Concession and sharing auctions: is there better option?

In recent years, the scenario of oil exploration and commercialization in Brazil has undergone major changes. On the one hand, the uncertainty about the transition of the energy matrix prevents the price from remaining at levels as high as they once were.

On the other hand, the pre-salt shows a much greater potential for production than originally speculated, creating the opportunity for new companies to enter this exploration process.

How are the models of concession and sharing auctions being considered under these conditions? What is the difference between them and for whom is each model better? In this article we invite Taciana Amar, lawyer, consultant at the PCPC office – Paulo Cezar Pinheiro Carneiro, Greco & Ayoub Advogados and responsible for the Oil and Gas area – Oil and Gas -, to talk a little more about these procedures. Check out!

How are concession auctions

Both models for this area were enshrined in Brazil in 1997, when Law No. 9,748 / 1997 was sanctioned, called the “Oil Law”. Taciana further explains the importance of this decision:

“From that moment on, the Brazilian oil industry has undergone profound changes. Several auction rounds were conducted by the ANP, attracting investments and allowing the development of private national companies – thus generating revenues for the Union, states and municipalities.”

The concession auction is the most direct of the two for the O&G market in Brazil. In it, the concessionaire owns all the oil it produces, paying in return the subscription bonus, royalties and special participation. See what each of these obligations is:

the signing bonus is paid when the exploration contract is signed. It is defined in auction, whoever offers the highest value, wins;

royalties are calculated according to the production value of the field, calculated on billing;

the special participation, defined by decree, is only payable in fields of high productivity and its rates are calculated progressively on the profit of the field.

After fulfilling these demands, the operator is free to benefit from the acquired lot. He assumes the cost and risk of production, in addition to being able to define the commercial policy of his product.

How sharing auctions are

Contrary to the concession model, in which all the profit on oil belongs to the explorer, in the sharing there is a co-participation between the company and the Government.

In the Brazilian case, the modality became more common from the moment that the pre-salt showed a much greater potential for extraction than the 5 billion barrels initially assigned to Petrobras.

It was from there that the sharing auction arose, in which the partner company is entitled to receive back the amount invested in the cost of the operation.

Taciana explains that this refund is paid with the product itself, the so-called “oil cost”, in addition to a portion of the field’s profit, that is, surplus oil.

In this case, the risk, costs and control from exploitation to commercialization are also shared. Therefore, the Government itself is co-responsible, through the state-owned Pre-Salt Petroleum (PPSA).

The biggest differences between concession and sharing auctions

To clarify the differences between concession and sharing auctions, we asked Taciana to give us a very practical summary of the conditions determined for each model. Look!

Production

Concession auction: 100% for the company.

Sharing auction: divided between country and company.

Control

Concession auction: without direct participation by the country.

Sharing auction: mandatory operation by Petrobras and PPSA in the consortium.

Signature Bonus

Concession auction: determined by the company as an offer element.

Sharing auction: default value.

Return to the country

Concession auction: 10% royalties, variable special participation and more taxes.

Sharing auction: royalties of 15%, profit on oil and less taxes.

Return to the company

Concession auction: total production.

Sharing auction: oil cost and oil profit.

How is the current scenario of O&G auctions in Brazil

The sharing auction model became more common after 2014, when a meeting of the CNPE decided that Petrobras itself would be responsible for developing the surplus of onerous assignment.

Even though it becomes an exploration route for companies, this type of auction is still seen as the least suitable for the Brazilian situation and scenario – Minister Paulo Guedes is one of those who defend this position. Taciana explains:

“Countries that opt ​​for sharing receive their share in volume of oil, which in turn is negotiated by a state-owned company. These extra steps increase transaction costs, with possible commercial losses and even corruption and fraud problems. Not to mention the weight of the state bureaucracy, such as PPSA, which will manage the contracts and participate in the management committee of the fields without having made any type of investment. In addition, once the costs are deducted from the portion that remains with the State, strong supervision will be necessary.”

In this sense, the concession model is more efficient, since all these steps are in charge of companies specialized in the type of operation required – able to assess risks, plan investments and focus on economic efficiency.

The lawyer even shares this idea. “I understand that the concession regime is simpler, has greater transparency, and there is no need for a new state-owned company,” says Taciana.

Another fact that proves this imbalance is that only one of five blocks offered at the end of 2019 was purchased – again demonstrating the dissatisfaction of companies with the sharing model.

There is still some uncertainty about what will happen in the future, but it is expected that there will be a regulatory change for these negotiations involving the pre-salt.

Whether with better conditions or following a new regime, the truth is that concession and sharing auctions must still coexist in the market. Knowing the difference between them is essential to monitor, position and prepare the strategies that will accompany these movements in the future.

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