BRAZIL SPONSORED ARTICLE
Recent developments and financing outlook in the Brazilian upstream oil and gas sector
Rafael Baleroni and Maurício Teixeira dos Santos of Souza Cescon Barrieu & Flesch, Sao Paolo explain why reserve based lending and other project finance structures are on the increase
Background The upstream oil and gas industry in Brazil was opened to private companies in 1997, when Law 9478, (the ‘Oil Act’) was published. Until then, the Federal Government exercised its monopoly in the upstream sector by means of Petróleo Brasileiro – Petrobras, the Brazilian national oil company.
The Oil Act created the Brazilian Oil Agency (ANP) as the regulatory body
responsible for the supervision and regulation of oil and gas activities and es- tablished that the exploration and production activities would be performed under concession agreements, granted after public biddings open for Petrobras and private companies alike. The Brazilian concession agreement is a tax and royalty agreement, where the concessionaire takes the exploratory risk, is respon- sible for the exploration and production activities and receives full ownership of the oil produced subject to the financial payment of taxes and royalties (gov- ernment take), being able to use the oil as it seems best – including exporting.
Following publication of the Oil Act, in 1998, Petrobras’ rights over existing
areas were recognised by means of the so-called “Round 0” of concessions. In 1999, ANP held Round 1, which corresponded to the actual opening of the market, with 11 oil companies obtaining concession agreements. From 1999 to 2008, ANP promoted 10 yearly concession rounds.
The concession model proved to be very successful. According to the 2012
BP Statistical Review of World Energy, since 2001, Brazilian oil production in- creased from approximately 1.3 million barrels a day to 2.2 million barrels a day in 2011, while the gas production increased from 7.7 billion m³ to 16.7 billion m³, which means that the national production has practically doubled in one decade.
Early capital sources for Petrobras As a result of the opening of the market, Petrobras needed resources to further explore and develop its fields – including in order to meet minimum investment obligations assumed in Round 0 – and to participate in the following Rounds, now competing with other oil companies. It is important to highlight that, de- spite Petrobras being controlled by the Brazilian Government, except as expressly provided by law, it is subject to the same legal regime applicable to private com- panies.
To obtain the abovementioned resources, Petrobras (i) sought partners for
the exploration and development of its concessions, by means of farm-out agree- ments and (ii) used project financing structures to raise capital, among which we highlight the complex structure of the Marlim Field, currently the third largest oil producing field in Brazil, having produced 187,000 barrels of oil equivalent per day (boe/d) in February 2013, according to ANP’s measurement data of February 2013.
36 ENERGY & INFRASTRUCTURE | LATIN AMERICA 2013
The pre-salt and the resulting legal changes In June 2006, Petrobras discovered major oil and gas reservoirs located under a thick salt layer at the Santos Basin. These areas were then called the “pre-salt”. It is estimated that the pre-salt areas run for about 800km along the Brazilian Southeast coast, with an area of approximately 149,000km², of which 41,772km² are already under concession agreements. The exploration of the
Farm-out transactions are equivalent to a sale of participation interest in areas
that are already under concession agreements. One of the advantages of farm- out transactions is that they are usually fast and confidential, having as an im- mediate consequence the reduction of the concessionaire’s commitments with exploration and development activities. For this reason, farm-out transactions have been – and still are – a highly adopted fund raising option for oil compa- nies.
In addition to farm-out transactions, Petrobras also sought funds by means
of project finance transactions. Project finance transactions have become in- creasingly relevant as a financing tool in Brazil after the macroeconomic reforms in the mid-1990s, which resulted in a victory over hyperinflation and the adop- tion of stable regulatory regimes – such as oil and gas – and foreign exchange policies.
Project finance of its investments became an attractive tool for Petrobras at
the time for various reasons. At the time, Petrobras was facing low oil prices ($9.20 brent barrel, on December 11 1998), which resulted in reduced cash to develop its activities and had its ability to raise capital using debt instruments limited by restrictions to public indebtedness resulting from agreements with the International Monetary Fund. Additionally, Petrobras could not count on any funds from the Federal Government’s budget. These factors required an off- balance, off-budget structure, so that neither Petrobras’ leverage ratio nor the Brazilian Government’s public debt limit were affected. Furthermore, due to strategic considerations, Petrobras was unwilling to farm-out any participating interest in the Marlim field or to allow lenders to have any claim over the field or rights connected with it.
Such challenges were the drivers behind the complex financial engineering
and avant-garde contractual agreements in the Marlim project, the first project finance in the Brazilian oil industry. Its key aspect was the creation of a joint venture, with no interest in the concession, between Petrobras and a SPC owned by equity investors in the project. The SPC was responsible for raising debt to pay for assets to be used in the Marlim field. As consideration for such, the SPC received up to 30% of the field’s revenues, calculated in accordance with certain criteria. The Marlim project resulted in investments of approximately $2.4 bil- lion in equity, quasi-equity and debt instruments, and was extremely successful and beneficial for all parties involved.
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