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pre-salt areas is a challenge for oil companies because these reservoirs are located at about 300km from the coast, in depths from 5,000 to 7,000 meters, under water depths from 1,500 to 3,000 meters.
The pre-salt areas are of great interest to oil companies and the Brazilian gov-
ernment due to the expectation of large volumes of high quality oil, despite the operational and technical challenges associated with it. As a result, the Brazilian government decided to revisit the legal framework applicable to oil operations in the country and, in 2008, suspended further concession rounds.
After legislative and public debates, in 2010, the Brazilian Congress approved
a new legal framework for operations in the pre-salt. Three laws were passed for such: (i) Law 12,276, regarding the direct grant of areas to Petrobras, by means of an “onerous assignment” of barrels of future oil output as equity contribution by the Federal government; (ii) Law 12,304, authorising the establishment of a new state-owned company called Empresa Brasileira de Administração de Petróleo e Gás Natural – Pré-Sal Petróleo, or “PPSA”; and (iii) Law 12,351, or the “Pre-Salt Law”, creating the production-sharing model to be used in areas deemed strategic by the Brazilian Government (including the pre-salt fields).
However, the expectations of large volumes to be produced resulted in dis-
cussions among the Brazilian states on the re-distribution of royalties arising from the production of oil and gas. These discussions caused the Federal Gov- ernment to halt the resumption of new concession rounds. After much debate, the non-producing states passed Law 12,734 in November 2012, which re-dis- tributes the royalties in a way that is detrimental to the original position of the producing states. Various provisions were vetoed by the Brazilian President but this veto was overruled by the Congress in March 2013 and, currently, the oil producing states are arguing before the Brazilian Supreme Court that the changes are against the Brazilian Constitution and thus invalid, because they affect the distribution of royalties regarding fields already producing. Regardless of the on- going discussion on royalties, the Federal Government decided to resume con- cession rounds in early 2013 and, currently, the 11th Bidding Round for concession agreements is occurring. The Government also announced that the first round for pre-salt areas and that a special concession round for areas with possible accumulations of unconventional resources (such as shale gas) will also occur in 2013.
The adoption of a production-sharing regime for the pre-salt areas was a
geopolitical decision by the Brazilian Government. The main difference between the new production sharing agreement (PSA) and the tax and royalty regime set forth in the concession agreement adopted in 1997 is over the property of the oil and gas produced. While in the concession agreements the oil company owns the totality of the production, in the PSA, as the name suggests, part of the production (the profit oil) is shared between the company and the govern- ment, after a part of it has been used to cover costs incurred by the oil company (cost oil). In both cases, the oil company takes the exploratory risks.
PSAs in Brazil will be executed between the oil company and the state-owned
company PPSA – which has not yet been incorporated. The participation in the blocks will be offered to the companies by means of bidding rounds, like in the concession regime. However, the Pre-Salt Law established that Petrobras will be sole operator of the pre-salt blocks, with a minimum participation of 30% in every PSA executed (it may be higher if Petrobras participates in and wins bidding procedures). Therefore, the biddings will only offer 70% of the partic- ipation in each block. PPSA, Petrobras and any private oil companies partici- pating in the blocks will enter into joint venture agreements to govern the operations under the PSA. This will include the creation of an operational com- mittee to manage the operations, in which PPSA will appoint half of the mem- bers, including the chairperson, who will have the tie-breaking vote.
The other legal change related with pre-salt areas was the creation of a sui
generis regime in favor of Petrobras, by means of a direct grant of oil rights – the so-called “onerous assignment”. By means of this regime, Petrobras received the right to explore and produce oil and gas in specific pre-salt areas located in the Santos Basin for 40 years, up to the limit of 5 billion boe, in consideration for the payment of R$74.8 billion ($37.3 billion). The direct grant was created as
a means to capitalise Petrobras so that it can obtain funds to develop its pre-salt fields. Given that Petrobras had a high debt to equity ratio and did not have enough cash generation to finance its activities by itself, an equity contribution was the alternative sought. However, the Federal Government was not willing to make a huge equity contribution to Petrobras in cash, given budgetary con- straints. For these reasons, the granting of oil rights was implemented as part of a primary public offering of shares to raise R$120.2 billion (originally R$115.1 billion). As a result of the offering, the Federal Government contributed R$12.3 billion in cash and R$67.8 billion in government bonds, while other sharehold- ers contributed R$35 billion in cash. Immediately following this, Petrobras used the government bonds plus R$7 billion in cash to pay for the oil rights. Thus, as a result of the offering, Petrobras obtained R$45.4 billion in net cash and the rights to explore and produce up to 5 billion boe in certain pre-salt areas.
It is noteworthy that, under the direct grant contract, Petrobras commits to
implement a minimum exploratory program that will require substantial capital expenditures. The public offering is intended to partially fund these expenditures while, at the same time, improving the debt to equity ratio and creating room for incurring into additional indebtedness to finance these investments.
Local content requirements and impacts in the offshore industry One of the main features of the Brazilian oil and gas sector is the local content requirement. Local content corresponds to obligations of the oil companies both to give preference to Brazilian suppliers and to reach a minimum percentage of its total exploration and development expenditures that is purchased from Brazil- ian suppliers. The purpose of this policy is to increase the participation of the Brazilian industry of goods and services, on a competitive basis, in oil projects. As the policy does not intend to benefit inefficient local companies at the expense of efficient foreign companies (as this would reduce the attractiveness of oil op- erations in Brazil), the concession agreements require that Brazilian suppliers and service providers are given preference only when their price, delivery time- frame and quality are equivalent to foreign companies invited to submit pro- posals.
The applicable minimum percentages are defined in connection with the
original bid for the area. A local content commitment is part of the bid submit- ted for the block and corresponds to a portion (in the 11th Round, 20%) of the total points a bidding company can achieve. ANP establishes minimum and maximum percentages that oil companies must take into account when prepar- ing their bids, but the final decision is made by the bidding company. Non- compliance with the local content commitment may result in the application of fines by ANP.
The local content policy exists since Round 0. However, in 2005 (Round
7), ANP introduced a relevant change regarding the requirements to evidence compliance with the local content commitment. In concessions prior to 2005,
ENERGY & INFRASTRUCTURE | LATIN AMERICA 2013 37
Since 2001, national production (oil and gas) has practically doubled
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