Brazil should end subsalt production-sharing regime: Petrobras CEO

Rio de Janeiro — Brazil should end the use of its production-sharing regime for developing oil and natural gas reserves in the country's subsalt frontier in a move that could unlock additional growth for Latin America's biggest producer, Petrobras CEO Roberto Castello Branco said Tuesday.

"The production-sharing regime is not efficient," Castello Branco said during a presentation at an event hosted by the Brazilian Petroleum Institute. "It was established by bureaucrats for political convenience."

Brazil implemented the production-sharing regime in 2010 as a way to maintain greater control over the region and keep most of the cash generated by development in the country. The policy obliged state-led Petrobras to be sole operator in the region and created an offshore polygon the size of New York State that required the use of production-sharing contracts in any development.

The production-sharing regime, however, caused development delays amid lackluster participation in the single auction held in 2013, when just one bid was submitted for the Libra area. In addition, Brazil failed to release an annual schedule of production-sharing auctions.

In 2016, Brazil changed the law to allow foreign oil companies to operate subsalt fields sold under production-sharing contracts and set up a five-year schedule of annual licensing auctions.

The changes proved popular with international players, who bid aggressively at recent production-sharing auctions, paid record-setting signing bonuses and guaranteed record profit-oil for the government. Many industry officials believe additional reforms would generate even more interest and investments.

"We definitely need to either end the production-sharing regime or, in a more-moderate move, end the subsalt polygon," Castello Branco said.

Brazil will hold its sixth subsalt production-sharing auction on November 7. The country will also auction off rights to develop 5.2 billion-15.1 billion barrels of recoverable oil discovered by Petrobras in the transfer-of-rights areas on November 6.

COST CUTTING

Oil companies operating in Brazil's subsalt frontier also will need to continue to focus on slashing development costs for the ultra-deepwater province, whether or not the country opts to end its experiment with production-sharing, Castello Branco added.

Cost cutting in the wake of the 2014-2016 collapse in oil prices combined with the high productivity of the subsalt region to reduce Petrobras' lifting costs to about $6/b in the second quarter, Castello Branco said. But the executive expects Petrobras to reduce its lifting costs to less than $6/b by the end of 2019.

"The search for efficiency and cost reductions is continuous," Castello Branco said. While Petrobras' lifting costs are among the world's best, the company still has areas where fat needs to be trimmed, such as in administrative costs and human resources, he said.

-- Jeff Fick, newsdesk@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com