Pre-salt: government wants to end Petrobras preemptive right

Sept 16, 2019

The government intends to make the pre-salt exploration regime more flexible by allowing blocks in these areas to be auctioned off in the concession model – in which the company owns the oil but assumes the risk of the activity, and the winner of the auction is who offers the highest bid. The change has the potential to increase federal revenues in the short term, which would allow public accounts to improve at a time when resources were scarce.

To this end, the government decided to support Senator José Serra’s project (PSDB-SP), which amends the pre-salt law and ends Petrobras’ preemptive rights in the selection of blocks. The goal is to approve the proposal later this year.

Pre-salt areas are currently auctioned under the sharing regime – created in 2010 to increase gains in reserves exploration. In this model, the Union owns the oil, and the companies act as partners. The auction bonus is fixed, and the winner is the one who offers the Union the highest percentage of oil (after discounting the exploration cost).

– This project is a priority. We are working on telecommunications, we will wait for the sanitation law to come from the House and we will work on the sharing regime. The idea is to approve later this year. The government is keen to move the debate forward, ” Congress government leader Fernando Bezerra Coelho (MDB-PE) told GLOBO.

Current rule

The text states that the concession regime could also be used to contract areas within the pre-salt polygon – a region defined by law that encompasses oil exploration fields between the Santos and Campos basins – and let the government decide to which blocks apply the concession or sharing scheme.

In addition, Petrobras would lose the right to exercise block preference at each auction in the area. Currently, the state company tells the government, before each pre-salt auction, if it intends to impose its minimum 30% stake as a partner of the winning consortium. This preference may now fall, given the assessment that the norm distorts competition for the fields.

If realized, this change would be the second to be made in the sharing model. The first, made in 2016, determined the end of Petrobras’ mandatory participation in pre-salt exploration.

José Serra’s project changes would not affect this year’s auctions. Three bids are scheduled for October and November, among them the pre-salt Transfer of rights, which will have revenues of R $ 106.5 billion shared with states and municipalities. The goal is that the changes are already adopted in next year’s auctions.

Brazil currently has two main oil exploration regimes: concession and sharing, with different tax criteria and royalty payments.

There is a third model of oil exploration in the country, called Transfer of Rights assignment. But this was a single contract between the government and Petrobras, governed by specific law, for the exploration of five blocks in the Santos Basin after the discovery of the pre-salt.

Everything that was bid on the pre-salt polygon, in addition to areas considered strategic, needs to be offered by the sharing regime. However, the government estimates that there are fields with lower productivity than the standard for this regime.

Therefore, the Ministry of Economy argues that the National Council for Energy Policy (CNPE) – the body that brings together ministries, chaired by the Minister of Mines and Energy – and advised by the National Petroleum Agency (ANP), decide what is the legal regime most advantageous for each block: sharing or concession.

According to ministry technicians, the need for flexibility is inherent in the different exploratory risk profiles of the areas. According to the Ministry of Economy, there are blocks whose geological potential does not justify bidding in the sharing model, which has a higher tax burden and charges royalties of 15% on gross revenue. In addition, there is the participation of state-owned Pre-Sal Petróleo SA (PPSA) as contract manager and member of the Operating Committee.

More competition

It is as if the Union is partnering in the exploration, sharing risks with companies. In the Libra area, the first granted under the sharing scheme, the Union is entitled to 41.65% of the oil produced, after discounting production costs. This portion of the oil is sold by the government itself through PPSA.

In the concession, royalties are 10%, in addition to the payment of special participation – which progressively affects the profit of very productive fields.

Therefore, the evaluation is that, in fields with low level of information or attractiveness, the concession model would be more adapted to the exploratory risk level. There would be less risk for the Union and business, and the fields would be more attractive to investors.

In practice, the project undermines the effectiveness of the pre-salt polygon as it would evaluate the contract model for each offered block.

The bids together, the technicians say, have the potential to increase competitive conditions in auctions by not giving Petrobras preemptive rights in the sharing bids, as well as matching the bidding blocks to the most appropriate regime for each area’s profile.

During the presidential transition in November, Guedes even argued with his team to simply end the sharing scheme for all future auctions. The idea, at that time, was to make the mega Transfer of Rights tender in the concession model, with potential to raise more than the estimated R$ 106 billion. The assessment, however, was that the change could disrupt the event.

Source: O Globo

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