- 1. What is the new framework the Government has proposed for areas it considers as strategic?
- 2. How will production sharing system work?
- 3. When a bidding procedure is held, what will Petrobras’ stakes be?
- 4. How does a company win a bid for areas that are put up to bid?
- 5. When the exploration of the block is offered exclusively to Petrobras, how will the percentage of the profit-oil for the Brazilian Government be defined?
- 6. How will the signing bonus be determined?
- 7. Will pre-salt areas that have already been bid for be governed by the new system?
- 8. What will be the role of the new state-owned company?
- 9. Will the new state-owned company make any investments? Can it partner or compete with Petrobras?
- 10. Who are the important players in this new scenario and how will transparency be maintained with these new proposals?
- 11. How will the royalties and special participation be dealt with?
- 12. How will it be possible to conciliate the production of fields explored under the different regulation systems?
 1. What is the new framework the Government has proposed for areas it considers as strategic?
ANSWER:
The new framework proposed by the Government includes new rules for oil and natural gas exploration and production in the pre-salt area and in other areas that may come to be considered as strategic. The Government submitted thee rules to the Congress on August 31 2009 in the form of four draft bills (DB).
The draft bills define the production sharing system for exploration and production in pre-salt areas that have not been put up for bid yet; the creation of a new state-owned company (Petro-Sal); the formation of a Social Fund; and the transfer of rights with compensation to undertake oil and natural gas exploration and production (E&P) activities in certain pre-salt areas to Petrobras, up to the limit of 5 billion barrels, besides the possibility of the government participating in a capitalization operation in the Company.
2. How will production sharing system work?
ANSWER:
The production sharing system will be in effect for areas not yet bid for in the pre-salt and for those the National Energy Policy Council (CNPE) defines as strategic.
In production sharing, contractors take on all activity risks and will only be reimbursed if commercial discoveries are made. This payment will be made in cost oil at an amount that will suffice to reimburse the contractor(s). The remaining production (excess in oil, the so-called profit oil) will be shared by the Brazilian Goverment and the company(ies).
Under this draft bill, the Government may sign two types of agreements: solely with Petrobras (100%) or based on bidding procedures companies may participate in freely, with the operator status and equity stakes of no less than 30% in the consortium to be assigned to Petrobras.
3. When a bidding procedure is held, what will Petrobras’ stakes be?
ANSWER:
Petrobras is ensured minimum 30% equity stakes. Additionally, it may participate in the bid and, thus, increase its stakes even more. The operator is responsible for the E&P activities, providing human and material resources for the execution of the activities. Besides having access to strategic information, the operator has control over production and costs and promotes the development of technology.
4. How does a company win a bid for areas that are put up to bid?
ANSWER:
The draft bill states that the company that offers the highest excess oil (profit oil) percentage to the Brazilian Government will be the winner. In this case, Petrobras must match the percentage the winning bidder offers the Government.
5. When the exploration of the block is offered exclusively to Petrobras, how will the percentage of the profit-oil for the Brazilian Government be defined?
ANSWER:
In this case, the National Energy Policy Council (CNPE) will set the minimum percentage of the oil for the Brazilian Government, based on the proposition of the Ministry of Mines & Energy (MME).
6. How will the signing bonus be determined?
ANSWER:
In the production sharing system, the signing bonus is not an assessment criterion for the bidding procedure and the CNPE will define it case-by-case.
7. Will pre-salt areas that have already been bid for be governed by the new system?
ANSWER:
No. Agreements that have already been signed will be respected, even if they include the pre-salt, and no change will be made to the criteria. The concession agreement system will remain in effect for them.
8. What will be the role of the new state-owned company?
ANSWER:
It will be a state-owned company, with 100% ofI its capital belonging to the Brazilian Government, and it will be created to represent the Government’s interests in the production sharing agreements. The company will not participate as an investor in the E&P projects, but it will be present on the operating committees that will define the consortia’s activities, it will be entitled to the tie-breaking vote and, furthermore, it will have the power to veto decisions. Its main attributions include representing the Government’s interests in the production sharing agreements, monitoring and auditing costs and investments in the sharing agreements, and managing the agreements that are signed to trade the Government’s oil and natural gas.
9. Will the new state-owned company make any investments? Can it partner or compete with Petrobras?
ANSWER:
No. Petrobras and possible partners will make all investments. The new company will not be responsible, whether directly or indirectly, for oil and natural gas exploration, development, production and trade activities and, thus, will not compete with Petrobras or share human or financial resources with it.
