Petrobras signs first E&P JV in Brazil

Brazilian state oil company Petroleo Brasileiro SA has signed the first domestic upstream joint venture contract with another company in its 45-year history.

Last week, Petrobras signed an exploration and production JV contract with a group led by former Argentine state company YPF SA.

The contract was signed by Roberto Monti, president of YPF, Joao Carlos Franca de Luca, president of YPF Brasil, and Joel Mendes Renno, Petrobras CEO.

It is the first E&P JV contract to be signed after Brazil's Congress passed legislation in August 1997 deregulating the Brazilian oil and gas industry and ending Petrobras's 45-year monopoly on virtually all aspects of the petroleum sector.

Petrobras has been negotiating dozens of such contracts with other private foreign and domestic firms and is expected to announce more signature deals in the weeks and months to come.

How profitable these JVs prove to be may hinge on how the Brazilian authorities clarify certain costs and expenses for determining profits under the country's new petroleum tax structure. That analysis comes from Banco Icatu SA, one of Brazil's largest investment banks.

Negotiations

While the new National Petroleum Agency (ANP) is overseeing an offering of more than 90% of Brazil's sedimentary basins to the international petroleum industry for E&P contracts, Petrobras continues to pursue its plan to boost domestic production to about 1.5 million b/d by early next century from about 1 million b/d today.

Although it has been allowed to reserve some Brazilian acreage for itself-notably key producing and development areas, especially in the prolific deepwater Campos basin-the state company also will participate in the ANP tender as well as seek JVs with other firms involving some of its set- aside acreage.

Sources say that Petrobras could sign as many as 30 E&P JV contracts by yearend. Almost 300 companies were involved in the original negotiations that began last year.

The following companies are among those that have signed letters of intent with Petrobras to form joint ventures covering E&P activity in and off Brazil (see map, p. 41):

• Exxon Corp. (operator), Royal Dutch/Shell, Texaco Inc., and a combine of Marubeni Corp. and Japan Petroleum Exploration Co. Ltd., for Albacora Leste giant oil field in the Campos basin off Rio de Janeiro state.
• Texaco (operator), a combine of Amerada Hess Corp. and Brazil's Odebrecht Perfuracoes Ltda., and Japan's Nissho Iwai Corp., for an undisclosed field in the Campos basin.
• Kerr-McGee Corp. (operator) and Exxon, for a field in the Santos basin.
• Chilean independents Sipetrol SA (operator) and Argentine independent Tecpetrol SA for a field in the Potiguar basin in Rio Grande do Norte state.
• Exxon (operator) for an undisclosed field at the mouth of the Amazon River.
• Mobil Corp. (operator) and Unocal Corp., for a field in the Espirito Santo basin.
• YPF (operator) for acreage in the Espirito Santo basin.
• British Petroleum (operator), Exxon, and Elf Aquitaine, for acreage off the Amazon River mouth.
• Elf, Shell, and Enterprise Oil plc, for acreage in the Campos basin.
• Amerada Hess and Odebrecht, for a field in the Santos basin.
• Anadarko Petroleum Co., Houston; Benton Oil & Gas Co., Bakersfield; and Brazilian firm Matapi Explorao Ltda., among others, for two fields in the Solimoes basin of Amazonas state.

Petrobras JV

The Petrobras JV contract is for petroleum exploration and production on Block BES-3, in the Espirito Santo basin off central Brazil.

The block is about 100 km northeast of Vitoria, the capital of Espirito Santo state.

Petrobras will have a 35% stake in the block, and the remaining 65% will be owned by a consortium led by YPF. Other consortium members are Santa Fe Energy Resources Inc., Houston; Wiser Oil Co., Dallas; Norbay, which YPF identified only as a U.S. company; and Brazilian oil field service companies Petroserv and Sotep.

Plans call for drilling three exploratory wells on the 907-sq km block, and shooting and processing 1,800 km of 2D seismic and 288 sq km of 3D seismic.

