Petrobras closer to shedding sub-salt yoke

OREANDA-NEWS. October 07, 2016. Brazil's lower congressional house approved a bill that would open control of coveted sub-salt reserves to companies other than state-controlled Petrobras.

After a tumultuous late night debate, lawmakers voted 292 to 101 to approve the text of a bill that scraps a provision of a 2010 law obligating Petrobras to hold a minimum 30pc operating stake in production-sharing agreements, the contract model used for sub-salt acreage.

Known as the sole operator provision, the controversial rule has long been criticized as a vestige of resource nationalism that slows down oil development.

Supporters of the bill say it will help pull Brazil out of a deep recession and ease record unemployment by reviving the oil industry supply chain. The political opposition and oil workers unions want to keep Petrobras in the driver's seat.

Petrobras executives have said the company does not have the financial footing to lead all new sub-salt projects. The company plans to shed around \\$35bn in assets in 2015-18 to generate revenue necessary to tame its almost \\$125bn debt load and keep up with heavy investments needed to develop its existing sub-salt portfolio.

Industry leaders say waiting until the firm has the capacity to participate in new bid rounds would further disrupt the local industry that is still reeling from the precipitous drop in oil prices and a massive corruption scandal involving many of Petrobras' local suppliers.

The bill approved last night was passed by the Senate in February 2016.

The lower house approved the Senate text but will convene next week to consider proposed amendments, such as a provision that would give Petrobras the right of first refusal for some projects.

After the vote on amendments, the bill will be sent to President Michel Temer for approval. Temer, who took over for ousted former president Dilma Rousseff in August, is expected to sanction the bill as part of a broader effort to attract foreign investment to Brazil.

Foreign companies such as Shell and Norway's Statoil already have a strong offshore presence in Brazil, and are the top candidates to operate sub-salt acreage if the bill becomes law. Company executives have said a rule change would improve Brazil's investment climate.

Both companies have already invested heavily in Brazil's sub-salt, Shell with the \\$53bn acquisition of major sub-salt actor BG and Statoil with the recent \\$2.5bn acquisition of the BM-S-8 exploration block where the Carcara discovery is located. But future investments hinge on a change to the current rules.

"The end of the obligation of Petrobras to be sole operator will unlock investment, create jobs and help make Brazil more competitive in the international arena. It's a big change that will benefit not only the oil industry, but the country as a whole," said Jorge Camargo, president of oil industry chamber IBP.

The IBP says a change in the law attract up to \\$100bn in investments when Brazil launches a new sub-salt tender next year. That round, the second since the adoption of the production-sharing model, is expected to cover four areas, Statoil-operated Carcara, Shell-operated Gato do Mato, and the Petrobras-operated Tartaruga Mestica and Sapinhoa fields, with sub-salt reservoirs connected to existing concessions.

Absent a change to the sole operator rule, Petrobras would have to act as the operator of all those projects once they are unitized with the existing concessions.

Only one sub-salt tender has been governed by the production-sharing model and the sole operator provision, the 2013 auction of 8bn-12bn bl Libra. Petrobras took a 40pc stake in that project. Total and Shell each took a 20pc interest and Chinese state-owned firms CNPC and CNOOC each hold a 10pc stake.

The consortium was the only bidder for the area and agreed to pay a R15bn signing bonus for the 35-year lease. The lackluster response to the auction, at a time when crude was above \\$100/bl, raised questions about the sole operator rules and production-sharing model.

A change to the sole operator rules could also allow Petrobras to sell stakes in other sub-salt projects governed by production-sharing contracts, such as the Santos basin region known as the Transfer of Rights area.