Petrobras Seeks Co-participation Partnerships

The National Petroleum Agency (ANP) recently announced plans for a special PSC tender on 28 October, in which the transfer-of-rights excess oilfields will be auctioned. This was an optimistic move, given that the transfer-of-rights legislation has yet to pass Congress.

At present, the Ministry of Mines and Energy (MME) is preparing a report for Congress that details the underlying terms of the auction and the final settlement between the government and Petrobras. The report will likely trigger efforts by the Senate leadership, including President Davi Alcolumbre (DEM) and government leader Fernando Coelho Filho (DEM), to schedule a floor vote on the transfer-of-rights measure next month. In doing so, we expect them to work closely alongside Tasso Jereisatti (PSDB), the legislation’s sponsor. If Senate leaders broker a deal with governors on the division of signing bonuses, then we would expect the bill to pass in both chambers of Congress immediately afterward. In our view, there is a 70% chance of passage by the end of April, falling to 50% by the end of May.

In light of the ANP’s announcement, Petrobras and government officials are now considering revisions to the NOC’s partnership strategy. Petrobras E&P Director Carlos Alberto Pereira de Oliveira and Secretary of Oil and Gas Marcio Felix recently met with partner IOCs, including Shell, BP, Equinor, Total and Repsol, to discuss a “co-participation” model for optimizing investments in the Santos Basin pre-salt fields. Petrobras retains its right to take a 30% stake in any of the transfer-of-rights auctioned blocks, and winning consortia would be required to compensate the NOC for its exploratory investments to date. The details of a revised co-participation model could be included in the MME’s transfer-of-rights report to Congress.

Meanwhile, Petrobras launched its “Resilience Plan,” seeking to increase shareholder value through cost and debt reductions. The plan includes a 6.6% cut in operating expenses via a voluntary workforce reduction program. The new plan also formalizes the company’s efforts to tender a growing list of mature oil and gas fields as well as downstream assets. Last year, Petrobras sold 34 fields in the northeast region’s Potiguar Basin to 3R Petroleum. In November 2018, it sold the Pargo, Carapeba and Vermelho mature offshore fields in the Campos Basin to Perenco for $370mn. The NOC also sold its 70% stake in the Campos Basin’s Maromba field to BW Offshore for $90mn. Aside from improving Petrobras’ balance sheet, these efforts underscore the government’s policy of stimulating greater private investment in the Campos Basin and other maturing fields.

In addition, the resilience plan could prompt the sales of BR Distribuidora and Liquigas. BR Distribuidora is the biggest distributor of petroleum derivatives and biofuels in Latin America, while Liquigas is Petrobras’ largest gas distributor and retailer, with operations in 23 of the country’s 27 states as well as in the federal district. Last year, the NOC had attempted to sell Liquigas to its competitor Ultragaz, but antitrust agency CADE stepped in to quash the deal.

Overall, the resilience plan bolsters Petrobras CEO Roberto Castello Branco’s commitment to divestment, even in the face of significant congressional opposition. Several weeks earlier, Senator Alvaro Dias introduced Public Law 579/2019, which would ban the privatization of Petrobras. Dias, a former presidential candidate of the Podemos party, seeks to project his national leadership after getting shunned by voters in the October 2018 elections. His legislation would amend the 1997 law that liberalized the oil and gas sector by prohibiting the government from selling majority stakes in Petrobras and Eletrobras’ nuclear power subsidiary, Eletronuclear. Dias’ proposal reflects alarm across the political spectrum that Minister of Economy Paulo Guedes is preparing to sell off the NOC, despite government assurances to the contrary.

Although Dias is a center-right politician, his initiative could draw support from the government’s center-left opposition in the coming months. Guedes wants to privatize Brazilian SOEs and argues that the government can no longer afford to hold majority stakes. However, Dias counters that Petrobras is successfully modernizing and expanding production in tandem with its private sector partners, as the 1997 law originally envisioned.

Dias leads Podemos in the Senate; with eight members, it is one of the larger parties in the chamber. He and his party could play pivotal roles in galvanizing legislative majorities on questions of energy and fiscal policy reforms in the coming year. Dias’ leadership underscores the populist appeal of a state-centric approach to the energy sector. Furthermore, as the Federation of Petroleum Workers (FUP) prepares for this year’s collective bargaining campaign, Dias could become the spearhead of government opposition. If his proposal is approved in committee, then it would have at least a 60% chance of full Senate passage, in our view. It could also stir up nationalist mobilizations against Petrobras divestments.