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May 15, 2019

Transfer of Rights Surplus Auction - Winners shall compensate Petrobras

Oil & Gas

In 2010, the Brazilian Government and Petrobras entered into an agreement by means of which Petrobras earned the right to produce up to five (5) billion barrels of oil equivalent (boe) within the Pre-Salt Area. The deal was part of a capitalization of the company.

As Petrobras operations progressed, though, it was found that there were way more than those 5 billion boe negotiated. After reaching an agreement with Petrobras to review the original terms of 2010, the government started preparations for the so-called Transfer of Rights Surplus Auction, in order to offer that substantial excess capacity of the reserves to the market. The auction is expected to be held on October 28.

Under the production-sharing agreement (PSA) system, the auction will offer the areas known as Búzios, Atapu, Itapu, and Sépia. The largest field on offer, Búzios, has a subscription bonus of BRL 68,194 billion and a minimum profit oil of 23.24%. For Sépia, the bonus is BRL 22,859 billion and minimum profit oil of 27.88%. For Atapu, bonus of BRL 13,742 billion and minimum profit oil of 26.23%. And the smallest area, Itapu, will be tendered with bonus of BRL 1,766 billion and profit oil of 18.15%.

In addition to the above features, there are other terms specifically for such coming auction, summarized. Ordinance No. 213 issued by the Ministry of Mines and Energy establishes parameters for the financial compensation owed to Petrobras for the investments made by the company in those areas that will be offered to the market. The rationale is to compensate Petrobras for the investments in the development of the area, vis-à-vis the fact that the production outcomes tend to diminish for Petrobras with the entry of new partners.

The compensation shall be negotiated directly between Petrobras and its future partners – a co-participation agreement will be executed between Petrobras and the new partners. There are estimates around US$ 20 billion.

The reference price of oil and gas shall be US$ 72 and US$ 5, respectively. And the volumes considered as contracted as Transfer of Rights are distributed as follows: Atapu, 550 MM boe; Búzios, 3,150 MM boe; Itapu, 350 MM boe; and Sépia, 500 MM boe. The new partners will be allowed to recover (pro rata to their participation) as cost oil those amounts paid to Petrobras as compensation.

The government also informed that any taxes to be levied upon such compensation shall be borne by Petrobras' future partners.

In addition to the economic compensation, Petrobras will receive another almost US$ 10 billion from the Federal Government for the revision of its Transfer of Rights agreement.

Our Oil & Gas team has industry expertise and it is constantly mapping potential business opportunities, studying and getting involved on legal and regulatory discussions. We have broad experience in Oil & Gas matters and transactions and in complementary areas of law, as well as on the liaison with the relevant authorities.

Please do not hesitate to contact us should you want to discuss and/or should you have any questions on this or any other matters within the Oil & Gas industry in Brazil.

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