Last week the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) of Brazil published the final tender protocol containing the rules and procedures, as well as the draft contracts, for the 4th bid round under the production sharing regime, for areas located in the pre-salt region. Bidding is scheduled to take place in Rio de Janeiro on 7 June 2018, and the areas on offer will be Itaimbezinho and Dois Irmãos in the Campos basin, and Três Marias and Uirapuru in the Santos basin. All blocks are located offshore the states of Rio de Janeiro and São Paulo, in South East Brazil.
The area of Saturno, in the Campos basin, included in the preliminary tender protocol published in January, has been removed from this auction by a decision of the Ministry of Mines and Energy and is not in the final tender protocol. Adjacent blocks, S-M-534 and S-M-645, had been excluded from the 15th concession round by a decision of the National Accounts Court (Tribunal de Contas da União),which considered that they would likely need to be unitised with the Saturno area, and should be subject to the production sharing regime. It is now expected that both sets of areas will be offered in a 5th production sharing bid round to take place still in 2018, subject to an approval by the National Council of Energy Policy (Conselho Nacional de Política Energetica – CNPE).
In accordance with current regulations [see Petrobras priority rights in upcoming bids for Brazilian production sharing contracts], Petrobras has exercised its priority rights to acquire a 30% participating interest as operator in 3 of the 4 areas on offer in the 4th pre-salt round: Dois Irmãos, Três Marias and Uirapuru. In pre-salt bids, like this, the signing bonuses are fixed and competing bids are assessed according to the percentage of profit oil that each bidder, alone or in a consortium, offers to the Brazilian state. The conditions for 4th pre-salt round are the following:
The final versions of the production sharing agreements included in the tender protocol have few differences in relation to the agreements offered in the 3rd pre-salt production sharing bid round. The drafts were submitted to public consultation, but few changes were accepted by the ANP. Some of the main differences from the 3rd round contracts, are as follows:
(a) Inclusion of the express possibility to recover as cost oil expenses related to data acquisition and requests for licences and permits incurred before the production sharing agreement is signed;
(b) Removal of the option to guarantee performance of the minimum exploration program through an escrow deposit. Although the form of guarantee was accepted in the production sharing agreements for the 3rd pre-salt round in October 2017, in the 15th concession bid round held in March 2018, this option was only available for onshore blocks. In the 4th pre-salt round, the ANP will only accept one, or a combination, of the following: letter of credit, insurance bond or a pledge of oil and gas reserves.
(c) Amendments to clarify the consequences of the default of one of the consortium members in relation to the rights and obligations of remaining consortium members. This has become a sensitive issue as a number of Brazilian oil companies have faced financial difficulties, most notably OGX. Under the amended PSA provisions, the defaulting party will be required to assign its participation interest to a third party, within 90 days counted from when its absolute default is established. Failing to do so will entitle the ANP to unilaterally terminate the agreement in relation to the defaulting party only, and in such case, the defaulting party will compulsorily transfer its participation to the remaining non-defaulting consortium members, in proportion to their participation.
(d) Following a public consultation that took place at the end of 2017 regarding the arbitration clause included in oil and gas agreements, the ANP has produced a dispute resolution clause, included in the concessions offered in the 15th round and now in the PSAs offered in the 4th pre-salt round. Discussions of the arbitration clause were prompted by a dispute between the ANP, Petrobras and the state of Espirito Santo in relation to the payment of special participation on production from the Parque das Baleias fields, operated by Petrobras. The issue, then, was which matters may be submitted to arbitration, and more specifically, whether interpretation of the definition of “field” in a concession clause and its impact on the concessionaires’ obligation to pay this government levy are arbitrable (see Superior Court of Justice analyses the scope of arbitration in oil and gas concessions). According to the Brazilian arbitration law, only disputes involving “disposable rights” may be decided by arbitration, and matters of public interest may not. It was expected that the public consultation would lead to amendments to the arbitration clause to clarify what are disputes involve disposable rights and are subject to arbitration. Although the arbitration clause lists certain types of dispute that may be subject to arbitration, it is not clear whether the list is exhaustive.
However, the ANP has not changed such section. Instead, it has amended procedural aspects of the arbitration, by, for example, changing from the ad hoc arbitration under UNCITRAL rules to an institutionalized arbitration. The new arbitration clause provides that the parties will agree on an institution to administer the arbitration and, failing such agreement, ANP shall indicate either the International Arbitration Court of the International Chamber of Commerce, the London Court of International Arbitration or the Permanent Court of Arbitration in Hague.
These pre-salt blocks are generally understood to have very favorable geology and high production potential. Brazilian oil and gas competitiveness has also been boosted by other recent policy changes, such as the changes to local content requirements and the extension of REPETRO tax incentives. So, despite removal of the Saturno area and limited improvements to the terms of the agreement, the 4th pre-salt round is expected to continue to the successful trend of other recent bids rounds, which have seen impressive uptake and record signature bonuses (for information on the last 4 bidding rounds see Brazil's 15th Oil & Gas Licensing Round - Offshore Exceeds Expectations, Healthy competition for Brazils presalt oil riches, and Brazil’s 14th Oil & Gas Licensing Round – Exploration Bounces Back).