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The Petrobras-government tussle

A deal between the state-run firm and the Brazilian government could lead to a mega bidding round

Brazil has billions of barrels of oil it has to figure out what to do with.

The government and state-owned Petrobras are locked in negotiations over the fate of as much as 15bn barrels of crude in the so-called "Transfer of Rights" (Cessão Onerosa in Portuguese) area, a cluster of fields in the pre-salt.

In 2010, when the government was embarking on a record-breaking sale of shares in Petrobras, it struck an agreement with the state oil company in which Petrobras paid for the right to develop and produce up to 5bn barrels of oil equivalent from the fields. At the time the agreement was signed, the price paid for such reserves was $42.5bn, around $8.50 per undeveloped barrel of oil.

However, the contract allowed the state oil company to renegotiate the terms of that sale depending on the WTI price at the time each field was declared commercial. The two sides have been at loggerheads for months over how to revalue the fields, though. Given that international oil prices have fallen sharply since 2010, a price revision should benefit Petrobras.

The first 5bn barrels discovered by Petrobras in the area are located in eight fields, which have been sanctioned: Buzios, Itapu, Sul de Sapinhoá, Norte e Sul de Berbigão, Norte e Sul de Sururu, Atapu, Sul de Lula and Sépia. Production in these fields should start up in the first half of 2018, and will be subject to Brazil's production sharing contract.

But the intervening years have thrown up another question that has vexed the negotiations. Petrobras has found far more oil than the 5bn barrels covered in the deal and the government has to decide whether it will hire Petrobras to develop the additional barrels, or offer it to the market through a bidding round.

According to estimates by independent consultancy Gaffney, Cline & Associates (GCA)—hired by the governmentthis excess oil amounts to somewhere between 9bn-15bn barrels of recoverable resources (see table). Petrobras, on the other hand, says the volume is smaller.

If there were a bidding round for this excess oil, it would certainly attract big cash and major foreign investment, given the sizes of the discoveries. The eventual bidding winner would have to work with Petrobras on the projects' investments and profits sharing.

The government wants to cut a deal with Petrobras soon, so it can hold this mega bidding round by the end of July. The timeline is tight because the government wants to get it done ahead of October's presidential elections. A committee with representatives from the Ministry of Mines and Energy, Ministry of Finances and Ministry of Planning have been negotiating with Petrobras since the middle of last year, with no breakthroughs as of yet.

The issue over the price difference on the discovered oil should be fairly straightforward. It most likely will benefit Petrobras, given the oil price decline since 2010, and the windfall will come at an opportune time as the company works to bolster its finances.

The other issue, about the excess oil, is a trickier one, where each side has its own geological interpretation about volumes, and the political agenda is pressing the timeline. We may see progress this year, but having all the issues resolved and a bidding round happening in July may not be feasible. Those 10bn-15bn barrels may remain in the ground for a while.

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