Brazil oil sector pushes for upstream contract change

Brazil must abandon production-sharing terms for pre-salt acreage in favor of a concession model to sustain offshore investment in the post-pandemic landscape, oil industry executives said in a webinar late yesterday.

Brazil's oil producers have been pushing for an end to the PSC for years, but executives from state-controlled Petrobras, Shell, Equinor, BP, Total and Chevron, among others, say the move to a unified concession model is now necessary to successfully compete for winnowed investments.

Adopted in 2010, Brazil's PSC awards acreage within the pre-salt polygon based on the highest percentage of profit oil—total production less costs—shared with the federal government, which is represented in consortiums by state-owned marketing firm PPSA. PPSA audits costs and has the power to veto development plans, but holds no equity.

Petrobras chief executive Roberto Castello Branco says Brazil's prolific geology is no longer enough to attract investors.

"The sharing regime is very disadvantageous from an economic point of view," Castello Branco said. "It gives companies the wrong stimulus, instead of maximizing efficiency the aim is to inflate costs to reduce taxation on profit."

PPSA's role of effectively determining return on capital is a disincentive for investors, Castello Branco said on the webinar, which was sponsored by Brazilian university FGV.

Andre Araujo, the president of Shell Brasil that is the country's second largest producer behind Petrobras, said the government has to make adjustments to attract companies back to upstream auctions, but changes are also needed to improve conditions in the exploration phase of blocks awarded during recent licensing rounds. "Regarding future auctions, I have already openly talked in favor of a unique concession model regime for future contracts. But it is important to remember that a change in regimes doesn't necessarily mean a return of investments. Concession contracts also have to be attractive," Araujo said.

Regulatory complexity and costs alienated Shell and its peers from participating in two pre-salt auctions in November 2019, ending a successful two-year run that reanimated the sector after the 2014 oil price collapse.

Brazil has suspended a concession model round and pre-salt offer planned for this year, but it is still planning a June 2021 auction of two areas not awarded in last year's Transfer of Rights (TOR) auction.

The government has prioritized a bill that would allow some areas in the pre-salt polygon to be offered under the concession model contract. But progress on the proposal has stalled as the country deals with the pandemic and several scandals that have shaken the conservative presidency of Jair Bolsonaro, who has given broad authority to his pro-market economy minister Paulo Guedes.

Mines and energy minister Bento Albuquerque recently spoke in favor of a simplified contract model, but the factious congress has shown little interest in accelerating the change, partly because of implications for political support and local tax revenue. PSC revenue was originally meant to fund Brazilian education.

By Nathan Walters