Originally published December 10, 2010

Keywords: Pre-Salt, PSA regime, petrochemical industry

On December 2, 2010, the Brazilian House of Representatives gave its final approval to the creation of a new regime for the exploration of the pre-salt reserves through the adoption of a production sharing agreement model (the "PSA regime"). The PSA regime was previously discussed in the Brazilian Senate, which approved the bill on June 10. Under the PSA Regime, Petrobras will own at least a 30 percent participating interest in every new venture within the pre-salt area, which is estimated to hold recoverable reserves of roughly 50 billion barrels of oil.

Petrobras will have the right, either solely or in consortium with other partners, to conduct all the exploration and production operations required within the pre-salt blocks, at its cost and risk, and, in the event of a commercial discovery, be entitled to reimbursement of the costs incurred (cost oil) and a share of the surplus production (profit oil). The oil produced becomes government property after both the cost oil and profit oil are deducted.

Government leaders believe that the PSA regime will enhance the development of the petrochemical industry. They believe that by increasing the state control over production will allow them to sell oil under more favorable conditions and to use oil to execute strategic agreements with trade and political partners. The government also aims to exert more control over the industry's supply chain by imposing even stricter local content requirements.

The PSA regime was originally provisioned by one of four separate bills proposed in August 2009, each of them dealing with specific matters related to the exploration of the pre-salt reserves. However, since their submission to the Congress, the four bills have been subject to many amendments, and several of the provisions have become quite different from the Executive Branch original proposals.

One of these significant changes was the incorporation of the PSA regime into the bill initially intended to regulate the creation of an oil wealth fund to manage the revenues from the pre-salt reserves and support social and economic development in Brazil (the "Social Fund"). According to Senator Romero Jucá, the Social Fund is part of the PSA regime and, therefore, both matters should be discussed and voted together as a single bill.

The Congress has also approved a very controversial amendment establishing that the royalties from all offshore fields (even those outside the pre-salt areas) must be equally distributed among all states and municipalities, instead of being directed mostly to the oil producing regions. This provision also determines that the government will compensate the producing states (mainly Rio de Janeiro and Espírito Santo) for their loss of funds, although it is unclear when and how this will occur.

President Lula has already asserted that he will veto this amendment, since the original proposals were not supposed to affect the royalties from the existing concession contracts. Lula believes that the pre-salt reserves have enough resources for a satisfactory distribution and that any change to the existing rules shall be discussed in the future under a separate bill.

A veto to the amendment will not affect the approval of the remaining subjects, particularly the PSA regime and the Social Fund, and the bill is now only awaiting for the sanction of the President.

Visit us at Tauil & Chequer

Founded in 2001, Tauil & Chequer Advogados is a full service law firm with approximately 90 lawyers and offices in Rio de Janeiro, São Paulo and Vitória. T&C represents local and international businesses on their domestic and cross-border activities and offers clients the full range of legal services including: corporate and M&A; debt and equity capital markets; banking and finance; employment and benefits; environmental; intellectual property; litigation and dispute resolution; restructuring, bankruptcy and insolvency; tax; and real estate. The firm has a particularly strong and longstanding presence in the energy, oil and gas and infrastructure industries as well as with pension and investment funds. In December 2009, T&C entered into an agreement to operate in association with Mayer Brown LLP and become "Tauil & Chequer Advogados in association with Mayer Brown LLP."

© Copyright 2011. Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.