Regulatory Framework

Systems that regulate oil exploration and production activities are applied in each country based on their specific local needs. For this reason, each regulatory framework is different, with variations involving the adoption of one or more systems.

In Brazil, the Union owns the oil, but companies or consortia can extract it in accordance with various forms of payment, such as royalties, which depend on the current system. The concession system governed the oil exploration and production activities in Brazil until 2010, when acts 12,276/10 and 12,351/10 were enacted and established, respectively, the onerous transfer of rights and production sharing systems. Since then, three systems have coexisted in the country: Concession, production sharing, and onerous transfer of rights.

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Get to know a few differences among them:

Concession Model

  • This model is usually used in case of high or medium exploration risk.
  • The concessionaire takes on all risks and investments in exploration and production.
  • In the bidding process, the signing bonus, the local content percentage, and the minimum exploration program - a proposal for the exploration work the companies submit to the National Petroleum Agency (NPA) - define the winner.
  • In the event of a commercial discovery, the concessionaire shall pay the Union, in cash, taxes levied on income, plus the applicable government take (royalties, special take, and payment for area occupation or retention).
  • After the payments are made to the Union, the oil and natural gas lifted from a block are the concessionaire's exclusive property.
  • In Brazil, this model is applied to all sedimentary basins, with the exception of the Pre-salt and strategic areas. Pre-Salt areas put up for bidding prior to the sharing system going into effect are also regulated by the concession model.
  • Areas covered by the concession model include, for example, Marlim, Roncador, Lula, and Jubarte.

Production Sharing Model

  • Typically used in case of low exploratory risk.
  • The contractor undertakes the exploration and production activities at its own expense and risk.
  • The company or the consortium carrying out the activities takes on the exploratory risks.
  • In the bidding process, the judging criteria is the percentage of excess oil (called profit oil), i.e., whoever offers the Union the largest share of the volume of oil produced is the winner. In Brazil, the signing bonus is also set forth in the notice.
  • If a discovery made in the area under the sharing system is not economically feasible, the company or consortium gets no compensation from the Union.
  • If there is a commercial discovery, the company or consortium receives, as compensation, the production volumes corresponding to their exploration costs (the so-called oil cost). Besides the oil cost, it also gets production volumes corresponding to the royalties due and profit oil. The value of the royalties is transferred to the Union, which distributes it to states and municipalities.
  • In Brazil, this model is adopted for oil exploration and production in pre-salt areas that were not under the concession model before the Act 12,351/10 and in strategic areas.
  • In such cases, Petrobras, as set forth under Act 12,351/10, always works as the operator, with a minimum interest of 30%.
  • The Libra block, in the pre-salt Santos Basin, was the first area to be auctioned under the production sharing system. Petrobras holds a 40% stake in this block.

Transfer of Rights

  • The Union, after due legal permission, granted the company the right to undertake, through direct contracting, exploration and production activities in pre-salt areas that are not under the concession model, limited to the maximum amount of 5 billion barrels of oil and natural gas.
  • In these areas, Petrobras will bear all costs and take-on all production risks.
  • The criteria used to determine the values for production done under the onerous transfer of rights system were set via negotiations between the Union and Petrobras based on technical reports issued by international certification entities.
  • Blocks originally granted for the onerous transfer of rights: Franco, Florim, Northeast of Tupi, South of Tupi, South of Guará, Area Surrounding Iara, and Peroba.
  • Contract term: 40 years, renewable for another five years.

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What is onerous transfer of rights surplus?

  • On June 24, 2014, the National Energy Policy Council (CNPE) approved the direct hiring of Petrobras for production in excess to the contracted under the onerous transfer of rights volume in four areas of the pre-salt: Búzios (Franco), Area Surrounding Iara, Florim, and Northeast of Tupi. Petrobras operates exclusively in these areas. Production will take place under the sharing system in contracts with 35-year terms.
  • According to the National Petroleum Agency (NPA), excess volumes are estimated between 9.8 and 15.2 billion barrels.