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Petrobras priority rights in upcoming bids for Brazilian production sharing contracts

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This week, Brazilian President Michel Temer has issued a decree that regulates the exercise of Petrobras’ priority rights in acquiring operatorship of blocks in the highly prospective pre-salt province, offshore Brazil.  This regulation gives Petrobras considerable flexibility and strengthens its leading role in the development of these reserves.  However, it also creates uncertainty for other potential bidders, which could impact the attractiveness of upcoming bid rounds and will need to be carefully considered by bidding consortia.

Background

When the production sharing regime was introduced to govern exploration and production of new awards of pre-salt acreage in 2010, Petrobras was initially required to operate all blocks, with at least a 30% participating interest.

As Petrobras has become financially and operationally stretched over recent years, this exclusive operatorship requirement has become viewed as delaying development of the pre-salt and the generation of revenue for the Brazilian government.  This was a factor in the government only tendering one pre-salt area under these rules in the six years since they were enacted.  The obligation on Petrobras to assume this role was also considered to be a potential burden, as demonstrated by its relinquishment of blocks that could be re-bid under these rules.

Therefore, in November last year, Law 12.351/2010 was amended to remove the obligation on Petrobras to operate and take an interest in all pre-salt blocks.  It was replaced by a provision for the National Energy Policy Council (Conselho Nacional de Política Energética – CNPE) to offer Petrobras a preference in the operation and acquisition of an interest in these blocks.

However, the nature of that preferential right was unclear and has since generated considerable discussion between Petrobras, other oil companies and the government.

Petrobras has argued that it should have the right to back in to awarded production sharing agreements on the terms of the winning bid, whereas a number of private oil companies argued that Petrobras should make a binding election to participate or otherwise in advance of the bid round.

 

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