(TNPetroleo) After the unsuccessful attempt to auction off the production surpluses from the Sépia and Atapu pre-salt blocks, on November 6, 2019, the government decided to carry out a broad change in the parameters that guide the supply of these areas. Either directly, through the significant reduction of government participation in the revenue that will be generated (government take), or indirectly, through Petrobras’ decisions that corroborate the government’s strategy by reducing the risks for the companies/consortium that acquire the blocks.
First of all, it is important to put the operation in context: Petrobras acquired the right to produce oil in the Sépia (up to 500 million boe equivalent) and Atapu (up to 550 million boe equivalent) fields as part of the last capitalization process of the company, in 2010, through the Transfer of Rights.
In 2016, the federal government decided to auction off production surpluses in the blocks assigned to Petrobras in the Transfer of Rights. As the company was already exploring/developing and in some cases even producing, this process gave rise to a negotiation involving the state-owned company and the Union through the Ministries of Mines and Energy (MME), Finance (current Ministry of Economy) and the National Agency Oil, Natural Gas and Biofuels (ANP). It was not a simple negotiation, as it affected the production curve planned by the oil company (postponement), with a reduction in the Net Present Value (NPV) of the projects. Petrobras had to be compensated for these impacts.
Once the agreement was signed, the government auctioned off the surplus production from the Búzios, Itapu, Sépia and Atapu fields. However, no proposals were presented for Sépia and Atapu, and a new round of negotiations was announced with Petrobras, which resulted in the three measures highlighted below:
The first measure to reduce risks and encourage the participation of other companies in the auction fell to Petrobras. On April 9, the company released a note to the market on the approval by its Board of Directors of the parameters negotiated with the Federal Government for the calculation of the indemnity due to the company on account of the excess volumes of the Transfer of Rights related to the Sépia and Atapu fields , in terms different from those established in MME Ordinance 213/19, still in force.
According to the aforementioned ordinance, Petrobras’ indemnification would be based on the following parameters:
According to the clarification released by Petrobras, on April 9, the production of the Sépia and Atapu fields, after the auctions of surpluses, will be divided as follows and with the following compensations:
In other words, of the volumes produced in Atapu and Sépia, Petrobras will keep 39.5% and 31.3%, respectively, under the Transfer of Rights regime. And, for that, it will receive indemnities paid by the winner of the sharing auction of US$ 3.253 and US$ 3.200 billion, respectively. It should be noted that the price of a barrel of oil and the discount rate for cash flow calculation purposes were central in defining the amount of financial compensation owed to Petrobras.
The note disclosed to the market informs that the percentage of 8.99%, established in Ordinance 213/19 for purposes of calculating the present value of the cash flow, was maintained. However, the note says nothing about the most important parameter: the price of a barrel of oil.
Despite not mentioning the value of the price of a barrel of oil negotiated with the Federal Government – which, according to Ordinance 213/19, still in force, must be US$ 72.00 -, the company informs that, in the agreement signed, there is a future profit sharing clause (earn out) if the price of a barrel of Brent oil reaches an annual average above US$ 40.00, limited to US$ 70.00. Thus, we can conclude that the price used for the purpose of calculating the indemnity was US$40.00. Value well below the US$ 72.00 defined in ordinance 213/19.
Based on the information disclosed, it is not possible to infer whether this agreement is beneficial to Petrobras. There is a lack of transparency to shareholders and, ultimately, to Brazilian society.
The second measure to make the auction viable was decided by the National Energy Policy Council (CNPE) on 04/20/21, implying a 70% reduction in Signature Bonuses, which will be paid to the Union by the winners of the auction of the Sepia fields and Atapu. The values decreased from R$22.9 billion and R$13.7 billion to R$7.138 billion and R$4.002 billion, respectively. The CNPE also reduced the Union’s participation in oil in Sepia’s profit, which went from 27.88% to 15.02% (-46, 13%) and Atapu, which dropped from 26.23% to 5.89 % (-77.54%).
It fell to Petrobras to announce the third measure to make the auction viable, communicating to the market, on 04/28/21, that it would exercise its preemptive right of the excess volumes of the Transfer of Rights assignment in the percentage of 30%, guaranteeing the company the participation of at least , 51.91% in the Sépia field and 57.65% in the Atapu field. With this measure, Petrobras gives a clear signal to the market that it believes it has more oil in these fields than defined in the Transfer of Rights process, helping to attract other companies to the auction.
There is no doubt that with these measures the auction of surplus volumes from Sepia and Atapu becomes more attractive, but the trend is that only large international groups, whether private (US and European) or state-owned (mainly Chinese) take the risk to purchase such assets, in addition to Petrobras itself.
About the authors: Henrique Jäger is a researcher at the Institute for Strategic Studies of Oil, Natural Gas and Biofuels (Ineep) and former president of Petros and João Montenegro holds a master’s degree in International Political Economy from UFRJ, researcher at Ineep and journalist specializing in oil and energy