OTC-28072-MS

Fiscal and Contractual Hurdles for Stablishing Asset Sharing Agreements in

Offshore Operations

Mônica Costa e Silva Chagas Santoro, Mario José Dias Tavares, Mateus Passeri de Almeida, and Vinicius Farias
Ribeiro, Petrobras

Copyright 2017, Offshore Technology Conference

This paper was prepared for presentation at the Offshore Technology Conference Brasil held in Rio de Janeiro, Brazil, 24–26 October 2017.

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Abstract
The availability of some processing spare capacity in offshore facilities, during its operational life, is an
expected event. At some point in time, it is also expected that some fields may share their assets, in
order to enhance its economic value. Asset Sharing Agreements are efficient tools for those purposes.
However, taxation and fiscal regime in Brazil does not promote a friendly framework for this initiative. This
article aims to discuss some key issues that regulatory agents shall address for adequating Brazilian legal
framework to international oil industry standards.

Introduction
Investments in assets for offshore deepwater production require a significant scale for achieving acceptable
economic returns (Pedroso, Abdala & Pinto, 2012). Some oil companies design their production facilities
to attend production peak. In addition, pressure depletion or water influx in hydrocarbon reservoir will
reduce oil and gas production through time. Therefore, a significant spare capacity arises when production
diminishes. Such events create an opportunity for these assets being used as "hub" production systems.
Furthermore, as a basin becomes more mature, it is likely that smaller accumulations are found. Likewise,
sharing assets may boost economic of fields that do not add significant value in a stand-alone basis. In the
North Sea and Gulf of Mexico (GOM), a growing number of satellite fields have been developed relying
on existing infrastructure (Cross et al., 1994; Lamey et al., 2015; Palagi et al., 2013; Willigers et al., 2010).
It is reasonable to expect that such arrangement will become frequent in Brazil, where deepwater mature
basins are becoming present. This scenario leads to the use of existing assets by more than one player, in
order to optimize new fields development or postpone the economic cap of mature fields. In this sense,
it is possible to predict that some of the platforms used to develop deepwater fields may become a hub,
making economically and techinally feasible the development of marginal nearby accumulations, that could
be stranded permanently in case of no existing assets (Pedroso et al., 2012).
Therefore, it is necessary to address a complex set of legal and technical issues that will exist in an
infrastructure sharing agreement - referred to in this article as Asset Sharing Agreement (ASA) - whether a
tariff or cost sharing may apply. This article aims to discuss which oil-industry key issues, mainly legislation
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and regulation, should Brazilian industry and government address. Some modifications to the existing
framework are necessary, so that these agreements become economically effective, following international
oil-industry standards. Implementing such agreements efficiently is a key factor for achieving the benefits
of sharing infrastructure for oil companies, government and society.

Economical and technical drivers for sharing infrastructure

The economical drivers for asset sharing (Figure 1), according to Cross et al. (1994), shows that the
owners of a host field with spare capacity will benefit in a number of ways from the satellite business. The
assignment of asset spare capacity to a third party, reduce its unitary cost ($/bbl). Host investors may also
collect additional revenues from satellite producers. Both possibilities extend asset’s economic life; thereby,
allowing a greater recovery factor of the host field by deferring abandonment.

Figure 1—Asset sharing between host and satellite fields

Besides the advantages for host field, there are numerous benefits to satellite field owners. As no or
few upfront investment is required for installing full producing and processing facilities, satellite fields can
produce more quickly than a stand-alone project, expediting payback of capital employed. There are also
potential reductions in OPEX, since the satellite would not be exposed to the full operating costs associated
with a stand alone platform (Cross et al., 1994). Thus, economic and financial indicators are improved.
Another technical aspect that should boost asset sharing refers to unitizations in shared reservoirs. When
the extension of a reservoir to a neighbouring area is identified after production has commenced, it is very
likely that it would be mandatory for both neighbours to share the producing facility. In Brazil, there is
an expectation that the number of unitized areas will increase, as many discoveries that present multiple
hydraulically connected reservoirs are revealed.
Corroborating this argument, on May 2017, the National Energy Policy Council (CNPE) authorized the
launching of the Second Bid Round for Exploration and Production of oil and gas, under Production Sharing
Regime in unitized areas in pre-salt polygon (ANP, 2017). The selected blocks are located within the pre-
salt polygon, and include three deposits in Santos Basin pre-salt (Carcará North Blocks, Gato do Mato South
and Sapinhoá Surroundings) and a post-salt deposit in Campos Basin (South-west Tartaruga Verde Pack).
However, there are some disadvantages in sharing assets. In such case, there is an economic dependency
between these fields. For instance, in the North Sea, a common offshore infrastructure design consists
of a regional hub that collects hydrocarbons from the fields located in the catchment area. A pipeline
leaving the hub exports the commingled production. Hubs, pipelines and oil-and-gas receiving terminals
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typically paid a tariff for their services. Once tariff revenues become insufficient to cover the costs of
those services, many commercial agreements default to cost-sharing arrangements, this "extra" cost sharing
generally translates into higher individual operating costs for these fields and may cause certain user-fields
to become uneconomical. As one user-field ceases production, the infrastructure facility's operating costs
are distributed over fewer fields, increasing individual operational costs. This may translate into a "domino-
effect" scenario, in which more and more fields become uneconomical, thereby cutting short the economic
life of the whole infrastructure facility (Willigers et al., 2010).
As a premilinary conclusion, despite a few downsides, the combination of lower CAPEX and OPEX,
tariff based or cost shared over field life, lowers the economic threshold for new developments and
for mature fields, making uneconomic stand-alone projects economically viable and postponing their
abandonment.

