The discovery of pre-salt reservoirs in Brazil dramatically increased the country's oil reserves. There was hope that oil would fund education, health, and infrastructure, but these hopes proved to be unfounded.
The government held no bid rounds for five years (2008 to 2013), while it discussed a new regulatory regime (production sharing). Activities were concentrated in Petrobras, which later became the sole operator in the pre-salt area as a result of the Production Sharing Law. Local content regulation increased in complexity. The renewal of the REPETRO special tax regime (then due to end in 2020) was not in sight. Investment in the sector dropped – the backlog of exploration wells ended in 2012. From 2012 to 2017, there was a massive reduction in exploratory wells (from 232 to 26, according to the Brazilian oil agency, ANP). The drop in oil prices between 2014 and 2016 contributed greatly to the crisis in the sector, and especially to Petrobras' crisis (also affected by corruption scandals).
Since August 2016, the federal government has been adopting measures to change the game and foster investments. Petrobras is no longer the sole operator in the pre-salt area but now has a preemptive right to be the operator with a minimum interest of 30%. Local content policies were changed to reduce their excessive complexity, lowering the required indices and removing local content as a bid criterion. Recently, the regulator also adopted a policy to waiver unmet local content requirements in previous contracts. The REPETRO special tax regime was extended until 2040. In exchange for investments, ANP now allows the extension of concessions due to expire in 2025 and the reduction of royalties in mature fields. Six bid rounds have occurred since 2016 (four being in the pre-salt area) and a bid calendar is now in place for future rounds, with six bids due to occur before 2021 (mature fields, onshore, offshore and pre-salt). Finally, Petrobras has put in place a divestment programme, and focused its upstream activities on the pre-salt and other highly productive areas.
Such measures have already had a positive impact. The various bid rounds have raised more than BRL27 billion ($7.3 billion) in signing bonuses and winners have committed more than $80 billion in investment over the coming years (according to ANP). More importantly, there has been a diverse mix of winners, and there are now various operators in the pre-salt area.
Further measures are expected soon. The most important two are improvements to the regulation of decommissioning and new regulation to facilitate reserve-based lending (RBL). According to ANP, at least 67 offshore production structures have been operating in Brazil for more than 25 years and will soon have to be decommissioned. Uncertainty around the assets that will have to be removed (particularly subsea facilities), abandonment guarantees and allocation of liabilities between buyer and seller create uncertainty in mature field transactions – affecting both Petrobras (as seller) and junior independent companies. They, and their lenders, anxiously await regulation of RBL transactions. Independents are already preparing their offers to acquire Petrobras' mature fields based on acquisition financings backed by reserves and their expected revenues, but uncertainties about foreclosure and step-in rights affect them. ANP is aware that those regulations may unlock mature field transactions and is willing to provide the necessary certainty.
The results emanating from two years of liberalisation, coupled with the recovery of oil prices, speak for themselves. The importance of retaining existing policies is evident. They generate massive revenues for the government and contribute to the country's progress. Regardless of the outcome of the presidential election, one should expect the new government to continue encouraging investments in the sector.
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