In 2012, Brazil produced 2.7% of the world’s oil – by comparison this is very similar to Nigeria’s 2.8% and more than double the UK’s 1.1% (BP’s Statistical Review of World Energy, June 2013). Discoveries have been made in deepwater zones in an area of rock known as the pre-salt layer and these discoveries may turn out to hold vast quantities of hydrocarbons. By some estimates, the assessment of Brazil’s overall recoverable reserves of oil and gas may be increased by around 30billion boe as a result.
With the potential size of that opportunity in mind, it is useful to consider the way in which companies may access the reserves.
Bidding rounds for concessions have been carried out on a regular basis from around 1997 with the most recent round being announced in August 2013. During this time annual production has more than doubled. Government take from the concession regime is in the form of royalties (rates vary from 5% to 10% and is based on production), special participations (payable at prescribed rates generally when the field produces large hydrocarbon volumes or is very profitable) and signing bonuses (which are usually set during the applicable bid round).
The first bidding round for Production Sharing Agreements (PSA) was announced in July this year and will cover part of the deepwater pre-salt layer. There are certain conditions attached to the PSA bidding round for example, the successful bidders will: (i) enter into a PSA with the Ministry of Mines and Energy (a draft of this was provided to the market in July); (ii) form a Consortium to include Petrobras as operator with at least a 30% interest and the state owned company, Brazilian Oil and Natural Gas Management Corporation who will represent the federal government; and (iii) involve varying percentages of local contractors and workers at different stages (local content requirements).
Many of the parameters have been fixed with the main variable being the proportion of profit oil which the parties are willing to provide to the government. In the PSA, there is a distinction between ‘cost oil’ and ‘profit oil’ – generally, the private enterprise is entitled to an increased share of petroleum at certain stages of production (the cost oil) so they can recoup certain costs associated with the development.
In the bidding round, it is likely that the company who offers the most profit oil to the government will be successful.
The idea behind the PSA regime is to ensure optimum level of government involvement in unlocking the huge potential Brazilian natural resources may offer. In any regime, to encourage parties to join and the right parties to be involved there needs to be the correct balance between government take and reward for the enterprises involved.
We will soon know whether Brazil has this balance correct as bids for the first of the pre-salt areas are anticipated shortly.
Clare Munro is head of oil & gas at Brodies LLP