Types of Asset Sharing Agreements

Most of the existing ASA contains four key commercial elements: a) capacity reservation and relevant
use-or-pay and excess throughput terms; b) tariff terms - the initial level and indexation, plus the basis for
calculation of periodic tariff payments; c) cost sharing procedure and d) liabilities division among parties
(Pedroso et al., 2012; Willigers et al., 2010).
Usually, ASAs define a fraction of the capacity of each asset to be reserved for each producer. Satellite
fields will either share the production costs (OPEX) or pay a tariff for the use of this reserved capacity, and
may establish a use-or-pay clause related to that use.
The construction of an effective tariff arrangement needs to address the objectives of both owner and
facilities user. The asset owner may require a tariff similar to its operational costs, creating a fair environment
for the new user. Alternatively, a tariff that would represent the opportunity cost for the satellite producer
to share facility, instead of installing a brand new one. In any case, it should be kept in mind that tariff
payers must be able to develop their field economically, leading to a win-win negotiation. However, if tariff
payments are too high, tariff payers may not be able to develop their field economically.
On the other hand, some satellite fields may share costs instead of paying a tariff. Host companies charge
tariff in order to recover capital expenditure (CAPEX), while the intention of cost sharing is to divide
operational costs (OPEX) among producing parties. Tariff arrangements generally remain operational to the
extent that tariff revenues paid by users' fields are higher than the shared assets production costs (OPEX).
From this point on, the standard adopted is a cost sharing agreement, where costs of shared assets are split
among users (Antia, 1994; Willigers et al., 2010).
In Brazil, under a Concession Contract, a Special Participation Fee (SPF) – a windfall profit tax – applies
when a field reaches a certain production rate. SPF applies both on net revenues originated from production,
as well as on Non-Financial Revenues, such as asset sharing tariffs. Therefore, in such case, companies shall
gross up tariffs, considering this tax, in order to preserve economic result. The downside of this alternative
is that a higher amount could harm satellite productors and projects feasibility. From another perspective,
under a Production Sharing Contract such tariff will be borne as cost oil, which may not jeopardize the
economic viability of satellite fields, but rather on the contrary, would increase the amount of cost oil
recovered by the producers.
Asset sharing may also involve hydrocarbons mixture, as production is likely to be commingled within
the process facilities. Hydrocarbon composition might be similar but almost certainly never equal. Brazilian
legislation establishes that each company receives the property of their production just after the Fiscal
measurement point, which is generally downstream the process facility. Moreover, state legislations defines
a specific tax (ICMS, ranging from 12% to 20%) that apply whenever the owner of a product is changed.
Thus, if a producer of a lower quality/energy oil or gas compensates the higher quality one by agreeing with
the lifting of a greater cargo, it would have to bear the burden of ICMS tax in this transaction.
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Thus, ASA should address beyond economic and technical aspects of infrastructure sharing, but also
fiscal and contractual hurdles to execution of these agreements in Brazil, due to specificities related to
Brazilian legislation. The next session of this article will detail fiscal and contractual details for ASA
agreements in Brazil.

