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Brazil urged to reform production-sharing contracts to unlock pre-salt potential

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Brazil urged to reform production-sharing contracts to unlock pre-salt potential


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Brazil must revamp how it writes its production-sharing contracts to maximize investment in its massive pre-salt oil fields, according to a new report by several influential groups of international developers.

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As Brazil prepares to auction on October 21 the promising Libra prospect offshore, interest in the lease-sale may be dampened if the country does not provide greater incentives for companies to invest, said the report by the Americas Society and Council of Americas Energy Action Group.

Christian Gomez, the Council of Americas' energy director who authored the report, said state-affiliated Petrobras' insistence on production-sharing agreements, in which oil remains the property of the state, may stretch the company too thin when it comes to developing the Libra field.

The agreements call for Petrobras to be the sole operator of drilling projects, with a minimum 30% stake.

"Production-sharing contracts should balance the right amount of risk and probability potential," Gomez said at a forum in Washington to discuss the report. "[Petrobras] may not have the resources to operate a large number of fields in the pre-salt."

Richard Mosbacher, chairman of Mosbacher Energy Company, added that the production-sharing agreements put Brazil in "a position that may be proven to be disadvantageous."

"I hope that the Brazil government will watch how the bids go on October 21," Mosbacher said. "I think there would be more players at the table if the terms were better."

The Libra field, one of the largest ever discovered, holds an estimated 8 billion to 12 billion barrels of oil equivalent. It will cost at least $174 billion to develop, Brazil's government has said.

And there may be other lucrative fields in the "pre-salt polygon" discovered in 2007, which includes 12 fields with proven reserves of about 18 billion boe.

Brazil's overall crude production has been stagnant or slightly declining in recent years, which analysts attribute to complicated tax laws, the production-sharing agreement terms and local-content rules that foreign companies find burdensome.

Ramon Espinasa, the Inter-American Development Bank's lead oil and gas specialist, said politics in Brazil are holding back the oil sector, with lawmakers already pledging to spend money they expect to receive from the pre-salt fields on health and education. He called the outlook "rather gloomy" for the oil sector.

"They're creating this idea that the country is very wealthy and has plenty of resources. But you are putting all your eggs in one basket, which is pre-salt," he said. "And it will take some time, between seven to 10 years, to get production on-stream in these complex areas. It will require huge investment to develop the pre-salt, and the conditions are not the most favorable."

Beyond reforming its production-sharing agreements, Brazil should also emphasize development of its natural gas sector and commit to a stable, long-term regulatory policy for its entire energy sector, the report said.

Gomez, who compiled the report after a June summit of energy executives, developers and lawmakers in Brasilia, said regulatory certainty is lacking in the country.

"You see a lot of changes in regulatory policy that governs the energy sector," he said. "Brazil's competitiveness is not guaranteed. The resources are there. It's just going to take the right policies to get them."

--Herman Wang,
--Edited by Jason Lindquist,