NATURAL RESOURCES AND STATE PARTICIPATION

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1 NATURAL RESOURCES AND STATE PARTICIPATION Adriano Drummond Cançado Trindade July

2 State Participation Strategic significance Public vested ownership Exploration+Production subject to regulation and, sometimes, State participation National Resource Companies Oil & Gas sector Mining sector NOCs: Control 90% of world oil reserves Account for 70% of production 25 of the world s top 50 oil companies are NOCs

3 National Resource Companies Instrument to exercise (permanent) sovereignty Economic nationalism National pride, fashionable Technology transfer Linkages with other sectors, industrialization Local content Job creation Infrastructure, regional development Social aspects Maximization of revenue Closer presence of the regulator (when associated with private companies)

4 Forms of State Participation Monopoly: no or little participation of private investors Equity participation: shares investment, risk and reward with private investor Carried participation: Investment + risk borne by private investor during exploration Investment + risk shared with private investor during development Rewards shared with private investor during production (compensation+uplift?)

5 Forms of State Participation Free Carried participation: Investment + risk borne by private investor Rewards shared with private investor Production sharing: Shares investment, risk and reward with private investor Involvement of State company in operations

6 National Resource Companies over time... Some examples of success, but... Conflicting objectives Inhibits private investment Inefficiency, bureaucracy, corruption Some resource companies becoming too powerful Yet many countries have National Resource Companies.

7 Dealing with National Resource Companies Governance Lack of transparency/accountability Political management Corruption Impact on Government/authority Dual role Investor vs regulator Economic aspects Expenditures in non-resource tasks Revenue: equity share vs taxation

8 Dealing with National Resource Companies Funding by the State High risk, long term Balancing priorities Investment in non-resource sectors Project delays Efficiency and Profitability Lack of transparency/accountability Political interference Curbing competition

9 Optimizing National Resource Companies Regulation vs equity control Definition of roles: NRCs, regulators, other sectors players Transparency and accountability State exposure to risk/funding Government take through taxation mechanisms

10 Brazil s Oil History in a Nutshell 1953: Monopoly over oil & gas E&P and creation of national oil company: Petrobras The Oil is Ours 1967: Monopoly raised to constitutional level 1970 s: Discoveries at the Continental Shelf Risk Contracts (curbed by 1988 Constitution) 1995/1997: Flexibilization of monopoly Concession system: tax & royalties Independent regulator (ANP) 10 Rounds ( ) 2007: Major pre-salt discovery New paradigm: low exploratory risk and high production potential

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13 Pre-Salt Regulatory System: Production Sharing Economic and political power both at domestic and international levels Role of the President of the Republic (Pre-Salt + Strategic Areas) Government take: share of the profit oil + royalties State powers within the consortium Strategic objectives Local content Linkages with other sectors Social objectives: Pre-Salt Fund

14 Pre-Salt Regulatory System: Production Sharing Petrobras National oil company (mixed capital, Government majority) Operator Minimum interest: 30% PPSA (Pré-Sal Petróleo S.A.) Government wholly-owned company Manage contracts (?) regulator s agent? Represent the Government interest in the consortium Commercial agent for Government share in profit oil But: no risks, no investment - free carried interest

15 Pre-Salt Regulatory System: Production Sharing Operational Committee Exploration plans and discovery assessment Commercial discovery and plans of development Work programmes and plans of production Budget PPSA appoints 50% of Committee members and the Chairperson Chairperson: veto powers and casting vote

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18 First Pre-Salt Contract: Libra (Oct/2013) Eleven companies were qualified, but only one consortium presented a bid Signature bonus: R$ 15 billion (US$ 7.5 billion) Minimum bid: 41,65% profit oil Was the tender a sucess? Is this structure adequate? Implications for Petrobras (and its shareholders)? CNOOC 10% CNPC 10% Total 20% PPSA Interest in the consortium Shell 20% Petrobras 40%

19 Obrigado. Adriano Drummond Cançado Trindade