Brazil eyes oil production-sharing system

Brazil’s Congress in the coming weeks could approve changes to oil sector laws that include creating a production-sharing model to be used for future projects in the country’s deep-water region known as the subsalt.

The proposal is part of President Luiz Inacio Lula da Silva’s campaign to boost state control over the massive offshore oil deposits buried deep under the ocean floor that could turn Brazil into a major energy exporter.

Existing oil projects in Brazil operate under a concession system.

Governments use concession and production-sharing systems to ensure oil fields are developed efficiently while maximizing tax and royalty revenues, or “government take.”

Experts say the two systems can be tailored to yield the same total revenues for governments, but there are key differences, including the following:

PAYMENT IN OIL: In production-sharing agreements, or PSAs, companies agree to give the government a percentage of the oil produced in a field. In a concession, the company owns the oil and pays taxes and royalties to the state.

PSAs usually involve competitive auctions between different companies seeking access to the field, with the winner being the company that offers the government the greatest percentage of oil.

POLITICAL APPEAL: PSAs were first used in Indonesia in the 1960s, according to the Oxford Institute for Energy Studies, to boost the power of governments that felt oil companies always had the upper hand in concession systems.

The switch to PSAs reversed the traditional relationship at the time by making the government the owner of the oil.

Creating a PSA does not guarantee the state a greater percentage of the earnings, but it is appealing to leaders who want to show they are in control of national resources.

The political element has been a key part of Lula’s drive for PSAs, with supporters frequently repeating the mantra “The subsalt is ours,” in reference to the deep water reserves that are buried under a thick layer of salt.

TIMING OF PAYMENTS: In concession regimes, companies frequently make large up-front payments — often in the hundreds of millions of dollars — during bidding rounds to boost their chances of winning rights to a field.

This can be advantageous to governments if they face budget shortfalls. PSAs generally spread payments out over the life of the project. They may also include signing bonuses, though these are much smaller than in concession systems.

BOOKING RESERVES: Oil companies must tell investors how much unproduced oil they have access to, because this is a key indicator of their ability to maintain future production and therefore revenues.

Companies generally prefer concession systems because they allow companies to list all the reserves on their books. In a PSA, it can list only the barrels it keeps.
Thus if a company agrees to give the government 70 percent of the oil from a field, it can book only the remaining 30 percent.

INSTITUTIONAL FRAMEWORK: Countries with limited oil field experience and weak state institutions often use PSAs because they are simple to create and require less government oversight than concession systems.

They are frequently used by poor nations of Africa and central Asia with unstable governments and weak rule of law. Countries with greater oil industry expertise and tax collection capacity, such as in the United States and Norway, tend to use concession systems.