Petrobras priority rights in upcoming bids for Brazilian production sharing contracts


This week, Brazilian President Michel Temer has issued a decree that regulates the exercise of Petrobras’ priority rights in acquiring operatorship of blocks in the highly prospective pre-salt province, offshore Brazil.  This regulation gives Petrobras considerable flexibility and strengthens its leading role in the development of these reserves.  However, it also creates uncertainty for other potential bidders, which could impact the attractiveness of upcoming bid rounds and will need to be carefully considered by bidding consortia.


When the production sharing regime was introduced to govern exploration and production of new awards of pre-salt acreage in 2010, Petrobras was initially required to operate all blocks, with at least a 30% participating interest.

As Petrobras has become financially and operationally stretched over recent years, this exclusive operatorship requirement has become viewed as delaying development of the pre-salt and the generation of revenue for the Brazilian government (see also  This was a factor in the government only tendering one pre-salt area under these rules in the six years since they were enacted.  The obligation on Petrobras to assume this role was also considered to be a potential burden, as demonstrated by its relinquishment of blocks that could be re-bid under these rules.

Therefore, in November last year, Law 12.351/2010 was amended to remove the obligation on Petrobras to operate and take an interest in all pre-salt blocks.  It was replaced by a provision for the National Energy Policy Council (Conselho Nacional de Política Energética – CNPE) to offer Petrobras a preference in the operation and acquisition of an interest in these blocks.  However, the nature of that preferential right was unclear and has since generated considerable discussion between Petrobras, other oil companies and the government.  Petrobras has argued that it should have the right to back in to awarded production sharing agreements on the terms of the winning bid, whereas a number of private oil companies argued that Petrobras should make a binding election to participate or otherwise in advance of the bid round.

New regulation

The solution eventually adopted in Executive Decree 9.041 of 2 May 2017 is closer to the position advocated by Petrobras.

Petrobras is required to declare its interest in any of the blocks offered for bidding within 30 days of the CNPE resolution setting out the technical and economic parameters of the blocks on offer.  It is required to specify the percentage interest that it intends to acquire, which must be at least 30%.

Following Petrobras’ declaration, the CNPE will propose the blocks in which operatorship should be offered to Petrobras and the percentage interest that it should be offered, between 30% and the percentage that Petrobras has indicated.  It is not clear whether the government may refuse to offer an operated interest to Petrobras in blocks that it has requested, considering that the enabling legislation seems to require Petrobras to be offered this preference.

In cases where Petrobras exercises its preferential rights, it will be required to join the winning consortium as operator and with the specified percentage interest if the winning bid offers the Brazilian federation the minimum percentage of profit oil specified in the tender rules.  Petrobras will have the option to join the winning consortium or not if the Brazilian federation is offered more than the minimum percentage of profit oil, and it must exercise this option during the bid round.

If Petrobras decides in advance not to exercise its preferential right, it may still participate in the bid round alone or in a consortium of its choosing on the same terms as other bidders.

Implications and issues

The clarification provided by the new rules is important in advance of a busy schedule for pre-salt bid rounds.  Brazil intends to offer production sharing agreements in two bid rounds scheduled to take place in October this year, with another two tenders expected during the course of 2018 and 2019.

This decree addresses Petrobras’ concern that it should not be required to participate in these blocks before knowing its share of profit oil, which is a key factor in assessing the economics of development.

However, other participants in these rounds may be concerned that, if they bid more than the specified minimum profit oil percentage, they do not know at the time of bidding whether they or Petrobras will be operating, nor what their participating interest will be.  These factors may also influence the attractiveness of a particular opportunity, especially when there are concerns about Petrobras’ capacity to undertake new exploration and development commitments.  A block that is a priority for private consortium members may not be top of Petrobras’ list.

The practical impacts of this mechanism will depend on how Petrobras intends to exercise its preferential rights.  We will soon find out.  The CNPE resolutions authorising the 2nd and 3rd production sharing bid rounds, and triggering the 30 day periods for Petrobras to exercise its preferential rights, were published on 4 May and 27 April respectively.

If Petrobras follows its recent policy of deleveraging and focussing on near term cash generation, it may decide to sit out these first pre-salt bid rounds.  This would help to restore a measure of diversity to the Brazilian upstream oil and gas industry.

However, Petrobras is seen as a Brazilian national champion, and the pre-salt is considered its crown jewels, discovered by Petrobras, which understands this petroleum province better than any other oil company.  At some point then, it seems likely that it will come under renewed political pressure to maintain its dominance in this area. 

For the same reason, some of the potential private investors in these blocks would welcome the opportunity to team up with Petrobras.  This priority mechanism may encourage a parallel process of bilateral discussions between Petrobras and bidding consortia, as seemed to happen in the first pre-salt bid round.

If Petrobras exercises its preference right, other bidders will need to consider this variable, how it affects the level of their bids, and what impact it should have upon their participating interests if Petrobras backs in; should all participants be diluted proportionally or as otherwise agreed?

With the rich pickings on offer in these upcoming bid rounds, the prospect of partnering with Petrobras is unlikely to deter many bidders, but if Petrobras does exercise its preferential rights, it introduces another factor to be considered carefully in the formulation of bids.