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Brazil mulls looser upstream contract designation

4 Oct 2017, 4.47 pm GMT

Brazil mulls looser upstream contract designation

Rio de Janeiro, 4 October (Argus) — Brazil's oil industry is hoping the government will scrap a geographic designation for upstream contract terms in favor of more flexible rules.

Sub-salt licenses in a specific offshore area are currently governed by production-sharing terms, while all other licenses are subject to a traditional concession model.

Giant sub-salt discoveries since 2006 prompted the federal government to pass legislation establishing coordinates for an offshore area between Rio de Janeiro and Sao Paulo states known as the sub-salt polygon. The region mainly covers areas in the Santos basin where other major oil discoveries have been made.

The production-sharing model, which has only been applied once so far, to the Libra sub-salt deposit in 2013, determines winning bids based on how much profit oil a company or consortium agrees to share with the federal government. State-owned oil marketing company PPSA is responsible for managing the government's share of production from sub-salt assets.

Concession model contracts, which are still used for onshore and post-salt assets, are awarded based on the highest signing bonus offered. The government's take from those fields is from royalties and special participation fees based on the size of the field.

"Within the polygon there is more than just sub-salt, inside there is sub-salt and post-salt. But if you drill in the polygon and find heavy oil in a smaller accumulation, that is still considered sub-salt and you are subject to the production-sharing contract," Antônio Guimarães, executive secretary of local industry chamber IBP, said on the sidelines of an event in Rio this week. "The sub-salt laws were designed for a high volume of production, discoveries like 10bn bl Libra. Can you imagine the work of PPSA to monitor a block with less than 150mn bl?"

Guimarães said oil regulator ANP should be tasked with deciding which assets have sub-salt potential and should be governed by the production-sharing contract.

During Brazil's 14th concession model bid round last week, ExxonMobil and Petrobras offered record-setting signing bonuses for Campos basin blocks believed to be connected to a sub-salt trend.

The combination revived doubts over the wisdom of the PSC, which critics have long complained is a drag on sub-salt development. But the oil industry acknowledges that changing the rules could be an uphill battle.

"Is it something companies would want? Definitely. Would it draw a lot of opposition? Definitely. We've heard this discussed informally, but no real movement in Brasilia so far," an oil executive in Rio told Argus. "A change like this would definitely open up a lot of questions, problems. What is the impact on existing contracts? Who decides what contracts for which blocks? Still very early."

Changing the contractual designations would require a change to the wording of a 2010 sub-salt law, a difficult prospect in Brazil's factious congress. Such a modification would almost certainly to draw the ire of groups opposed to Brazil's opening of the country's sub-salt patch to companies other than Petrobras.

In 2016, Brazilian president Michel Temer sanctioned a law removing a rule that obligated Petrobras to hold a minimum 30pc operating stake in all sub-salt assets. The change was part of a major regulatory overhaul that included an easing of local content commitments and simpler contract terms aimed at reviving the oil sector.

Those changes appear to have contributed to a greater turnout in the 14th bid round which set a total signing bonus record of R3.8bn ($1.21bn). Sixteen mainly foreign companies have signed up for two sub-salt rounds on 27 October.

Guimarães says lifting the sub-salt polygon would help accelerate Brazil's offshore development and would be much easier than privatizing Petrobras, which some government officials have said is a future possibility.

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