If oil is black gold, then Brazilian Congress is about to unlock a treasure fit for King Midas. The key is the so-called “transfer rights” bill, currently pending in the Senate and the subject of voracious negotiations between lawmakers and the future government about how to distribute a fortune of more than BRL 100 billion. The story goes back to 2010 when the Brazilian government increased its stake in state-owned oil company Petrobras.

By that time, the federal government and Petrobras had made the transfer rights agreement, under which Petrobras paid roughly BRL 75 billion to exploit 5 billion oil barrels on the so-called “pre-salt” layer. In return, the government paid BRL 49 billion for shares of the company, which aimed to increase its ability to develop the project.

Since then, Brent prices have dropped and a lot more oil was discovered: estimates project between 6 and 15 billion extra barrels. Meanwhile, Petrobras’ net debt increased so much that it became the largest in the world for the oil and gas industry. More resources and fewer means to exploit them led both parties to reassess the transfer rights agreement.

The process is still ongoing, but according to Minister of Mines and Energy, Wellington Moreira Franco, Petrobras is entitled to receive money.

The bill being analyzed by Congress provides a legal framework for the deal and allows Petrobras to sell 70 percent of the areas it has the right to exploit. According to a study conducted by Rio de Janeiro Federal University (UFRJ), selling this stake would generate revenue of USD 28 billion to Petrobras. As a comparison, by the end of the third quarter of 2018, Petrobras’ net debt was USD 72,8 billion.

Professor Agostinho Pascalicchio, from Mackenzie University in São Paulo, calculates that these 5 billion barrels could generate USD 300 billion in gross revenue, considering Brent current levels, around USD 60 per barrel. However, he highlights that the cost of extraction will probably be very high due to the pre-salt layer conditions, so companies would have better margins with Brent trading around USD 75 per barrel.

The bill also paves the way for what is considered to be the biggest oil auction in the world. According to the president of the Brazilian Senate, Eunício Oliveira, the country may receive something between BRL 120 billion and BRL 130 billion for the sale’s signing bonus alone. The potential royalties are unknown, as it is almost impossible to precisely measure the amount of oil that lies underneath the ocean.

Besides the money, the auction is a huge chance to innovate and speed up pre-salt development for the entire sector, according to Mr. Pascalicchio.

“This means that Petrobras would invest in upstream projects for the first time in such a long time. It also may attract international partners, which would bring more investments, innovation and, therefore, a greater capacity to learn about the production limits of the pre-salt layer”, Mr. Pascalicchio told The Brazilian Report.

How to share the profits?

As far as the government is concerned, the money couldn’t come at a better time. The Brazilian economy is struggling after its worst recession ever and the budget deficit for 2018 alone may reach up to BRL 159 billion. It’s no wonder the incoming government is actively involved in negotiations to get this bill approved.

One of the biggest sticking points in the negotiations concerns how the money will be shared. Mr. Oliveira is pressing for ways to guarantee that states and municipalities will have a percentage of these resources. The future Minister of the Economy, Paulo Guedes, agreed, but this led to a whole new round of talks.

States and municipalities hoped they may have their piece guaranteed by way of a presidential decree from Michel Temer, but it is now more likely the bill will be amended in the coming legislative year.

The second option would be to send the bill back to the lower house, which would take longer for it to be passed. So far, six senators have presented amendments that dedicate between 20 and 75 percent of proceeds to states and municipalities.

Mr. Guedes came up with a third alternative, which is to negotiate with the Federal Accounting Court (TCU) to approve the deal between Petrobras and the federal government, even without the support from the bill. As the transfer rights bill is unlikely to be passed before the end of the year, the auction itself may be delayed until 2020.

Besides technical, fiscal and legislative difficulties, there is also political opposition to the transfer rights deal. Many members of Congress, such as Lindbergh Farias, leader of the opposition in the Senate, believe that Petrobras should be the only one to access this resources.

“We do not accept the transfer rights deal. Petrobras has already made investments. We are talking about more than BRL 700 billion in profits that Petrobras might obtain in 20 years. We are fighting against the bill,” Mr. Farias told Agência Senado.

MoneyDec 26, 2018

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BY Natália Tomé Scalzaretto

Natália Tomé Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.