Results of Brazil’s 5th Pre-Salt Bid Round

On September 28th, 2018, the Brazilian National Agency of Oil, Natural Gas and Biofuels (“ANP”) held the 5th Production Sharing Bid Round. This Round offered 4 blocks in the Pre-salt section of the sedimentary basins of Campos and Santos.

Under the  production sharing regime, the winning bids are the ones which offer to the Brazilian State, from a minimum percentage set out in the Tender Protocol, the largest portion of oil surplus. The signature bonuses are fixed by the Tender Protocol.

The 4 blocks were awarded, resulting in R$ 6.82 billion in signature bonuses.

According to the legislation in force, Petrobras has the preemptive right to act as operator in the pre-salt blocks and the company opted to be the operator with a 30% stake in the area of Sudoeste de Tartaruga Verde. However, as no other company showed interest in obtaining a participation in this area, Petrobras obtained a 100% participating interest in the block, as specified below.

The following blocks were auctioned: (i) Saturno was awarded to the consortium formed by Shell (50% and operator) and Chevron (50%), that offered R$ 3.125 billion in signature bonus and 70.20% of oil surplus; (ii) Titã was awarded to the consortium formed by ExxonMobil (64% and operator) and QPI (36%), that offered R$ 3.125 billion in signature bonus and 23.49% of oil surplus; (iii) Pau-Brasil was awarded to the consortium formed by BP Energy (50% and operator), Ecopetrol (20%) and CNOOC Petroleum (30%), that offered R$ 500 million in signature bonus and 63.79% of oil surplus; and (iv) Sudoeste de Tartaruga Verde was awarded to Petrobras (100% and operator), offering R$ 70 million in signature bonus and 10.01% of oil surplus. In summary:

Block Signature Bonus (R$) (fixed) Winner
Saturno 3,125,000,000.00 Shell (50%); Chevron (50%)
Titã 3,125,000,000.00 ExxonMobil (64%); QPI (36%)
Pau-Brasil 500,00,000.00 BP Energy (50%); Ecopetrol (20%); CNOOC Petroleum (30%)
Sudoeste de Tartaruga Verde 70,000,000.00 Petrobras (100%)

The 5th Bid Round of Production Sharing continued the schedule of bidding rounds  planned by the ANP. In addition to this Round, the 6th Bid Round of Pre-salt Production Sharing is scheduled to take place in the second half of 2019, with the possibility of offering the prospects of Aram, Sudeste de Lula, Sul and Sudoeste de Jupiter and Bumerangue, in the Santos Basin.

For the coming years, the ANP has already demonstrated its interest in holding the following Bidding Rounds:

  1. The 16th Bid Round for Exploratory Blocks, scheduled for the second half of 2019, for which the ANP was authorized by the National Energy Policy Council to select blocks from the Pernambuco-Paraíba, Jacuípe, Camamu-Almada , Campos and Santos basins;
  2. The 17th Bid Round for Exploratory Blocks, projected for 2020, in which blocks from the Pará-Maranhão, Pelotas and Potiguar sea Basins should be selected, as well as blocks from the ultra-deep waters outside the Pre-Salt polygon in the Campos and Santos Basins; and
  3. The 18th Bid Round for Exploratory Blocks, scheduled for 2021, in which blocks from the Ceará and Pelotas Basins, and blocks from the ultra-deep waters outside the Pre-Salt polygon of the Espírito Santo Basin, should be selected.

ANP publishes regulations for the reduction of the rate of Royalties on incremental production from Mature Fields

On September 24th, 2018, Resolution No. 749/2018 of the Brazilian National Agency of Oil, Natural Gas and Biofuels (“ANP”) was published in the Federal Executive Official Gazzette, regulating the procedure for granting, at the request of the operator, a reduction of royalties to up to 5% on incremental production from mature fields.

