The Petroleum Agency (ANP) recently released new information regarding the auction of surplus volumes derived from the “Onerous Assignment Regime,” expected to be held by the end of the year. The Onerous Assignment Regime, which was created by Law No. 12,276/2010, authorized the Federal  Government to onerously assign to PETROBRAS, without a bidding procedure, the performance of hydrocarbon exploration and production activities in open acreage located in the pre-salt, up to a limit of five billion (5,000,000,000) boe.

On April 17, 2019, the National Council for Energy Policy (CNPE) published the Resolution No. 6/2019, authorizing the ANP to hold the “Onerous Assignment Surplus Round” (“Bidding Round”), since technical assessments indicate volumes over 5 five billion (5,000,000,000) boe (“Surplus Production”). In this Round, the development areas of Atapu, Buzios, Itapu, and Sepia, all located in the Santos Basin, will be offered to the market.

CNPE Resolution No. 6/2019 also approved the technical and economic guidelines applicable to the Bidding Round under the Production Sharing Regime, amongst others:

  1. Brent Price of US$ 76.18;
  2. Average daily production of twelve thousand (12,000) barrels of oil per active producing well;
  3.  Federal Government Profit Oil: I – in the Atapu area, 26.23%; II – in the Buzios area, 23.24%; III – in the Itapu area, 18.15%; and IV – in the Sepia area, 27.88%;
  4. Judgment Criterion: The highest rate of Profit Oil to the Federal Government;
  5. Signature Bonus: I – in the Atapu area, thirteen billion, seven hundred forty-two million reais (R$ 13,742,000,000.00); II – in the Buzios area, sixty-eight billion, one hundred and ninety-four million reais (R$ 68,194,000,000.00); III – in the Itapu area, one billion, seven hundred sixty-six million reais (R$ 1,766,000,000.00); and IV – in the Sepia area, twenty two billion, eight hundred and fifty nine million reais (R$ 22,859,000,000.00);
  6. Royalties: at a rate of 15% on the total volume of oil and natural gas production;
  7. Minimum Local Content: Buzios, Itapu, and Sepia: Development/Production Phase: 25% for well construction; 40% for the collection and disposal system; and 25% for the stationary production unit; as for the Atapu, it must meet the conditions under the Concession Contract of the adjacent area, called Oeste de Atapu, which means: 35% in the exploration phase; and 30% in the Development/Production phase;
  8. Payment of Financial Compensation to Petrobras: as a condition to signing the Production Sharing Agreement, the winner(s) of the Bidding Round shall compensate Petrobras for the investments made in the areas to the extent of its participation in the deposit; and
  9. Recovery as Cost in Oil: the amounts paid to Petrobras by the Contracted Party on the Production Sharing Regime are recoverable as Cost Oil (as per CNPE Resolution No. 13/2019).

MME Ordinance No. 213/2019 set forth the guidelines for calculating the compensation due to Petrobras for investments made in the Buzios, Atapu, Itapu, and Sepia fields.

According to MME Ordinance No. 213/2019, the compensation will be based on current market parameters, by deferring the production of the volumes contracted under the Onerous Assignment Regime. The idea is to maximize the Net Present Value – NPV of the Federal Government and maintain Petrobras’ NPV on the date of signature of the Production Sharing Agreement(s). The cash flow shall be discounted at a rate of 8.99% per annum in constant tax-free currency, monetarily restated by the Producer Price Index Finished Goods (PPI), published by the Bureau of Labor Statistics.

MME Ordinance No. 213/2019 detailed the expenses which shall be considered while calculating the cash flow. Costs associated with drilling and completing wells, subsea equipment, and production platforms will be included in the CAPEX, for cash-flow purposes.

Expected cash flow investments should consider the following unit cost metrics in a million dollars:

Expected operating costs for cash flows should consider the following unit cost metrics:
Furthermore, the following volumes per area shall be taken into account by bidders:
On May 21, 2019, Petrobras expressed its interest to be the Operator in Buzios and Itapu. Therefore, Petrobras must hold a minimum participating interest of 30% in each of the areas.Under article 4 of Decree No. 9,041 of May 2, 2017, upon the conclusion of the judgment phase, for the blocks in which it expressed interest in acting as operator, Petrobras:

(i) shall form a consortium with the winning bidder, if the percentage of the Profit Oil attributed to the Federal Government is equal to the minimum rate; or

(ii) may form a consortium with the winning bidder if the percentage of the Profit Oil for the Federal Government exceeds the minimum rate. If Petrobras decides not to be part of the consortium, the winning bidder, individually or in a consortium, will hold 100% of the participation in the offered block, and must indicate the Operator and the new allocation among the consortium members, as the case may be.

As mentioned above, the agreements related to the areas awarded in the Bidding Round will be entered into with the ANP in the form of Production Sharing Agreements. The ANP recently released two models, one with Petrobras’ participation as Operator, and the other without Petrobras’ operation.

As the blocks on offer in the Bidding Round contain reservoirs that extend to areas contracted under Onerous Assignment Regime, the ANP informed that a “Co-Participation Agreement” shall be signed among Petrobras and the contracted parties, with PPSA as the manager and intervening party. The Co-Participation Agreement will be submitted to the ANP’s prior approval.

On June 26 this year, MME Ordinance No. 265/2019 was published, to govern the essential rules of the Co-Participation Agreement applicable to the development and production of hydrocarbons in the “Co-Participated Area”.

In due course, we will disclose our analysis of the key terms of the Co-Participation Agreement.