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Brazil cuts oil royalties to boost recovery rates

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(Argus Media) Brazil’s hydrocarbons regulator ANP reduced royalties to 5pc from around 10pc in an effort to boost recovery at qualifying mature fields.

The royalty reduction is contingent on new investment commitments and only applies to those fields that have either been in production for at least 25 years or have accumulated production of at least 70pc of proven reserves. The ANP estimates around 241 fields would qualify for the lower royalty.

The measure is expected to help Brazil increase its average recovery rate in mature fields, mainly in the Campos basin, to a minimum 35pc in the long-term, up from a current 21pc, ANP director general Decio Oddone told Argus on the sidelines of an event today in Rio de Janeiro.

A renewed interest in the Campos basin, where firms such as state-controlled Petrobras and Chevron have already requested contract extensions, is expected to check 9pc/yr declines in the medium term. Recent pre-salt discoveries in the area and a robust associated natural gas transport network have attracted firms such as Norway’s Equinor, Chevron and ExxonMobil to recently awarded exploration assets.

Petrobras’ short-term plan is to increase production in the basin by around 25,000 b/d and increase reserves in the basin by around 1bn bl of oil equivalent, according to a company presentation.

Equinor’s recent $2bn acquisition of a 25pc stake in the 249,000 b/d Petrobras-operated Roncador field will help the company increase flows through enhanced recovery. A forthcoming deal with China’s state-owned CNPC expected to cover equity stakes in the Petrobras-operated Marlim field should also attract more investment to the basin.

The ANP proposal to slash royalties in exchange for increased production commitments was first introduced in September 2017, but wrangling with cash-strapped state governments, particularly Rio de Janeiro, delayed final approval.

The resolution published today by the ANP comes at a time when most companies are holding off on upstream investment until after general elections, which will be held in two phases starting 7 October.

The royalty cut is complimented by a recent resolution obligating Petrobras to present new development plans for languishing onshore and shallow-water assets within 90 days. Petrobras has pulled back on investments outside of the country’s ultra-deepwater play, a situation that is aggravating some state governments, particularly in Brazil’s northeast, where unemployment remains at record highs. The company is still trying to sell dozens of onshore and shallow-water assets as part of its 2017-18 $21bn divestment plan.

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