Incremental production is the positive difference between the volume of oil and natural gas actually produced in a given month and the monthly production volume predicted for this month calculated according to the field’s reference production curve. The reference production curve will be established by analyzing the historical decline of the field, according to the equation described in article eight of Resolution No. 749/2018.

The request must be accompanied by a review of the Field Development Plan, which should contemplate the schedule of new activities and investments, OPEX, valuation of recoverable volumes and production projections, among other information.

The royalties for small production mature fields will be calculated at the rate of 5% on incremental production. However, royalties for large production mature fields will be calculated by applying regressive rates corresponding to 7.5% and 5%, according to the percentage of increment reached.

As defined by Resolution No. 749/2018, small production fields are those that produce up to 5,000 barrels of oil equivalent per day when it is an onshore field, or up to 20,000 barrels of oil equivalent per day when it is an offshore field. Large production fields are those producing more than this volume.

Oil or natural gas fields with an effective production history of at least 25 years, or whose production has reached at least 70% of the proven reserves are eligible to request a reduction of the royalty rate. The ANP will analyze the request based on the information contained in the most recent Annual Report on Resources and Reserves (“BAR”).

We should also point out that the operator must demonstrate, in the Development Plan, that the incentive will economically benefit the Federal Government, States and Municipalities, with regard to the extension of the field’s production life, incremental recovery factor and additional government participation.

The request for the incentive will be analyzed within 180 days, along with the review of the Development Plan by the ANP. After approval, the respective concession agreement will be amended to include the reference production curve and the new royalty rate.

Finally, once the amendment to the concession agreement has been executed, the reduction of royalties on incremental production will become effective from the month following the completion of the first activity contemplated in the Development Plan.ANP approves new measures to encourage the resumption of E&P activities in onshore and shallow water basins

On September 19th, 2018, the Board of Directors of the Brazilian National Agency of Oil, Natural Gas and Biofuels (“ANP”) approved new measures to further encourage the resumption of exploration and production of oil and natural gas in onshore and shallow water basins.

ANP Ordinance 309/2018 had determined the formation of a Working Group to assess: (i) the level of investments needed to reverse, or at least mitigate, the dramatic drop in the production from fields located in these basins in recent years; and (ii) what other measures could be taken by the ANP to foster investments in these fields, in addition to those already announced by the ANP since the publication, by the National Energy Policy Council (“CNPE”), of the current exploration and production policy and the conclusions of REATE (the Ministry of Mines and Energy’s working group for the revitalization of exploration and production of oil and natural gas in onshore areas), such as the Permanent Offer and the reduction of royalties for incremental production.

Furthermore, as determined in the current exploration and production policy established by the CNPE, the ANP will promote the maximization of the recovery factor and encourage competitiveness in the sector, that is, seek a greater number of participants, especially smaller companies. These measures are intended to increase the government’s income from its holdings, mitigate the decrease in production and attract new investments.

Accordingly, the ANP’s Board of Directors has determined that Petrobras must, within 90 days, submit a request for the extension of onshore and shallow water concession contracts that it intends to continue operating, along with the respective revised development plans that contemplate the new investments that will be made in these concessions.

In other cases, when Petrobras is no longer interested in operating the respective concession, there are three alternatives: (i) Petrobras must complete, before the end of the first half of 2019, the procedure for the assignment of the rights related to those concessions which have been previously initiated; (ii) Petrobras will hold, within 180 days, and with the support of the ANP, an auction for the sale of other fields that were not included in Petrobras’s Divestment’s Plan; and (iii) the ANP will take administrative measures to force Petrobras to make additional investments or return the areas to the ANP so that the ANP can include them in the Permanent Offer.

Finally, the ANP will request an analysis by the Administrative Council for Economic Defense (“CADE”, the Brazilian government anti-trust agency) as to whether the fact that Brazil has a market with a single buyer for the commercialization of oil, especially in the collection, treatment and disposal of production, could be seen as an obstacle to the development of a diverse and competitive market for the exploration and production of oil and natural gas in onshore and shallow waters.