The regimes of concession and production sharing
The regimes of concession and production sharing
The discovery of the pre-salt polygon, in 2007, led the government to establish, in 2010, the regime of production sharing. Until then, all the areas were granted under the concession regime. Ever since, Brazil has a mixed regulatory regime.
As of 2017, the Open Acreage became the main bidding model for oil and natural gas exploration and production areas in Brazil, and is now applicable to both concession and production sharing contracting regimes.
How the concession regime works
Under the concession regime, the concessionary company assumes all the risks associated with exploration activities. If it does not find oil or natural gas, it bears the losses alone; however, if it is successful, it becomes the owner of everything produced. In return, the company pays government takes, such as a signature bonus, a fee for the occupation or retention of the area (in the case of onshore blocks), royalties and, in the case of high-production fields, a special participation fee. The contracts are signed by ANP on behalf of the Federal Government.
In these bidding rounds, interested companies - either individually or as a consortium – offer a signing bonus and propose a Minimum Exploratory Program (PEM), that is, they commit to carrying out certain activities, such as seismic surveys and the drilling of wells, among others, in that area. The company or consortium that presents the most advantageous proposal, in accordance with the criteria set forth in the tender protocol, is granted the right to explore that area to verify the existence of commercial oil and/or natural gas deposits.
How the production sharing regime works in Brazil
Under the production-sharing regime, which applies to areas located in the pre-salt polygon and other areas considered strategic, the Federal Government remains the owner of the extracted oil and gas. The contractor is entitled to a portion of the production sufficient to recover its costs, known as the “cost in oil,” and the surplus, known as “profit oil,” is divided between the Federal Government and the contractor.
In addition, there are also the signing bonus and royalty payments. Under this model, the government not only regulates and oversees operations but also participates directly in production and receives a share of the actual output. Thus, the key difference is that, while under the concession regime production belongs entirely to the company upon payment of taxes and royalties, under the production-sharing regime the oil remains the property of the Federal Government and is divided based on actual production.
It should be noted that, under the production sharing regime, the National Energy Policy Council (CNPE) decides whether to conduct competitive bidding or to award the contract directly to Petrobras, with a view to safeguarding the national interest and fulfilling the other objectives of energy policy. In both cases, contracts are signed under the production-sharing regime.
If it decides to hold bidding processes, CNPE first offers Petrobras the right of first refusal to serve as operator of the blocks to be awarded. When Petrobras expresses interest in acting as operator, it must specify in which areas it wishes to exercise this right, indicating its stake in the consortium, which shall not be less than 30 percent.
The blocks and the technical and economic parameters of production-sharing agreements are set by a CNPE resolution, and the bidding processes are conducted by ANP. The Ministry of Mines and Energy (MME) is responsible for establishing the guidelines to be followed by ANP in conducting the bidding process and drafting the tender protocols and contracts, which are subsequently approved by MME.
In production-sharing auctions conducted by ANP, the winning company will be the one that offers the Brazilian government the highest percentage of oil and natural gas (that is, the largest share of the oil surplus).
The consortia that operate in the pre-salt polygon are composed of Pré-sal Petróleo S.A. (PPSA), representing the Federal Government, and the companies that won the bidding process. Under the production-sharing regime, the contracts are signed on behalf of the Federal Government by the Ministry of Mines and Energy (MME).