november, 2009 brazil’s new oil & gas regulatory framework the pre-salt’s four bills of law...

November, 2009

Brazil’s new Oil & Gas Regulatory Framework

The Pre-salt’s four Bills of Law

Luiz Antonio Maia Espínola de [email protected]

Informações Confidenciais de Propriedade de TozziniFreire Advogados

Summary

I. The world’s major legal-regulatory regimes

II. Historical background of Brazilian regulatory

framework

III. Overview of the Bills of Law proposed by

President Lula

IV. Legal and economic constraints in the proposed

regulatory framework

V. Trends

I. The world’s major legal-regulatory regimes


Main Characteristics of each regime

OC holds title over the hydrocarbons State’s Remuneration by means of Tax + Royalties Full risk of the OC Government as regulator

Concession

State is the original title holder over the production Cost oil and profit oil Full risk of the OC, with the recovery of the cost oil in the discovery Government as regulator / NOC executes the PSA

ProductionSharing

State holds title over the production NOC contracts and remunerates the OC for the operation State’s risk NOC executes the Services Agreement

ServicesAgreements

State and OC both hold title over the production State’s Remuneration by means of Tax + Royalties Risk shared between the Government and the OC Government as regulator / NOC with active participation

in the Joint Venture

Joint Venture


Geographic Distribution of the different legal-regulatory regimes

Brazil

Mexico

USA

Norway

Angola

Nigeria

Russian Federation

Saudi Arabia Indonesia

Venezuela

Concession

Joint VentureMostly Concession / PSA

ServicesPSA

PSA/ServicesMultiple

Adopted Regimes:

Concession/PSA

Abu Dhabi (United

Arab Emirates)

Source: Wood Mackenzie, Deutsche Bank, Bain & Company, TozziniFreire Advogados

II. Historical background of Brazilian regulatory framework


Historical Background – From State Monopoly to the Pre-Salt Discoveries

Opening of the market to private OCs and establishment of the Concession regime 72 OCs operating in Brazil Increase in the number of oil industry service providers (2000 – 210 / 2008 – 1761) National oil production increased by more than 75% Growth of 300% in the oil industry Participation in GDP increased from 2.8% in 1997 to 10% in 2008

1997 – 2009Incredible progress of the

Brazilian E&P Industry

1995 – Constitutional Amendment1997 – Petroleum Law

Flexibilization of the Monopoly

Until 1995 Petrobras’ Full Monopoly Petrobras’ platform P-51

Source: Petrobras


The New Regulatory Framework Background

2006 - Discovery of potentially massive reserves in the pre-salt area

2008 - Government creates a task force to issue recommendations for a new regulatory framework

2009 - The President submits the Bills of Law to Congress

2007 - Suspension of the 8th Bid round 2008 - 41 pre-salt sites removed from the 9th Bid round

Task force recommends the adoption of PSAs, and drafts the four Bills of Law


The Pre-salt area

Oil

Ocean2 km

Post-salt2 km

Salt3 km

Pre-salt2 km

Espírito Santo Basin

Campos Basin

Santos Basin

Estimated reservesTupi Field: 5 to 8 billion boeIara Field: 3 to 4 billion boe

Pre-salt area

Brazil

Source: Petrobras

Source: Folha de São Paulo


Brazilian pre-salt numbers

Pre-salt area: around 149.000 km2

Area under concession: (28%) of which:with Petrobras partic. – 35.739 km2 (24%) without Petrobras partic. – 6.003 km2 (4%)Area not auctioned: 107.228 km2 (72%)

Source: Petrobras

III. Overview of the Bills of Law proposed by President Lula


The Pre-Salt Bills of Law

Bill Number Scope

5941/09 Capitalization of Petrobras

5939/09 Creation of a State-Owned Company – Petro-Sal

5940/09 Creates the Social Fund

5938/09 Adoption of the Production Sharing Agreements


New Brazilian Regulatory Framework

Pre-salt and other

Strategic areas

Remaining areas

Current Concession regimeremains applicable

DirectAssignment

ProductionSharing

Agreement

Up to5 billion boe

No changes shall be made in the areas already under Concession,even those included in the Pre-salt area

100%Direct

Negotiation

Bidding Process

Min.30%

Max70%Bid winners

Source: Petrobras


Federal Union subscribes shares equivalent to the Economical value of the oil reserves

(first 5 billion BOE to be exploited)

Bill of Law 5941/09 – Capitalization of Petrobras

FEDERALUNION

Assignment of non auctioned pre-salt areas

Payment (Federal Bonds)

Petrobras CorporateCapital Increase

PETROBRAS

Payment in cash by interested minority

stockholders

DIRECT ASSIGNMENT


Bill of Law 5939/09 – Creation of PETRO-SAL

Public Company – Integrally owned by the Federal Union

Does not perform E&P activities Does not take part in marketing activities Does not make investments Does not assume any risks

PETRO-SAL

Manages the PSAs and hydrocarbons commercialization contracts in relation to the Government’s share of the Profit Oil


