Petrobras CEO questions PSC contract model

The management of Brazilian state-controlled Petrobras is questioning the effectiveness of the production-sharing contract model that governs pre-salt acreage, raising the possibility of a return to industry-preferred concession terms.

The PSC model in Brazil is "not efficient", Petrobras chief executive Roberto Castello Branco said today.

Speaking at an industry event in Rio de Janeiro, he called for ending the PSC terms or removing the geographic pre-salt polygon designating the contract model. Blocks outside the polygon are already governed by the industry-preferred concession model, even if they have pre-salt potential.

Industry leaders and some politicians have discussed similar proposals since the production-sharing model was established in the country's 2010 petroleum law.

Brazil's president Jair Bolsonaro has spoken in favor of ending the PSC model, but wider political support is limited because it would imply diverting more revenue from Brasilia to state governments.

Industry leaders have long argued the concession model, which relies on royalties for the government's take, offers more straightforward terms. But brisk turnouts at four pre-salt licensing rounds since 2016 suggest that any complexity in the PSC, under which an agreed percentage of profit oil is shared with state-owned marketing firm PPSA, has not deterred upstream investment.

Since 2016, the government has carried out two concession model rounds including assets with pre-salt potential located outside the polygon. Those assets attracted firms such as Petrobras, Shell, BP and ExxonMobil, but they have come under scrutiny from government agencies arguing that the assets should be offered under the production-sharing model.

The next test of investor appetite comes on 10 October, when Brazil will conduct a 16th concession model round including assets adjacent to the polygon in the Campos and Santos basins. This will be followed by two production-sharing rounds on 6-7 November, including a long-awaited tender for some 15bn bl of excess reserves in the Santos basin pre-salt cluster known as the Transfer of Rights (TOR).

The oil industry had pushed for the coveted TOR assets to be offered under the concession or similar TOR model—both considered more attractive than the PSC. But the round is still scheduled to go forward in November with the PSC model, although informal talk of a delay persists.

When asked about the possibility of a change to the contract terms this year, a senior government official was noncommittal, telling Argus the focus is on ensuring the success of this year's rounds.

In today's remarks, Castello Branco also said the country's local content rules, which obligate firms to use a percentage of local goods and services, need another overhaul.

Brazil already slashed obligations in 2017, even allowing for retroactive commitment reductions, but further easing remains a priority for producers looking to cut costs and accelerate production, particularly in a lower oil price environment.

Past local content changes appear to be having a positive impact on Petrobras' drive to lower pre-salt breakeven prices. Castello Branco says the company believes pre-salt lifting costs have the potential to fall below the $6/bl average achieved in the second quarter.

The company has invested heavily in new technology for high-yield wells in its pursuit of a $35/bl pre-salt breakeven price.