PRODUCTION SHARING VERSUS CONCESSION CONTRACTS IN BRAZILIAN UPSTREAM: AN ECONOMIC COMPARISON

PRODUCTION SHARING VERSUS CONCESSION CONTRACTS IN BRAZILIAN UPSTREAM: AN ECONOMIC COMPARISON Edmar de Almeida – IE/UFRJ Thales Viegas – IE/UFRJ Felipe Dias – IBP Francisco Ebeling – IBP 34rd IAEE International Seminar Stockholm, June 2011

PLAN OF THE PRESENTATION Introduction Fiscal Regimes and Contracts in Oil E&P Evolution of Brazilian Oil industry Simulation Models For the Different Types of Contracts Results

INTRODUCTION • 1997 - Liberalization of the Brazilian Oil and Gas Industry. • 2007- Discovery of the Subsalt oil and gas reserves • Geological paradigm shift • New role for the oil and gas industry in Brazilian economy • 2010 – New Oil and Gas Law • Introduction of new Production Sharing Contracts - PSC, with new government take levels • Petrobras will be the sole operator for the PSC contracts • Concession contracts for the blocks already conceded

PAPER OBJECTIVE • To compare the PSC Contracts with the existing Concession Contracts • To verify if there is room for increasing significantly the government take • To verity if the object of gaining control over the process of investment and production is compatible with the objective of increasing the government take.

E&P FISCAL REGIMES Fiscal Regimes Concession System Contractual System Service contracts “Productionsharing” with risk Without risk

MAIN DIFFERENCES BETWEEN CONCESSION AND PSC CONTRACTS • Concession: • Operator has the right to explore and produce at its own risk • Operator has the property over the oil and gas produced; • Operator has the right to sell the total volume of oil and gas produced. • Government take represent a cost for the project • PSC • The state does not transfer all the property right over the oil and gas resources; • The state maintain control over the investment decision making process regarding the E&P activities; • Operation will receive a payment in oil to reimbourse for the capex and opex costs; • Profit oil will be shared between the operator and the state owned oil company;

SEQUENCE OF BIDDING ROUNDS

GEOGRAPHICAL DISTRIBUTION OF EXPLORATION BLOCKS FOR EACH ROUND

SUBSALT BLOCKS/FIELDS IN THE SANTOS BASIN Volumes identified in the Santos Basin: • from 25 to 45 billion boe • From 900 to 1,600 bcm (or 32 to 56 tcf) Source: Petrobras

SUBSALT BLOCKS/FIELDS IN THE SANTOS BASIN UNDER CONCESSION CONTRACTS Source: Petrobras

SUBSALT BLOCKS/FIELDS IN THE SANTOS BASIN UNDER ONEROUS CESSION CONTRACTS Source: Petrobras

EXPECTED EVOLUTION FOR THE OIL PRODUCTION IN BRAZIL Source: Brazilian Petroleum Institute

THE NEW REGULATORY FRAMEWORK

CONCESSION CONTRACTS IN BRAZIL • Mandatory choice between the return of the area or the commitment of well drilling • Submission of the Development Plan for ANP approval • Royalties: up to 10% • Special Participation Tax for Large fields: up to 40% of gross profits • Mandatory R & D investments only for fields that pay Special Participation (1 % of gross field revenue) • Auctions to concede exploratory blocks: companies selected by • Bonus value • Investment program • Local Content rate

PSC CONTRACTS IN BRAZIL • The terms are not totally determined • Submission of the Development Plan for ANP approval • Royalties: 15% • New State Owned company to represent the State: PPSA • Petrobras • Auctions to select Petrobras partners by exploratory blocks. • Bidding factor: Government Share on profit oil

MODELLING THE CONCESSION CONTRACT GR = Gross Revenue Royalties NR = Net Revenue Explor. Develop. Opex Gross Profit S.P. Net Profit IT COSTS: Explor = Exploration Develop. = Development Opex = Operating GOVERNMENT TAKE ROYATIES: 10% S.P. = Special Participation: up 40% IT = Income Tax: 34%

MODELLING THE PSC CONTRACT GR = Gross Revenue Royalties NR = Net Revenue Cost Oil Profit Oil Cost Oil Recovery Limit Explor. Desenv. Opex Company Gov Profit IT = 34% COST RECOVERY Explor = Exploration Dev = Development Opex = Operating Cost Recovery Limit = rate to be determined GOVERNMENT TAKE IR = Income Tax GOV = Government Share ROYATIES

COMPARING CONCESSION AND PSC CONTRACTS • Project: • Reserves : 790 million barrels • Oil price: 75 dollars • CAPEX: 13,5 dollars/barrel • OPEX : 8,5 dollars/barrel • Discount Rate: 10% • Period for Exploration : 5 years • Period for development 3 years

IRR Level for Concession contract and PSC contracts with different Sharing Scenarios Source: Own Elaboration

Expected Monetary Value for different Geological Risk Scenarios Geological Risk in % Source: Own Elaboration

MONTE CARLO ANALISIS • Risk Variables for Concession • Oil price : 50-100 dollars • Capex : 11-15 dollars/barrel • Opex : 6.6 – 9.3 dollars/barrel • Geological risk : 30-50% • Risk Variables PSC • Oil price : 50-100 dollars • Capex : 11-20 dollars/barrel • Opex : 6.6 – 12 dollars/barrel • Geological risk : 30-50% • Revenue Limit for cost recovery: 30-100%

MONTE CARLO RISK ANALISIS POR CONCESSION CONTRACT 9% Expected Monetary Value Simulations

MONTE CARLO RISK ANALISIS PSC CONTRACT 32% Expected Monetary Value Simulations

MONTE CARLO RISK ANALISIS FOR PSC CONTRACT – ZERO GEOLOGICAL RISK SCENARIO 15%

CONCLUSIONS • Increasing government control over the oil projects through PSC contracts is not compatible with increasing Government Take • Economic risk for the investment under PSC contracts are significant higher. • In order to compensate for these higher risk, PSC contracts should be used only for blocks with very low geological risk areas. • Government should directly invest in exploration in the Subsalt Area in order to identify low geological risk areas

THANK YOU edmar@ie.ufrj.br

PRODUCTION SHARING VERSUS CONCESSION CONTRACTS IN BRAZILIAN UPSTREAM: AN ECONOMIC COMPARISON