Relief for Petrobras: Changes to Brazil's Pre-Salt Legislation
On February 24, 2016, the Brazilian Senate approved a bill that would relieve Petrobras of two statutory burdens that industry players view as significant obstacles both to Petrobras and to the development of Brazil's pre-salt oil and gas reserves.
By a 40 to 26 margin, the Senate voted to cancel the requirements that Petrobras be the operator and hold at least a 30 percent working interest in all pre-salt fields. Although the bill faces stiff opposition in Brazil's Congress and from some elements of the executive branch, the Senate's action offers hope as, in the midst of the political and economic crises that have shaken the country's foundations, powerful and influential voices are calling for Petrobras to focus on the short-term profitability that it desperately needs, while allowing private investment to take the lead in developing Brazil's pre-salt reserves.
Law 12.351, enacted in 2010, exerted government control over Brazil's pre-salt fields, widely considered to be the crown jewels of the country's oil and gas reserves, by mandating a weighty role for Petrobras in any pre-salt development. Even during the halcyon days of $70 crude oil, the industry questioned Petrobras's ability to finance 30 percent of the development of the pre-salt sector and muster the resources necessary to effectively and efficiently operate extremely capital-intensive, labor-intensive, and technologically challenging ultra-deepwater drilling more than 300 miles off the coast of Brazil.
Now, with crude oil prices struggling at historical lows and the Lava Jato scandal ensnaring the highest levels of Petrobras's management and Brazil's political and corporate elite, and in the face of shrinking budgets and revenues, Petrobras simply does not appear to have the financial resources to make the significant long-term investment necessary to lead the development of the pre-salt fields in a meaningful way.
For these reasons, the oil and gas industry has hailed the Brazilian Senate's bill as a pragmatic and necessary move that will allow private investors to develop the country's pre-salt resources under the existing production-sharing contract regime, while giving Petrobras the breathing space to right its finances and address the fallout from the Lava Jato scandal.
The Senate's bill stopped short of entirely removing Petrobras from the pre-salt play. Through revisions to the original proposed bill, Petrobras will still have a 30-day right of first refusal to elect to operate and hold a minimum 30 percent working interest in any pre-salt fields. Although the first refusal right is designed to protect Petrobras's options, especially if the company's financial picture brightens, there are some concerns that Petrobras's failure to exercise its first refusal rights for any particular pre-salt field might be viewed by the market as a qualitatively negative endorsement of that field.
It is also unlikely that the Senate's bill will clear the Brazilian Congress and President Dilma Rousseff without significant political opposition. The bill was initially introduced by Senator José Serra of the opposition PSDB Party, while the PT Party, in power in Brazil since 2002, has forcefully defended Petrobras's central role in the pre-salt developments and, in fact, authored the 2010 legislation. Turning the Senate's bill into law will not be easy, and it may require some PT politicians to reconsider their preference for the Brazilian government, through Petrobras, to be the primary developer of Brazil's oil and gas resources. Nonetheless, the bill marks hope that some measure of relief may be in sight for Petrobras and for Brazil's pre-salt potential.
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S. Wade Angus
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Christopher J. Fox in the Houston Office and Daniel C. D’Agostini in the São Paulo Office assisted in the preparation of this Alert.
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