Understand what changes with the IPO of the pre-salt

On the same day as the world digested the Donald Trump’s election as President of the United States, the Chamber of deputies of Brazil concluded the vote of the Bill 4567/16, which changes the rules for the exploration of the pre-salt layer and makes room for the entry of new competitors on the side of the Petrobras on recently. The text, which has already passed the Senate in February and should be sanctioned now by President Michel Temer, ends with the obligation of Petrobras, steeped in a deep crisis, participate in the next block to be auctioned. The oil company from now on you will be able to choose the projects in which you want to participate, but it is not mandatory that she’s in all the blocks. Understand what will be the changes and how they affect the industry.

What is the pre-salt?

The pre-salt layer are huge reserves of oil and natural gas discoveries off the coast of Brazil in 2006, at great depths, under a thick layer of salt. The jazidos are in a range that extends approximately 800 km between Espirito Santo and Santa Catarina. Daily oil production in the pre-salt layer, operated by Petrobras in partnership with foreign companies, past average of approximately 41,000 barrels per day in 2010, to the level of one million barrels per day by mid-2016, according to the company. The exploration potential is huge, as well as the difficulties and costs to access it.

The previous law which stipulated?

12,351 law of 2010 was responsible until now for regulating the exploration and production of oil and natural gas in the pre-salt areas. The standard contemplated the mandatory participation of Petrobras in all operating consortia of these blocks, with a minimum of 30%. The oil company still should be the exclusive operator, accepting full responsibility for control of business costs and the complete process of operation.

The approval of this regulatory framework did not please the American oil companies, as revealed by the leak of cables obtained by the website WikiLeaks in 2010. At the time, the representative of one of them, according to the documents, heard of the then favorite candidate for the Presidency, José Serra (PSDB), Foreign Minister today, the promise that the rule would be changed if he wins. Sierra, author of the original proposal on the move, always denied having made the statements attributed to him in the telegram.

What changes the Bill?

The project ends with the obligatory Petrobras to participate of all the bids for the exploration of the pre-salt. From now on, the oil company can choose the projects in which you want to participate. In the words of its President, Pedro Parente, the change allows the company to decide “where to allocate our investments so empresarialmente responsible”, in a moment in which the company has as a priority the disinvestment and debt settlement which reaches 125 billion dollars (393.13 billion dollars). The law contemplates that Petrobras will always have priority ahead other operators.

The National Council of energy policy (CNPE) will offer to the State, “the national interest”, the preference to be the carrier of the fields to be auctioned. If Petrobras be interested, the oil company will continue having a mandatory minimum of 30% participation in the Consortium, a percentage considered reasonable in the industry to ensure the involvement and confidence of any partner. If you refuse, the block would pass into the hands of a foreign operator.

The change also contemplates that the President always have the last word, one of the amendments negotiated by Dilma Rousseff as President. The presidential decision could oblige Petrobras to participate in a block in which you are interested and also the opposite: veto the company’s investment in a field where Yes wanted to invest.

This veto does not end to please the Brazilian Institute of oil, gas and Biofuel (IBP), for example, who believes that the new law still has “a high degree of protectionism”. His Executive Secretary, Antônio Guimarães, recognizes, however, that “change is urgent”. “If it is not approved soon, won’t you give time to signal the new direction the investor for the next year, when should happen the next auctions. It’s far from ideal but solves the problem, “afimou Guimarães to EL PAÍS in October during the Rio Oil & Gas, the largest oil and gas event of Latin America.

The Bill was initially approved in the Senate, with the support of Dilma Rousseff who, fearing its defeat in the vote, decided not to drop the proposal and built a substitute version of the Bill. The project, to date, has the opposition workers ‘ Party and the former President.

What is the economic potential of the pre-salt?

According to industry sources, there are between 20:30 billion barrels in subsalt exploration phase in Brazil. Time to talk about the number of barrels that could still be found in unexplored fields figures vary among the most conservative and the most optimistic. The first estimate that there are 50 billion barrels still to be discovered, while optimists increase projections up to 200 billion. “If you already have 30 billion barrels is a lot of oil, even. Not in 50 years time to produce all this “, illustrates Antônio Guimarães, the IBP.

The change will save the industry crisis.

