Transfer of rights over pre-salt oil fields opens new opportunities

The end of a long deadlock between the Brazilian Federal Government and Petrobras regarding the transfer of rights (“cessão onerosa”) over pre-salt layeroil fields is a complex matter, but also an opportunity for foreign investments in the context of a mature global industry for oil & gas.

Under the original contractual conditions, the rights to explore these fields were conferred upon Petrobras in 2010 against payment of a fixed amount, which was to be subsequently adjusted from the declaration of commerciality, based on the variation of the price of oil and the exchange rate. Changes in circumstances such as the sharp decline of the price of oil since then have opened a new discussion of those rules.

There is agreement that the Federal Government should compensate Petrobras for the impact resulting from the changed contractual conditions. Payment in cash or Treasury bonds, or in the form of rights over additional oil fields are alternatives under consideration. A final definition regarding this compensation amount is expected for the next few days.

Petrobras has also revisited its corporate strategy so as to open the oil and gas markets for new participants, as well as to address its financial imbalance. The decision is in line with the new Federal Government’s policy, aimed at fostering private investments in order to boost Brazil’s economy. Furthermore, the relevant fields proved to have substantially larger amounts of oil than originally estimated. Competitive bids to be held in relation to the fields originally awarded to Petrobras should generate ample cash.

On February 28 the Brazilian National Council for Energy Policy (CNPE) issued guidelines for the auction of such oil fields, which is scheduled to take place on October 28. It shall be an open competitive bid and, in accordance with the recently altered rules of the shared oil partition regime, Petrobras shall not be required to participate or operate in consortium with other bidders. It shall, however, retain a right of first refusal.

However, essential aspects related to those bids are yet to be decided. First, there is no indication yet as to the division of the proceeds of the bid with States and Municipalities, a sensitive topic which until recently had been the subject-matter of negotiations in Congress. CNPE’s resolution also provides that the rules of compensation to Petrobras related to the investment made until the bid will be proposed by the Mines and Energy Ministry, and then approved by the National Oil Agency (ANP). Up to now, it is not defined.

To clear the decks, the Federal Government is to obtain endorsement of the National Audit Court (TCU). This is a pragmatic route to ensure peace in relation to the review of the economics relating to these important topics, given the pivotal role the Audit Court plays in relation to competitive bids involving public assets.

Should this new framework prevail, there will be a welcoming environment for foreign investment, in view of the need for large amounts and state-of-the-art technology to explore the oil fields. The bids will constitute an opportunity for high return on investment - and also an important step for Brazil’s development.