Total project cost is put at about $20 million, said Renno.

Tax hurdles

Banco Icatu energy analyst Ana Siqueira Dantas told OGJ that a key point for private investors in Brazil's recently deregulated oil sector will be whether the federal government defines exploration and drilling costs either as operating expenses or as capital investments, because this will determine the scope of oil and gas profits.

In Brazil, drilling costs are normally classified as either: exploration expenses when referring to an exploratory well and, in this case, expensed in the year it is incurred; or as investment costs, in the case of a development well and, thus, capitalized for further depreciation, according to the rules established by the regulatory or fiscal entity.

In Brazil, previous regulations had allowed Petrobras to consider development drilling in the same category as exploratory drilling, thus allowing Petrobras to expense all drilling costs in the same category and within the current fiscal year. This may be changed to conform to U.S. generally accepted accounting principles.

Dantas and Banco Icatu analyst Marcio Brito analyzed the new tax structure for Brazil's oil industry, the status of negotiations between Petrobras and private oil companies, and the effects of low international oil prices.

They defined oil and gas profits as the hydrocarbon sales price minus exploration investments, operating costs, depreciation, royalties, and taxes.

Law No. 9478, passed by Brazil's Congress in August 1997, establishes four tax equivalents for exploration and production activities:

• A signature bonus. The minimum value of the signature bonus will be defined in the concession tender and will correspond to the payment offered in the bid. This tax is not applicable to the areas kept by Petrobras, because there was no bidding in this approval process.
• Rental fees for the occupancy or retention of an area. These fees will be paid upon taking title to the exploration and production area. In each concession contract, a unitary amount (Brazilian real per square kilometer) will be specified and used to calculate annual payments. The unitary amount will take into account the geological characteristics of the block and the location of the sedimentary basin.
• Royalties. Royalties and rentals are mandatory for all concession contracts signed with ANP. Until now, Petrobras was subject to the payment of royalties at the rate of 5%. Royalties will be paid on a monthly basis, in an amount that corresponds to 10% of the sales price of the oil and natural gas produced. There is no provision for royalty payments in kind.
• Special participation, which applies to fields with large production volume or high profitability and will be charged as an extra levy on profits.

"Exploration and production taxes paid by Petrobras will increase, but not to a level that could leave us concerned," Dantes said. "The Brazilian government wants and needs to attract foreign investments for the oil sector, so it does not make sense to overtax the sector," affirmed Dantas.

Brito noted, "In our evaluation of Petrobras's specific taxes (see table) for the sector (royalties, special participation, and rental fees), taxes will in- crease from $0.50/bbl in 1997 to $2.30/bbl in 2004 (or from an estimated $162 million last year to a projected figure of $1.137 billion in 2004)."

Oil price effects

According to Dantas, international crude oil prices will not have much of an effect on Petrobras, because domestic refined product prices have, prior to deregulation, always been controlled by the federal government. Law No. 9478 established a 36-month transition period dating to August 1997.

During this period, reviews and changes in refined product prices will be decided jointly by the ministries of Finance and Mines and Energy.

ANP will set the criteria for the importation of oil products, and import criteria must be compatible with the continuing process of price deregulation, because without such criteria, Brazil could have marketers importing 100% of their gasoline needs, thus destabilizing local markets.

Refinery gate prices in Brazil are set extremely high in order to subsidize other products and support buying subsidized products from Petrobras, which is ultimately unsustainable, argued Dantas.

"As a net importer of crude oil, Petrobras is currently benefiting from the present low international crude pricesellipseIn 1997, Petrobras imported 495,000 b/d of crude and 395,000 b/d of refined products. Assuming that the government does not change domestic products prices, higher international crude oil prices will affect Petrobras negatively, and lower prices will have a positive effect," added Brito.

The government will control most products prices until August 2000. After this transition period, the fluctuation of crude oil prices will affect Petrobras in the same way it affects other oil companies, concluded Dantas.

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