Analysis of Investment in Downstream Under the Production-Sharing Agreement - a Case Study: Libra, Brazil, 2014

Abstract

This paper aims to evaluate the economic feasibility of a exploration and production of hydrocarbons project under the production sharing regime, specifically of the Libra field, Brazil, starting based upon some assumptions and considerations published before the auction. The discovery of pre-salt and the consequent changes in the Brazilian oil and gas industry with the introduction of production sharing agreements brought a new reality to the national market of hydrocarbons exploration and production. PETROBRAS was designated Operator of all blocks, with a minimum content of 30%. Previously, in the post-salt layer, Leasing Agreements were effective, and PETROBRAS, as every other company, could have 100% of a given block. The high value of the signing bonus for the pre-salt areas and in particular to the area of Libra, subject of the first auction under the production sharing system, made it even more important to conduct a thorough and rigorous decision analysis applied to risky investments and taking into account the issue of risk tolerance. This paper describes how to conduct investment and risk analyses through Monte Carlo Simulation and Decision Trees, and compares the outcomes of this study with the results of the auction in order to validate the methodology and determine optimum share versus risk tolerance. The Decision Theory applied emulated the results observed for Libra: 40% PETROBRAS; 20% TOTAL and 20% Shell; and 10% each one of two Chinese Oil Companies. A comprehensive analysis is made with discussions about the result of the auction, how major oil companies positioned themselves, considering competitive strategy, technological and regulatory risks, as well as minimum governance requirements.