Recent discoveries of gigantic oil and gas reserves, estimated at 60 billion barrels of oil equivalent, beneath a 2 km-thick salt layer in the Brazilian continental platform, measuring approximately 800 km by 200 km, christened ‘Pre-Salt’, have caused the government to reflect on the most suitable regulatory framework to lead Brazil towards sustainable economic growth and human development.
Governmental discussions on the new regulatory framework for Pre-Salt resulted in four bills of law sent by President Lula da Silva to Congress on 31 August 2009, which provided for: (i) the alteration of the current regulatory framework (concession regime), establishing production sharing regime for the Pre-Salt and other strategic areas, and appointing Petrobras as sole operator of all Production Sharing Agreements (PSAs), with minimum participating interest of 30%; (ii) the creation of a new state-owned company to manage government interests in the PSAs and the commercialisation of production; (iii) the exploration right assignment by government to Petrobras in an amount equivalent to a prospective recovery of a maximum of 5 billion barrels of oil equivalent in consideration for the government’s subscription for Petrobras shares; and (iv) the establishment of an accounting/financial welfare fund to administrate PSAs revenues.
Of the estimated Pre-Salt area, 21% is already being explored under a concession regime and the remainder will be placed for bidding under the new regulatory framework, expected to be applicable only to free acreage in the Pre-Salt and in government-defined strategic areas. Existing concessions are protected by constitutional principles, vested rights and judicial acts, and will not be retroactively impacted.
The bills of law initially submitted to the Congress under a special urgency regime, afterwards waived by the President, should be approved by March 2010. Despite Congress’ commitment for thorough scrutiny by then, the timeframe for their approval may be compromised by copious amendment requests.
Several issues have been raised by industry players, but two merit special attention and are the object of the main amendment requests: (i) the role of Petrobras, as sole operator of all Pre-Salt blocks and strategic areas, and (ii) the nomination by a new state-owned company of 50% of members and the chairman of the operating committee of the consortia under the production-sharing regime, with casting vote and right of veto.
Although industry is more concerned with these two points than with the change per se in the way of performing exploration and production activities in Brazil, either because it will be more directly affected thereby, or because it is used to working under the production sharing regime, the main reflection at this time should be on what benefits the regime change will bring for the nation.
The question posed by the government during discussions of the Interministerial Group established in the second half of 2008 to study this enterprise was whether the objectives outlined for the Pre-Salt could be achieved without substantially altering the current framework (Law # 9,478/97), making adjustments to government take, or whether only a regime change could truly provide it with the means of achieving these objectives, which can be summed up as greater government appropriation of Pre-Salt exploitation revenues, allied to its absolute control of the exploration schedule.
From an economic point of view, maintaining the concession regime with increased government take and high signature bonus would be an immediate way for the government to earn income and for investors to continue assuming the investment risk. This is not the case under the production sharing regime, where the government only earns upon production and absorbs the investment risk by paying the ‘cost oil’ to the ‘contracted party’ which, in turn, reduces its concern with the operating costs.
From a technical stance, the oil industry, except for the aforementioned points, is interested in operating under the two regimes, naturally depending on clear rules and the business interest that may be generated depending on what the government proposes. From a legal standpoint, controversy notwithstanding, the Brazilian constitution allows the implementation, by law, of a new regime – production sharing – to stand alongside the current concession regime, commensurate with Art. 177, which establishes that this matter be governed by lawmakers.
Despite lengthy discussions and solid arguments on both government and industry sides, the underlying debate is definitely more ideological than economic, technical or juridical because it revives discussions on the role of state-directed development versus the entrepreneur state, which had been overcome with the enactment of the distinctly liberal Federal Constitution in 1988.
There is an undeniable nationalisation pitch to the bills under discussion, with the creation of a new state-owned company to manage the production sharing agreements and the role envisioned for Petrobras. It remains to be seen whether Brazil’s giant Pre-Salt reserves and current good international standing will be capable of attracting the massive exploration capital required.