The Brazilian Surplus Transfer of Rights – a huge prize and a big challenge

The great prize – Surplus Transfer of Rights in the presalt Santos basin

One of the largest discoveries in presalt Santos basin will be auctioned in November 6, 2019, named as Surplus Transfer of Rights. IHS Markit estimates that there are more than seven billion boe in the four areas offered (Atapu, Buzios, Itapu and Sepia), besides the five billion boe of recoverable reserves granted to Petrobras. This bid round could only take place after years of discussions as changes in the law, negotiations with Petrobras and definition of the regime needed to be resolved.

The background

An unusual contract was firmed in 2010 to Petrobras, in which the company would have the rights to produce among seven areas in the presalt Santos basin the total reserves of five billion boe in exchange for a US$42 million payment to the government. It was an oil-for-shares agreement between the government and the company to ensure Petrobras’s role in development of these areas and to ensure that the state’s ownership stake would not be diluted when the NOC raised the necessary development capital.

Under this contract, it was established that a revision of the terms would be reviewed when Petrobras declared commercially of the fields and that Petrobras will be the only operator with 100% stakes with no rights to farm out. For years, a dispute over the terms of that transaction have left both sides debating additional compensation, as these areas held far more than the 5 billion boe in recoverable reserves, all areas were declared commerciality before the slump of the oil price, and before Petrobras financial problems.

In 2019, the government defined that the surplus reserves will go to auction under production sharing agreement and the payment of US$ 9 billion to Petrobras, as creditor of 2010 terms, will be paid from the signature bonus of the bid round. It was also reviewed the maximum volume of recoverable resources under the contract for each area, the length of the contract, and the minimum local content requirements.

The offering fields for the surplus bid round are Buzios, Sepia, Atapu and Itapu, all of which are either under development or producing phase.

The Brazilian government expects to raise in signature bonus a total of US$26.3 billion (106.5 billion Brazilian reais), which can be paid integral or partially (in two installments) .The government also determined the minimum profit oil of 23.24% for Buzios, 27.88% for Sepia, 26.23% for Atapu and 18.15% for Itapu, and Petrobras has secured the right to take operating stakes in Buzios and Itapu fields with a minimum 30% equity.

The problem: how would be the agreement of two contracts under different specifications at the same area? How Petrobras is going to receive the reimbursement for the expenses already incurred in the areas?

The solution for this problem was published in the Portaria MME 265/2019. The winning bidder will sign a co-participation agreement, unitization of some fields and a compensation to Petrobras.

In this agreement, the investments and production will be divided between the parties with the proportion of the recoverable volume of oil under each area, and will be negotiated between the winning bidder, PPSA and Petrobras after the bid and subject to ANP’s approval until September 2021.

The winning bidder will also have to sign the unitization agreement for Búzios, Atapu and Sépia fields as they have a reservoir that goes to the adjacent areas either under concession agreement or non-contracted areas. The individualization of production (or unitization) impacts on some activities such as the conclusion of production individualization agreement (so far only Atapu and Sépia were approved by the agency), contractual obligations related to local content, expenses eventually incurred in exploration and production prior to the conclusion of the production sharing contract, among others.

The cost problem

The winning bidder will have to pay a compensation amount to Petrobras for the expenses already made in the area at the date of the co-participation agreement. Basically, the compensation value is the different of the net present value under the 2010 terms (transfer of rights regime) and net present value of the whole field considering the two different contracts (production sharing agreement and transfer of rights regime). This model implies that the Petrobras will receive a compensation as the new consortium entrance will have rights to produce oil and Petrobras’ 5 billion boe production will be delayed.

Compensation value = NPV1 - NPV2

where, NPV1 = prospective net present value of the cash flow related to the production of the volume awarded under the Transfer of Rights (concession) regime in each area, without concomitant production of the surplus volumes under the Production Sharing regime, in US million dollars, calculated based on the partial development plan of the reservoir of each area;

NPV2 = prospective net present value of the cash flow related to the production of the volume awarded under the Transfer of Rights regime in each area, considering the concomitant production of surplus volumes under the Production Sharing regime and the respective participating interest of the Transfer of Rights in the Agreement, in US million dollars, calculated based on the global development plan of the reservoir of each area.

The government has established some premises in Portaria MME 213/2019 for the net present value calculation for Búzios, Sepia, Atapu and Itapu fields in terms of oil prices and natural gas, the discount rate of 8.99%, the depreciation method, and the capex and opex for each field.

Under a negotiation, the winning bidder could also have a percentage of the production in the period between the production sharing agreement date and the effective date of the co-participation agreement, which is 18 months later than the end of March 2020. The amount paid by the winning bidder signing the production sharing agreement as compensation to Petrobras expenses will be recognized as cost oil on the date of transfer of ownership of the asset.

As most of the expenses were made at the upcycle of the upstream market, the values presented by the government for the compensation is higher but above IHS Markit estimations, reaching in some cases 30% higher. Therefore, operators will have to understand the main terms of this bid round to have their bets according to their reality, as a large amount of money will need to be place upfront.

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Mariana Anjos is a senior research associate on our cost & technology team.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.