Development of Surplus Transfer of Rights Oil Volumes Under Production-Sharing Terms Could Bring the Brazilian Government $210 Billion by 2050, IHS Markit Says

High-quality, de-risked transfer of rights oil volumes could offer significant reserves to international oil companies and billions in revenue to Brazil, but the clock is ticking

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Tuesday, July 10, 2018 8:00 am EDT

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"We at IHS Markit expect Petrobras to maximize the resources it can negotiate under the TOR contract, and to exercise its option of operatorship and minimum working interest of at least 30 percent in any production-sharing agreements that may be offered"

HOUSTON--(BUSINESS WIRE)--According to new analysis from IHS Markit, surplus Brazilian oil volumes estimated at 7.4 billion barrels-of-oil-equivalent (BOE) could yield an estimated $210 billion in royalties, government profit share and income taxes by 2050, should the cash-starved Brazilian government choose to auction the excess volumes under production-sharing terms.

These surplus ‘transfer of rights (TOR),’ volumes, which are known to reside in the massive pre-salt* oil fields of the Santos Basin offshore Brazil, are in addition to the five billion BOE from the Santos Basin already under contract to Petrobras through a transfer of rights agreement with the Brazilian government, according to new analysis from IHS Markit (Nasdaq: INFO), the leading global source of critical information and insight. (*Pre-salt oil deposits are located offshore Brazil under deep, thick layers of rock and salt and require substantial investment to extract.)

IHS Markit expects a surplus TOR production-sharing agreement (PSA) auction would attract fierce competition from oil companies, especially for the Buzios and Entorno de lara areas, where winning profit-share bid rates would likely exceed the 75 percent seen in recent pre-salt bid rounds.

Following one of the worst economic recessions in the country’s history, the federal and state budgets are in great need of revenue, and Brazilian authorities are well aware of the relief that could come from the oil and gas sector. By Brazilian government estimates, signature bonuses alone for these surplus volumes could generate approximately U.S. $27 billion or R$100 billion (Brazilian Reals).

The move would also inject much-needed capital into Petrobras, while also enabling Petrobras to replenish its reserves and to be more selective in future exploration bid rounds. In addition, continued development of these shorter-cycle opportunities offers more favorable risk-return characteristics for Petrobras than other discoveries still under appraisal.

“These high-quality discovered barrels are already de-risked—so they are known to exist, and they are very attractive for the large IOCs (international oil companies) and NOCs (national oil companies) because a portion can be booked on a balance sheet as reserves almost immediately,” said Ricardo Bedregal, director of upstream research for Latin America at IHS Markit. “To access these top-tier resources would be an unprecedented, golden opportunity for these companies, who are in constant search of large, bookable reserves, and competition in an auction would be incredibly fierce.”

The vast majority of these surplus volumes are believed to reside in the Buzios field, and in parts of the Atapu, Sururu and Berbigao fields, known as the lara/Entorno de lara area (see map). It is important to note that a significant portion of the Atapu, Sururu and Berbigao volumes are located within the BM-S-11 concession (operated by Petrobras in partnership with Total, Shell and Petrogal), which would also be entitled to produce from those fields.

The interested parties have yet to resolve these competing claims through field unitization, resulting in another layer of contractual uncertainty that must still be addressed, IHS Markit said. A change in the law currently making its way through the Brazilian legislature could enable Petrobras to sell up to 70 percent stake in the fields, which would simplify the unitization process.

Bedregal said the potential size and possible availability of these resources have likely not been on the radar of many companies since an auction of this type has never happened before—it wasn’t previously an option for outside companies. However, the IHS Markit analysis is likely to elevate the discussion to the top executives in the major offshore companies as the current Brazilian government pushes to renegotiate the terms of the 2010 TOR agreement and hold an auction for the surplus—all before the country’s October 2018 presidential elections.

The current Temer (Michel Temer, president of Brazil) administration has declared its objective to hold an international auction for these surplus volumes and is working toward the prospect of doing so before the impending presidential elections. An inter-ministerial committee was created in January 2018 to accelerate an agreement within 90 days, but that deadline came and went with a new target set to conclude negotiations by May. However, that deadline has also passed.

Despite these challenges, Robert Lewis, senior Latin America upstream research analyst at IHS Markit, sees evidence the current government is trying to find a way to bring in investment capital and to accelerate the development of these fields, which Petrobras has already largely appraised.

“The government knows that without these surplus TOR volumes, sustaining production growth rates in the Santos Basin pre-salt will depend heavily upon the sanction of new developments still undergoing appraisal, which has a longer lead time, and entails greater risk and cost,” Lewis said. “Much of these TOR discovered volumes are ready to go. The first platform at the Buzios field has already entered production. The missing link in this equation is the contractual right to produce these huge volumes of oil.”

The industry, Bedregal said, sees Fernando Coelho Filho as a policy maker who understands the balance between foreign direct investment and the political and economic needs of Brazil. The youthful 33-year-old ex-minister of energy and mines in Brazil recently resigned his ministry post to run for the Brazilian legislature, having created a strategy to modernize and advance the country’s oil sector. Following his departure from the ministry, Coelho has continued to fight for legislation that will encourage investment and enhance returns for governmental budgets and the domestic economy. “Coelho has shown he is open to understanding the challenges facing E&P investors, and is progressive in his views for how that collaborative approach can drive greater opportunities for Brazil,” Bedregal said.

Regardless of whether the Temer administration can resolve these contractual hurdles or the issue carries over to the next administration to resolve, development of these resources is critical for Petrobras to sustain its net oil production growth in the Santos Basin to 2030, IHS Markit said.

“We at IHS Markit expect Petrobras to maximize the resources it can negotiate under the TOR contract, and to exercise its option of operatorship and minimum working interest of at least 30 percent in any production-sharing agreements that may be offered,” Bedregal said. “However, before any international auction can proceed to offer these surplus volumes, significant aboveground uncertainties must be resolved, and renegotiations of the terms of the original TOR between the Brazilian government and Petrobras must be concluded.”

This is a critically important issue for both the government and Petrobras, so the Temer government, Bedregal said, is likely going to want acknowledgment for finding a positive resolution, and capturing a significant revenue opportunity for the country, which has continued to struggle economically, before elections are held. However, Bedregal acknowledges that political processes tend to move in cycles of starts and stops, especially in Brazil, but the size of the prize is a major incentive for all parties concerned.

“Considering the potential surplus TOR volumes from Buzios and Entorno de lara alone, total government take from royalties, profit-sharing and taxes could bring an estimated $160 billion to $210 billion, and exceed $15 billion per year by the early 2030s,” Bedregal said. “With so much at stake, we at IHS Markit believe that the Temer government is working hard to address this issue quickly. However, if not the Temer government, the next government, regardless of political ideology, will make resolution of the TOR legal and contractual issue uncertainty a priority in 2019.”

To speak with Ricardo Bedregal or Robert Lewis, please contact Melissa Manning at melissa.manning@ihsmarkit.com, or press@ihsmarkit.com . For more information about the IHS Markit Plays and Basins Analysis: The Future of Santos Basin’s Surplus Transfer of Rights Report, please contact Dyene Galantini at dyene.galantini@ihsmarkit.com .

About IHS Markit (www.ihsmarkit.com)

IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.

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