Bill of Law 5938/09 – PSA – The division of cost oil and profit oil in Brazil

Production Sharing Agreement in Brazil

Cost Oil Royalties and, when in land, third parties’ participation Contracted

Oil Companies

Federal Union

Special Participation (based on the production volume)

Profit oil division

Profit Oil


Bill of Law 5938/09 – PSA – Brazilian key players

PETROBRAS

Production Sharing Main Players

PETRO-SALANP OIL COMPANIES

Operator in all PSA Blocks

Minimum participation of30% in all PSA Blocks

May be directly contracted by the Government

Participates in all PSA Blocks by means of

Consortium

Holds 50% of the seats inthe Operation Committees

Elects the OPCOM’spresident, who has

casting vote and veto powers

Acts as the Government’s Regulating Body

Analyses and approvesExploration and

Development Plans

Drafts the PSAs andBid Tender Protocols

Participation limited to 70%

Participate solelyas investors

Innocuous Participation inOPCOM’s decisions


Bill of Law 5938/09 – PSA – Unitization Issues

Unitization Lacks Due Regulation

WHICH RULES SHALL BE APPLICABLE FOR THE UNITIZED FIELD?

Areas under PSA rulesX

Areas under Concession rules

Areas under Concession rulesX

Areas in the pre-salt area notcurrently under Concession nor PSA


Bill of Law 5938/09 – PSA – 11 different Unitization Possibilities

Concession vs Concession

Parties: Concessionaire A and Concessionaire B

PSA vs PSA

Parties: PSA Contractor A and PSA Contractor B

Concession vs PSA

Parties: Concessionaire and PSA Contractor

Concession vs Non-auctioned areas under

Concession

Parties: Concessionaire and Federal Union

(represented by ANP)

PSA vs Non-auctioned areas under PSA

Parties: PSA Contractor and Federal Union

(represented by PETRO-SAL)

Concession vs Areas directly assigned to

Petrobras

Parties: Concessionaire and Petrobras

PSA vs Areas directly assigned to Petrobras

Parties: PSA Contractor and Petrobras

Concession vs Non-auctioned areas under PSA

Parties: Concessionaire and Federal Union

(probably represented by PETRO-SAL)

PSA vs Non-auctioned areas under Concession

Parties: PSA Contractor and Federal Union

(represented by PETRO-SAL)

Non-auctioned areas under PSA vs Areas

directly assigned to Petrobras

Parties: Federal Union (represented by PETRO-SAL)

and Petrobras

Non-auctioned areas under Concession vs

Areas directly assigned to Petrobras

Parties: Federal Union (represented by PETRO-SAL)

and Petrobras

IV. Legal and economic constraints in the proposed regulatory framework


Bill of Law 5938/09 – PSA – Constitutional Issues

Mandatory Participation of Petrobras

Direct Contracting of Petrobras

PETROBRAS as Sole Operator

Free initiative, free competition, isonomy, economicity, impersonality, duty to bid and e the free practice of economical activity

General Natural Resources constitutional provision grants title over the production to the Producers

Federal Union Holds Title Over The Production

Unitization of Blocks Under Concession

Legal Security, Vested Rights


Main conflicts in the proposed Regulatory Framework

Cost Oil

In Brazil, rendering of services maybe subject to taxation (e.g. ISS)

Which operations shall be accounted? Cost-oil calculation needs detailed ruling.

PSA tax implications in Brazil

Corporate Governance - PETRO-SAL does notassume risks or make investments

PETRO-SAL’s powers in the Operational Committee

Unitization conflicts Unbalanced penalties

Petrobras’ capitalization conflictsAssignment waiving bidding procedure;Federal Union, as majority shareholder,

should decline to vote the appraisal report

Bills of Law delegate some key aspects ofthe regulation to future Acts of the Executive


Petrobras as PSA’s Sole Operator

Integrated program for the acquisition of goods

and services

Standardization of the technical requirements

for equipments and materials

Only one Company for the acquisition of goods

and services

No competition impairs development and

expertise exchange between IOCs

PROS

CONS

Fields with smaller productivity may be

left aside

Constraints to the development of

technology by the service providers

Lack of attractiveness of the Brazilian PSA regime

for IOCs and new Brazilian OCs


Brazilian PSA Operational CommitteePETRO-SAL

PETRO-SAL(representing the

Federal Union)and Bid Winners

50% of the seats 50% of the seats

Indicates theOpCom Chairman

OPERATIONAL COMMITTEEChairman Powers

Casting vote

Veto power

the deciding vote cast by the Chairman to resolve a tie

the power to cancel or deny a particular voting procedure

V. Trends


Trends

Regardless of the regime adopted, the acquisition of goods and services should grow considerably;

• Huge Volume of investments

• Local Content will be crucial

Although the new regulatory framework does indirectly restrict foreign investments, there are still good opportunities for services providers;

The result of 2010’s elections may influence the outcome of the proposed regulatory framework

• Oil Industry representatives are attempting to improve the Bills of Law by furnishing political parties with information regarding the Oil Industry

Trends

Even if approved in the Congress, the Bills of Law shall still be subject to a constitutional analysis by the Supreme Court

november, 2009 brazil’s new oil & gas regulatory framework the pre-salt’s four bills of law...

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