to note that the bidding has not grabbed the attention of some of the biggest American and British IOCs, such as Exxon and BP. Besides Repsol / Sinopec (Hispano-Chinese), Shell (Anglo-Dutch) and Total (French), the other interested IOCs are mainly from Asia (two from China, one from Japan and one from India).

The interested IOCs are still under the ANP’s consideration regarding participation in the bidding, but the expectation is that all such entities will be qualified.

It is worth mentioning that, among the first 11 companies in the PFC Energy 50 Ranking – the definitive ranking of the world’s leading publicly traded energy companies by market capitalisation – only four did not demonstrate an interest in the first PSA bidding round: 1st Exxon; 4th Chevron; 5th BP (British Petroleum); and 9th Gazprom.

Some say that Petrobras’ sole operatorship and the PPSA’s rights in the consortium were the main reason some of the major IOCs were not interested in bidding. In any case, it is undeniable that Brazil is economically stable and has less difficulty securing credit lines. Petrobras, in turn, is much bigger than it used to be in the past when the Concession Petroleum Law was enacted in 1997.

This is yet another major development in the panorama of pre-salt discoveries and the minimisation of exploratory risk. The seismic information attained thus far shows that the oil discovery success rate in the pre-salt layer is much higher not only than the global average (25 percent), but than Petrobras’ own success rate (40 percent). In other words, despite some of the political decisions made, pre-salt is a reality that is expected to elevate Brazil to a higher economic level.

Luis Menezes is a partner at Villemor Amaral Advogados. He can be contacted on +55 21 3806 3495 or by email: luismenezes@villemor.com.br.

Luis Menezes

Villemor Amaral Advogados