“Won’t mean in any case a short-term milhões and even less with the barrel to 50 dollars. But it’s the tip of the iceberg. It will gradually “, says the CEO of a foreign company, present in Brazil. “There are many foreign companies who have no interest or position to take on the exploration of pre-salt layer field, but with the change you eliminate a financial burden of Petrobras that will allow the Government to launch new auctions and appear new interested”, says the Executive. “The diversity of new entrants has to be seen also from the point of view of the supply chain. An example: If you talk with key suppliers, their portfolio in Brazil has always been 80% dependent on Petrobras. With the oil crisis they have over 50% of its idle capacity, “he says.

When Brazil will feel the effects?

Not in the short term. The next auctions should be next year, but the exploration of an oil field could begin just nearly a decade after their purchase. Both the expected investment and the creation of new jobs could be coming and nobody offers concrete figures. The actors of the sector have their own predictions. “To participate in the auction, several companies will automatically install itself in the country to prepare.

That alone will generate a positive job creation movement in Brazil. Then who buys a block has to do geophysical exploration to estimate the properties of the subsoil, engineer projects, there will be investments in drilling … There are long-term investments such as the operation of the auction, but there are other short-term if you solve issues like Repetro who [regime de isenção fiscal para os fornecedores do setor da exploração de petróleo e gás]already have effects on next week, “says the Executive of IBP.

The new legislation will change the distribution of royalties, earmarked for health and education?

No, but the Cloviomar Cararine, Economist of the Federation Only oil tankers, explains his fears since the value of the royalty is calculated from the volume of production, price per barrel and Exchange. According to him, the new law does not change the percentage (15%) dedicated to these sectors, but believes that the problem will be in the volume to be produced. “We believe that Petrobras has more technical capacity, and the volumes are actually calculated. There is always the suspicion that foreign operators do not account for the values produced correctly.

In addition, in the production-sharing model, the lower the cost to produce, more resources are distributed between the carrier and the Union, says the Economist. “According to information submitted by Petrobras, your cost of operation in the pre-salt fields are in 9 dollars per barrel while the world average is at 15 dollars per barrel. Our simulations show that, only in the case of the field of Pound (about 12 billion barrels), if Petrobras were not operator, the resources for education and health would lose 70 billion dollars in about 35 years of operation.

What are the arguments against the opening of the pre-salt?

There is no discussion in Parliament on this subject that is not tumultuous and completed. The basic text of the project was approved in Congress the day October 5 by 292 votes to 101, with one abstention. PT, PC do B, PDT, PSOL and network voted against. Despite the consensus and optimism in the industry, critics fear of sharing the cake at a time in which the barrel of oil they sell cheap, which would give advantage to foreigners to offer less for a treasure immeasurable yet. Believe that this is a first step towards the privatisation of the State. “The proposal is to deliver to the world’s big oil the primacy, the preference for oil exploration. What is the consequence of that? We will withdraw money from education and health. Only at the Pound, which is the filet mignon of the pre-salt, if approved the project, the Union will cease to raise around $246 billion dollars, “said the Deputy José Guimarães (PT-CE).

There will be new changes in the oil and gas industry?

The greater openness to foreign investment in the exploration of the pre-salt is just one of the discussions at the table to revitalize the sector. The review of local content policies, which oblige operators to hire huge volumes with Brazilian manufacturers and suppliers, is another of the main guidelines. “Companies have to buy equipment or invest in local shipyards with rates and sky-high taxes and that on the operation of the companies. The revision of these policies is critical, “says Adriano Oka, Vice-President of JLT reinsurance, one of the largest managers of risk, insurance and reinsurance undertakings i[seguros das seguradoras]n the world.

Although the industry consensus that the Government should relax the standards, the national industry-led by the Federation of Sao Paulo and Rio – keep their fear before a change to end their business thanks to release to hire foreign manufacturers and suppliers. Negotiations between those who seek the opening up of the market and the aimed at protecting the local industry should seek a delicate balance: create a plan that will encourage and help the segments able to be competitive even at a global level, but resign and drop others that even satisfy domestic demand.

There is another signal that is being charged to the Government Fear to ensure legal certainty that anime foreign investors to put here your milhões, and not in other oil reserves: renewal of Repetro. The Brazil, unlike other countries, the investment rate and the Repetro, special customs arrangements, was the chosen mechanism for exempting the industry suppliers of oil and gas exploration of some federal and State taxes. If not renewed, the regime has shelf life until 2020. “There is a Government signalling that he will extend the scheme. But investors need to know that it’s going to be valid for longer Repetro 20 years ago, “says Guimarães, the IBP.



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