10. Who are the important players in this new scenario and how will transparency be maintained with these new proposals?
ANSWER:
In addition to Petrobras which, according to the proposal, will operate all of the blocks to be contracted under the production sharing system in the pre-salt, the Ministry of Mines & Energy (MME), the National Energy Policy Council (CNPE), the National Petroleum Agency (ANP) and Petro-Sal will play a fundamental role in operations.
The Ministry of Mines & Energy will propose to the CNPE: the guidelines, planning how the oil and natural gas will be used; the blocks to be subject to the sharing system; the technical and economic parameters of the agreements (the criteria for the profit oil, Petrobras’ minimum stakes, the signing bonus, among others). It will also set guidelines for the bidding procedures for the ANP; and approve the public notice and agreement drafts.
The National Energy Policy Council will determine the block contracting pace; the blocks to be contracted exclusively with Petrobras and the ones that will be open for bidding; the agreement’s technical and economic parameters; the changes (upwards) in defining the area that is called the “pre-salt;” the areas classified as strategic; and the policies to be followed to trade the Government’s oil and natural gas.
The National Petroleum Agency will assist the Ministry of Mines & Energy in delimiting the blocks for sharing; it will prepare drafts of the public notices and agreements; hold the bidding procedures; analyze and approve the work and production plans; regulate and inspect the companies’ activities based on the best oil industry practices; and harmonize the rules to be applied under the different systems. The ANP will also regulate and inspect the E&P activities in areas involved in the transfer of right with compensation to Petrobras.
Petro-Sal will represent the Government in the consortia and operating committees. The new state-owned company will manage the production sharing agreements and the agreements drawn-up to sell the Government’s oil and natural gas. It will appoint half of the members of the Operating Committee, including the Committee’s chair, who will be entitled to the tie-breaking vote and hold the power to veto decisions.
An Operating Committee will be created for each block assigned to the production sharing system to manage the consortium formed by Petrobras, Petro-Sal and, in the event a bidding procedure is held, the winner(s). This Operating Committee will define the exploration plans to be submitted to the ANP and the discovery assessment plans; it will declare the fields’ commerciality; define the work and production programs; analyze and approve the budgets; supervise the operations; approve cost accounting; and define the unitization terms. The Operating Committee will be constituted of representatives of Petro-Sal (which will appoint half of the members and the Committee’s chair) and of the contractors.
11. How will the royalties and special participation be dealt with?
ANSWER:
The original draft bill stated that the current government take system would be maintained until the new royalty rules to be used under the sharing system were approved. However, during the process of discussion of the draft bills in the Congress, a new article was included determining the royalties in 15% and the new criteria of distribution between Federal Government, States and Municipalities. As for the Special Participation, in the current draft bil being discussed in the Congress, it will not be charged in the production sharing system.
In the onerous transfer of rights proposal, no special participation is foreseen for volumes produced in the areas that are the object of the transfer of rights, but royalty payments will be maintained according to the same standards currently applied to the concessions.
12. How will it be possible to conciliate the production of fields explored under the different regulation systems?
ANSWER:
If the bills are approved, Brazil will have three regulatory systems. The concession system will remain valid for the areas that have already been granted and for areas outside of the pre-salt that are not considered strategic. The production sharing system will be for the pre-salt and for the strategic areas. The transfer of rights system will allows the Government to grant Petrobras the rights to perform E&P activities in certain pre-salt areas, up to the limit of 5 billion barrels of oil and natural gas.
- 13. How will the transfer of rights with compensation work?
- 14. What is Petrobras’ capitalization?
- 15. What will be the amount of the transfer of rights and of the capitalization?
- 16. When is it expected for the transfer of rights to be made?
- 17. In this capitalization process, will Petrobras’ minority shareholders be hindered in any way?
- 18. How much will the government be able to bring in?
- 19. How would the ON/PN ratio be thereafter?
- 20. How will ADR holders participate?
13. How will the transfer of rights with compensation work?
ANSWER:
Under the transfer of rights, the Government may grant Petrobras the right to explore and produce given pre-salt areas, at its own cost and risk, up to 5 billion barrels of oil and natural gas.
The amount of this transfer will be assessed based on the best practices used in the oil industry, and Petrobras will pay this amount to the Brazilian Government. According to the draft bill, Petrobras can pay the government using federal public debt securities, the price of which will be based on the market value.
