PRODUCTION SHARING VERSUS CONCESSION CONTRACTS IN BRAZILIAN UPSTREAM: AN ECONOMIC COMPARISON

Edmar de Almeida IE/UFRJ Thales Viegas IE/UFRJ Felipe Dias IBP Francisco Ebeling IBP

34rd IAEE International Seminar Stockholm, June 2011

Federal University of Rio de Janeiro Energy Economics Group

PLAN OF THE PRESENTATION

Introduction Fiscal Regimes and Contracts in Oil E&P Evolution of Brazilian Oil industry Simulation Models For the Different Types of

Contracts
Results

Federal University of Rio de Janeiro

Energy Economics Group

INTRODUCTION
1997 - Liberalization of the Brazilian Oil and Gas

Industry.
2007- Discovery of the Subsalt oil and gas reserves
Geological paradigm shift New role for the oil and gas industry in Brazilian economy

2010 New Oil and Gas Law

Introduction of new Production Sharing Contracts - PSC,

with new government take levels Petrobras will be the sole operator for the PSC contracts Concession contracts for the blocks already conceded

Federal University of Rio de Janeiro

Energy Economics Group

PAPER OBJECTIVE
To compare the PSC Contracts with the existing

Concession Contracts
To verify if there is room for increasing significantly

the government take

To verity if the object of gaining control over the

process of investment and production is compatible with the objective of increasing the government take.

Federal University of Rio de Janeiro

Energy Economics Group

PLAN OF THE PRESENTATION

Introduction

Fiscal Regimes and Contracts in Oil

E&P
Evolution of Brazilian Oil industry Simulation Models For the Different Types of

Contracts
Results

Federal University of Rio de Janeiro

Energy Economics Group

E&P FISCAL REGIMES

Fiscal Regimes

Concession System
Service contracts

Contractual System Production sharing

with risk

Without risk

MAIN DIFFERENCES BETWEEN CONCESSION AND PSC CONTRACTS

Concession:
Operator has the right to

PSC
The state does not transfer

explore and produce at its own risk Operator has the property over the oil and gas produced; Operator has the right to sell the total volume of oil and gas produced. Government take represent a cost for the project

all the property right over the oil and gas resources; The state maintain control over the investment decision making process regarding the E&P activities; Operation will receive a payment in oil to reimbourse for the capex and opex costs; Profit oil will be shared between the operator and the state owned oil company;

Federal University of Rio de Janeiro

Energy Economics Group

PLAN OF THE PRESENTATION

Introduction Fiscal Regimes and Contracts in Oil E&P

Evolution of Brazilian Oil industry

Simulation Models For the Different Types of

Contracts
Results

Federal University of Rio de Janeiro

Energy Economics Group

SEQUENCE OF BIDDING ROUNDS

Federal University of Rio de Janeiro

Energy Economics Group

GEOGRAPHICAL DISTRIBUTION OF EXPLORATION BLOCKS FOR EACH ROUND

Federal University of Rio de Janeiro

Energy Economics Group

SUBSALT BLOCKS/FIELDS IN THE SANTOS BASIN

Volumes identified in the Santos Basin: from 25 to 45 billion boe From 900 to 1,600 bcm (or 32 to 56 tcf)

Source: Petrobras

SUBSALT BLOCKS/FIELDS IN THE SANTOS BASIN UNDER CONCESSION CONTRACTS

Source: Petrobras
Federal University of Rio de Janeiro Energy Economics Group

SUBSALT BLOCKS/FIELDS IN THE SANTOS BASIN UNDER ONEROUS CESSION CONTRACTS

Source: Petrobras

EXPECTED EVOLUTION FOR THE OIL PRODUCTION IN BRAZIL

Source: Brazilian Petroleum Institute

THE NEW REGULATORY FRAMEWORK

PLAN OF THE PRESENTATION

Introduction Fiscal Regimes and Contracts in Oil E&P Evolution of Brazilian Oil industry

