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A pinch of pre-salt

Written by  Monday, 17 October 2016 00:00

After a thoroughly no good, very bad, couple of years for Brazil, the country is on the path to reform, and the first part starts with the country’s coveted pre-salt. Audrey Leon reports on what the opening means for the country and its state-owned oil company.

Petrobras' Rio headquarters. Photo by Audrey Leon/OE.

Earlier this month (October), both chambers of Brazil’s congress voted to change the country’s law that limited outside participation in its pre-salt areas. The house voted on 5 October, 292 to 101 to pass the reform. Once the law is signed by new president Michel Temer, international companies will be free to play in the pre-salt with or without Petrobras’ partnership.

For the last six years, Brazil’s pre-salt prize was governed by a separate law, different from its normal concession regime, Jose Valera, Houston-based partner and co-head of law firm Mayer Brown’s oil and gas practice, told OE. The law, passed under former president Luiz Inácio Lula da Silva, stated that instead of concessions, there will be production sharing contracts (PSCs), and in all cases, Petrobras must be the operator with a minimum 30% working interest. Valera says that the law also stated that the PSCs will be awarded pursuant to a competitive tender process. Since 2010, only one PSC has been awarded, for the Libra field. A consortium of oil and gas companies united for the Libra contract: Petrobras (40% interest, operator), Shell (20%), Total (20%), CNPC (10%) and CNOOC (10%).

While the pre-salt law might have been viewed as an excellent way to ensure that the country’s resources are kept in-country, it also left Petrobras’ hands tied.

“[The law] has proven to be too much for Petrobras to handle,” Valera says. “They have a large inventory of properties in Brazil, and this obligated them to be the operator and to put up a minimum of 30% of the money – even for areas they weren’t interested in, but other companies were. So, if other majors wanted the government to put out for bid more areas in the pre-salt – Petrobras was essentially, by law, dragged into it, to be the operator and to put money into it even though it had other priorities – or wanted to do something else with the money or simply didn’t have the capacity to operate one more field at that time.”

With Petrobras being in debt to the tune of approximately US$125 billion, according to Bloomberg, taking on additional operator and expenditure responsibilities was largely out of the question. And while the company has been trying to sell properties to make up the difference, there is still a way to go.

Notably, in July, Norwegian oil giant Statoil bought Petrobras’ 66% operated interest of the BM-S-8 offshore concession in Brazil’s prolific Santos basin, which includes a part of the Carcara oil discovery, for $2.5 billion. Earlier that same month, Petrobras put nine shallow water fields offshore the states of Ceara and Sergipe up for sale.

However, in September, Petrobras announced it would once again cut its capex, this time by 25% to US$74.1 billion, as part of its 2017-2021 business plan. The company also said it plans to divest some $19.5 billion of its assets between 2017-2018.

The Cerrado drillship was the first used to drill the giant Libra pre-salt prospect. Photo from Schahin.

 

With Petrobras tied up, Valera says that this effectively delayed the development of Brazil’s pre-salt resources. However, now with a new government in place, the law is close to being changed. “Now each chamber of the Brazilian congress has approved its version of the bills,” Valera says, “the president has signaled that he will sign the amendment to the pre-salt law.”

Valera expects the law to be signed by the end of the year, with new areas to be offered next year.

It didn’t take long before IOCs expressed their interest. “[Petrobras’] foreign ministry representation unit in Houston received seven manifestations of interest of big companies," Petrobras CEO Pedro Parente told Bloomberg on 10 October.

According to Valera, the reform follows a very rough period for Brazil including a recession, political crisis, and then, of course, the Petrobras corruption scandal.

“Everything happened at the same time,” he told OE. “Now [Petrobras] and the country are coming out of it. This is one of many reforms to be passed by the current [Temer] administration – to control spending and open more the energy sector to the private sector. Petrobras will no longer be the only champion in the country. In the long-term this should prove to be good for the country and for Petrobras.”

Although some believe that the reform passed doesn’t go far enough, Valera says that this is the best that could be done at present in terms of reform.

What changes?

The Cidade de Saquarema FPSO, offshore Brazil. Photo from SBM Offshore.

Valera notes that while the PSC regime will not change for the pre-salt, what will is the process before areas are offered up for bid. Brazil’s hydrocarbons national authority will consult with Petrobras to determine whether the company wants to be the operator of the area. “Only if so, Petrobras would have a minimum 30% working interest,” Valera says. “But, if Petrobras declines its preferential rights to be the operator, it doesn’t have to be anymore, and they don’t have to have a minimum 30%.”

Valera says that the area would be offered, and Petrobras’ preference to not be the operator would be noted in the bid documents. Companies would be able to bid, and in some cases, be awarded 100% working interest. Valera adds that alternatively, if bidders want to bring Petrobras in as a non-operator partner, they can do so.

The opening of the pre-salt could be a boon to Brazil’s oil and gas industry like what is currently happening in Mexico. “While only the big boys can play in the pre-salt,” Valera says, “this will give an opportunity to start-ups in the sense of service and support companies.”

What’s next for Brazil?

Brazil’s ANP (National Agency of Petroleum, Natural Gas and Biofuels) announced at the end of September that it intends to hold a fourth bid round offering mature fields. “Of the 13 areas selected after consultation of interest held by the ANP this year, 10 will be offered: White Crane, Rio Doce, Rio Mariricu (Espírito Santo Basin), Iraúna, Northwest Rosado Hill, Urutau (Potiguar Basin), Araçás east, Itaparica, and Marail Guan Valley Quiricó (Reconcavo Basin).”

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