As for the criteria to be used to define the amount of the transfer of rights, this will be defined by means of negotiations between the Government and Petrobras based on technical reports prepared by international certification entities pursuant to the best practices in the oil industry. The ANP and Petrobras will be in charge of securing the mentioned technical expert reports.
14. What is Petrobras’ capitalization?
ANSWER:
This is an operation that is typical of the capital market, which entails in ramping-up the Company’s joint stock by issuing new shares. The goal is to boost Petrobras’ investment capacity. The transfer of rights bill authorizes the Government to underwrite Company joint stock shares and pay them in with federal public debt securities, the price of which will be based on the market value.
15. What will be the amount of the transfer of rights and of the capitalization?
ANSWER:
The amount of the transfer of rights has yet to be determined and will be based on negotiations between the Government and Petrobras, who will base themselves on technical reports hired by both parties. These reports will be prepared based on the best practices of the international oil industry.
In a first stage, the Government would pay in up to its limit of 32%, while the other shareholders could exercise the remaining 68%. If the other shareholders do not exercise the total, the Government and the shareholders who did exercise could exercise the remaining portion. The amount will be used to:
a) obtain funding for the investments envisaged in its business plan, including those related to its role as the sole operator in all the blocks under the production sharing agreement model, with a minimum share of 30%;
b) obtain funding to pay for the transfer of Rights with compensation and the possible price adjustments arising from revision of the contract;
c) obtain funding for those investments allocated to the development and production in the transfer of Rights areas;
d) optimize its capital structure and paving the way for new funding options, while maintaining optimum debt levels;
e) maintain the policy of contracting critical resources for long term, thereby reducing costs due to increased scale and facilitating financing for its suppliers.
The total size of the capital increase is expected to be (i) an amount equal to the price to be paid for the transfer of rights and (ii) up to three times this amount. The figure of three times is based on the federal government’s ownership of approximately one third of the equity capital of the company, and the offering of pre-emptive rights to the remaining two thirds of shareholders. As a minimum, where only the government capitalizes the company, the proceeds from the capitalization will be used in their entirety to pay for the transfer of rights. For amounts above that amount, the company will pay for the transfer of rights and retain the remaining proceeds in its cash position, ensuring added strength for future investments;
16. When is it expected for the transfer of rights to be made?
ANSWER:
The proposal determines the transfer of rights should take place in no more than a year after the bill is approved. This term is for the onerous transfer agreement to be signed. Such agreement must lay down all of the clauses for the transfer to be reassessed, including the term for the revision of the amount.
It must be emphasized that the one-year term is only for the transfer agreement to be signed. All assumptions, including area redefinitions, will be defined in the transfer agreement’s clauses and don’t need to comply with the one-year term set forth in the draft bill, which is only for the agreement signing.
17. In this capitalization process, will Petrobras’ minority shareholders be hindered in any way?
ANSWER:
When Petrobras’ stock is increased, the minority shareholders may exercise their rights under the corporate law to maintain the proportion of the stakes they already hold in the company by buying more stock. If not all shareholders exercise their right to take part in the capital increase, resulting in unsubscribed shares, those shareholders who exercised their rights in the first stage to will be allowed to acquire these unsubscribed shares, in accordance with the new shareholding proportions arising from the first exercise of rights.
18. How much will the government be able to bring in?
ANSWER:
Article 9 of the Transfer of Rights and Capitalization Draft Bill does not determine the amounts for the capitalization.
The Government will only be authorized to subscribe to PETROBRAS’ joint stock and to pay in using government bonds.
19. How would the ON/PN ratio be thereafter?
ANSWER:
There is no way to ensure the ON/PN ratio will remain the same after the operation. It was previously defined that the issuing will maintain the same ratio. At the first moment of the subscription, the government can only subscribe ON shares, since it only holds this type of stock (and considering the issue will be made observing the current ON/PN ratio). However, if there are leftovers, this may mean the government may also subscribe PN stock, just as, in turn, those who hold PN stock may subscribe to ON stock.
20. How will ADR holders participate?
ANSWER:
The Company will work on extending the right to participate in the issuing to all shareholders, including ADR holders. The initial indications are that there is a way to extend to ADR holders the right of preference. All that will be required is for Petrobras to make a special registration at SEC, the execution time of which would not have any impact on the operation’s timeline, since it can be done via Petrobras’ Automatic Shelf Registration Statement (ASRS) (Form F-3) which is currently in effect. The offer could be made by means of a concise prospectus supplement that would incorporate, by reference, the information contained in the 20-F and 6-Ks in the same fashion as the prospectus supplements used to issue PifCo notes.
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