Simulation Models For the

Different Types of Contracts

Results

Federal University of Rio de Janeiro

Energy Economics Group

CONCESSION CONTRACTS IN BRAZIL

Mandatory choice between the return of the area or the

commitment of well drilling

Submission of the Development Plan for ANP approval Royalties: up to 10% Special Participation Tax for Large fields: up to 40% of gross profits Mandatory R & D investments only for fields that pay Special

Participation (1 % of gross field revenue)

Auctions to concede exploratory blocks: companies

selected by
Bonus value Investment program Local Content rate

Federal University of Rio de Janeiro

Energy Economics Group

PSC CONTRACTS IN BRAZIL

The terms are not totally determined Submission of the Development Plan for ANP

approval
Royalties: 15% New State Owned company to represent the

State: PPSA

Petrobras Auctions to select Petrobras partners by

exploratory blocks.
Bidding factor: Government Share on profit oil
Federal University of Rio de Janeiro Energy Economics Group

MODELLING THE CONCESSION CONTRACT

GR = Gross Revenue Royaltie s Explor. Develo p. NR = Net Revenue Opex S.P.
IT

Gross Profit
Net Profit

COSTS: Explor = Exploration Develop. = Development Opex = Operating

GOVERNMENT TAKE ROYATIES: 10% S.P. = Special Participation: up 40% IT = Income Tax: 34%

Federal University of Rio de Janeiro

Energy Economics Group

MODELLING THE PSC CONTRACT

GR = Gross Revenue Royaltie s Cost Oil Cost Oil Recovery Limit Explor. Desenv . Opex Company
Profit IT = 34%

NR = Net Revenue Profit Oil

Gov

COST RECOVERY Explor = Exploration Dev = Development Opex = Operating Cost Recovery Limit = rate to be determined

GOVERNMENT TAKE IR = Income Tax GOV = Government Share ROYATIES

Federal University of Rio de Janeiro

Energy Economics Group

COMPARING CONCESSION AND PSC CONTRACTS Project:

Reserves : 790 million barrels Oil price: 75 dollars CAPEX: 13,5 dollars/barrel OPEX : 8,5 dollars/barrel Discount Rate: 10% Period for Exploration : 5 years Period for development 3 years

Federal University of Rio de Janeiro

Energy Economics Group

IRR Level for Concession contract and PSC contracts with different Sharing Scenarios

Source: Own Elaboration

Expected Monetary Value for different Geological Risk Scenarios

Geological Risk in %

Source: Own Elaboration

MONTE CARLO ANALISIS

Risk Variables for Concession
Oil price : 50-100 dollars Capex : 11-15 dollars/barrel Opex : 6.6 9.3 dollars/barrel Geological risk : 30-50%

Risk Variables PSC

Oil price : 50-100 dollars Capex : 11-20 dollars/barrel Opex : 6.6 12 dollars/barrel Geological risk : 30-50% Revenue Limit for cost recovery: 30-100%

Federal University of Rio de Janeiro

Energy Economics Group

MONTE CARLO RISK ANALISIS POR CONCESSION CONTRACT

9%

Expected Monetary Value Simulations

MONTE CARLO RISK ANALISIS PSC CONTRACT

32%

Expected Monetary Value Simulations

MONTE CARLO RISK ANALISIS FOR PSC CONTRACT ZERO GEOLOGICAL RISK SCENARIO

15%

CONCLUSIONS
Increasing government control over the oil projects

through PSC contracts is not compatible with increasing Government Take

Economic risk for the investment under PSC

contracts are significant higher.

In order to compensate for these higher risk, PSC

contracts should be used only for blocks with very low geological risk areas.
Government should directly invest in exploration in

the Subsalt Area in order to identify low geological risk areas

Federal University of Rio de Janeiro

Energy Economics Group

THANK YOU edmar@ie.ufrj.br

Federal University of Rio de Janeiro

Energy Economics Group