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New Brazilian Government Plans Concessions for Oil Auctions

Source: Reuters 11/22/2018, Location: South America

A top aide to Brazilian president-elect Jair Bolsonaro said the new government would adopt concession contracts for lucrative pre-salt oil auctions, raising concerns that talks to change the regime would drag and derail much-needed investment.

Later, however, Roberto Castello Branco, who Bolsonaro has tapped to lead state-led oil company Petroleo Brasileiro SA said there was no final decision yet on what contracts the new administration would offer in the highly prized deep water oil tenders.

Bolsonaro, a longtime economic nationalist and far-right legislator, modified his stance on the way to his election last month, declaring himself open to selling state assets and ceding ground over the government’s role in the crucial energy sector.

Investors are eager to win a bigger slice of Brazil’s oil prize, but the shift away from an increasingly successful production sharing auction regime also raises concerns that any changes would require lengthy discussions in Congress, raising uncertainty and causing investment to dry up.

A senior transition official, who was not authorized to speak publicly, said Bolsonaro’s administration would seek to modify the current production-sharing contract in the pre-salt fields. The source said they plan to adopt a concession model that would involve less state interference.

“That’s a clear preference of ours, we will change to concessions instead of production-sharing,” the source said, without elaborating on whether the new policy would require a change in the law.

The production-sharing model, which was rolled out by the leftist Workers Party (PT) and reformed by the center-right government of Michel Temer, gives the state a share of income.

It has proved successful in recent auctions, luring oil majors like Exxon Mobil Corp, Chevron Corp, Repsol SA, Royal Dutch Shell Plc, and BP Plc .

CONCESSION CONCERNS

Asked about the potential shift during an event in Rio de Janeiro on Thursday, Marcio Felix, the minister for mines and energy, said the best solution was to make a relatively simple adjustment to a law that mandates all pre-salt blocks must be tendered with production-sharing contracts.

Nonetheless, Felix said he suggested to the incoming administration that any changes should take place after 2020, once key auctions have taken place.

He said his main concern was that congressional talks would snarl and pause the current round of tenders, which have been successful in attracting much-needed investment.

“If we get into that discussion in Congress, for example, we run the risk of paralyzing auctions and that’s what we do not want. The risks need to be well measured,” said José Mauro Coelho, a director at the Energy Research Company.

Higher oil prices and the need to replace shrinking reserves have boosted oil majors’ appetites for costlier offshore ventures, pumping money into the government’s coffers.

NEW DIRECTION

Last month, newspaper Valor reported Bolsonaro’s team was planning to tweak the production-sharing model to attack some of the political abuses perpetrated by previous administrations.

Petrobras was at the center of an investigation dubbed “Car Wash” that uncovered a massive and long-running pay-to-play corruption scheme.

The government found that political parties and politically appointed executives took over 6 billion reais ($1.58 billion) in bribes, mainly from construction and engineering firms, in exchange for winning contracts with Petrobras.

Scores of powerful businessmen and politicians, including former President Luiz Inacio Lula da Silva, have been jailed in connection to the case.

The PT ran Brazil for 13 of the last 15 years and has been blamed by critics for a weak economy and endemic graft. Temer took office in 2016 after former PT President Dilma Rousseff was impeached.

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Related Articles: Accounting, Statistics  Acquisitions and Divestitures  Asset Portfolio Management  Economics/Financial Analysis  General  Insurance  Investment  Mergers and Acquisitions  Risk Management 


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