Analysis: Brazil subsalt regulatory model takes shape

Proposed legislation sent to Brazil’s national Congress today by the executive branch would create production-sharing contracts with Petrobras for all oil and gas from subsalt layers and in “strategic areas” to be defined in the future.

Pennwell web 380 272

John Waggoner
Technology Editor, Drilling & Production

HOUSTON -- Proposed legislation sent to Brazil’s national Congress today by the executive branch would create production-sharing contracts with Petrobras for all oil and gas from subsalt layers and in “strategic areas” to be defined in the future.

The idea is to harness the bonanza of Brazil’s subsalt hydrocarbons for use by the state for social and economic development while not infringing upon the rights of private enterprise already active offshore. As might be expected in a region still bitter over the nationalization of oil and gas assets in Venezuela, and in a country where Petrobras was once known as “a government within a government,” the debate is fraught with rival interests and will be sure to take months to resolve, according to statements today by key lawmakers. However, the bills have been sent to Congress “with urgency” in a bid to push them into law in time to maintain existing schedules for the development of the country’s massive subsalt hydrocarbon reserves.

Petrobras to become sole subsalt operator
The main beneficiary of the new legislation appears to be state-owned Petrobras. The national oil company would become the official operator of all subsalt hydrocarbons with certain caveats to allow private participation.

The federal government, for example, would be free to hire Petrobras exclusively for subsalt E&P if it wishes, or to conduct public bids with the free participation of any company, according to Petrobras. In areas subject to public bids, Petrobras will have a minimum interest of 30%, with the additional right to participate in bidding processes to increase its interest in those areas. In this sense, the new rules would be similar to previous bidding rounds, with the exception that Petrobras would remain the operator.

However, new concepts that were introduced in the bills are at first glance some of the most significant changes in the regulatory structure since the massive liberalization reforms that broke the Petrobras monopoly upstream.

Two of those concepts were defined by Petrobras as follows:
* “Profit oil” refers to production from a certain field, after deduction of costs and expenses related to oil production.
* “Cost oil” corresponds to costs and investments made by the contracted party for exploration and production activities.

Private companies allowed to bid with Petrobras
The winner of the bid will be the company that offers the highest percentage of “profit oil” for the Brazilian government. Petrobras will have to match the percentage offered by the winning bidder, in proportion to its participation. In areas in which Petrobras has exclusivity, a government council called CNPE will determine the percentage of “profit oil” to be paid to the Brazilian government from the national oil company.

Another important nuance is that the payment of subscription bonus (which is not a criterion for the bid) will be defined on a case-by-case basis by CNPE, while royalty payments will likely follow the terms of Law No. 9,478 of Aug. 6, 1997, which is the landmark law under which all E&P concessions are currently tendered.
However since the bills are touted as a way to spread the oil wealth around the country, there is considerable political effort by states currently not receiving royalties to get a share of the pie.

There is a specific proposal for the creation of a new state-run company to represent the interests of the Brazilian government in the production-sharing contracts. The new company would not conduct upstream activities or engage in investments, but it would participate in operational committees, with voting rights and veto powers, that will define consortium activities.

Other crucial details emerge
Other legislative proposals include, according to Petrobras:
* The authorization to the Brazilian government to transfer to Petrobras the oil and gas exploration and production activities in areas of the subsalt layer that are not subject to concessions, limited to the maximum volume of 5 Bboe
* Petrobras and the Brazilian government would sign a contract to determine these geographical areas, the amount to be paid for this “transfer of rights,” the conditions for the reappraisal of the transfer value and the payment conditions for Petrobras
* Exploration and production activities in these areas will be regulated and supervised by the National Petroleum Agency (ANP). The ANP will also approve agreements concerning the unitization of production that may be required in this area

The bills also provide authorization for Petrobras to float more shares. Petrobras said it will use the proceeds from this float to pay the federal government for transfer of the areas not subject to concession, and to finance its investments as outlined in the company’s annual strategic plan.

Editor’s note: The author of this article was present in Brazil during the liberalization of the upstream oil and gas sector and was on hand during the first six Oil Rounds sponsored by the ANP.

Pennwell web 380 272


More in Regional Reports