Fiscal and Contractual Hurdles for ASA

Special Participation Fee (SPF)
The article 56 of the Ordinance of ANP 10/99 disposes that revenues not originated from oil production
earned by concessionaire in the concession area ("Non-Financial Revenues") should be added to production
gross revenue for calculating production net revenue (ANP, 1999). In this manner, the value obtained by
charging a tariff for infrastructure sharing would be added to the production net revenue, increasing the due
SPF. Consequently, the additional SPF would reduce the net tariff obtained for asset sharing, if the investor
accepts such burden. The other option would be to gross up this tariff with the applicable SPF.
In case of asset sharing, application of aforementioned article 56 would entail some contradictions. The
first is that it could be more advantageous for concessionaire to maintain spare capacity of its facilities
to detriment of government and economic interest in developing new production fields. The second
contradiction, for example, is that under a Production Sharing Contract (PSC) such tariff will be borne as
cost oil, which would increase the amount of oil recovered by oil companies and reduce government income.
Therefore, if in one hand – Concession Contracts – Brazilian government increases SPF earnings, on the
other hand – PSC – it reduces profit oil. The antagonism becomes more acute when a unitization between
Concession and PSC occurs.
Another risk that may arise from sharing assets is that, from the regulatory point of view, ANP may
determine the unification of fields benefited by asset sharing, as it has been previously observed. ANP
has interpreted as belonging to one single field, reservoirs that flow their production to the same facilities.
This procedure guarantees a higher collection os SPF to the State, as higher production triggers earlier or
higher SPF levels. This decision aims to maximize government take in short-term, disregarding companies’
resultsand country’s interest (hydrocarbon production) in the long-term. This decision affects negativelly
oil companies’ confidence and, possibly, willingness to do business in the country.

REPETRO
The Normative Instruction RFB No. 1415/2013 in its article 28 provides that assets listed in its Annex I,
admitted in REPETRO regime, can be used in a shared form, by the same beneficiary, to attend to more
than one service agreement with the same or with other contracting operators, by means of communication
to RFB. Nonetheless, legislation is not clear to how an asset sharing would be treated, if it has not initially
applied to be shared with all benefited parties.
As a consequence, if a satellite field uses a chartered infrastructure from a third company; such company
would be seen as sub-chartering its facility. In this case, a service tax (ISS) would apply. This amount could
be grossed up to the tariff, following the same argument and dilema discussed for SPF.
A consortium might be formed for sharing this asset, which would end up in sharing its cost, instead of
charging a tariff for its use. In this case, the holder of REPETRO regime would have to be adjusted. In this
scenario, it is a possible interpretation of current legislation, that REPETRO admittance must be adjusted,
mitigating the risks of loosing REPETRO or be seen as a sub-charter. Although not a major problem, such
adjustment would require a negotiation among the involved parties: asset owner, original producer and
newcomer.
However, REPETRO legislation is unclear regarding the asset sharing by different beneficiaries, i.e.,
when it is accessed by a third party. In addition, REPETRO legislation prevents sub-chartering, which would
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make it impossible to charge a tariff from a satellite producer for use of shared assets. In this case, the risk
of loss of benefit guaranteed by REPETRO, if any, would make asset sharing unfeasible.

Oil and gas Blending

Assuming that a vessel does not have segregated tanks or process trains and it is being shared by two
different fields, the oil or gas from these fields will be commingled, forming a new blend of intermediate
quality/energy and value. In order to keep the value of input production from each producers unchanged,
one must choose a form of output compensation. For example, a higher value production input shall be
compensated by the lifting of a higher volume of lower value commingled product. Alternatively, in the same
case, offloading the same input volume and receiving a financial compensation for the lower value output
could be another solution. Regardless of chosen compensation alternative, there will be a tax inefficiency
due to collection of ICMS in volumetric and PIS/COFINS in financial alternative.
Besides, a special tax regime could be negotiated with State tax authorities so that oil can be transferred
without the risk of charging taxes in the compensation operation, in order to make asset sharing economical.
The main objective of such special regime would be the recognition, by State tax authorities, of non-
incidence of ICMS in compensation operation.

Unitizations
It is common for a Contracted Area to have multiple reservoirs. Also, due to the size and number of
blocks within a basin, the probability of several deposits extending to different blocks is high (Derman and
Melsheimer, 2010). With the advent of pre-salt regulatory framework, "unitization" takes major importance
in industry debates. In this area, located in Santos, Campos and Espirito Santo Basins in Brazil, a more
complex issue arises: unitization of distinct contract forms - concession, production sharing and onerous
transfer (Lima and Ribeiro, 2013).
For instance, it can be mentioned the case of the Shared Deposit of Tartaruga Mestiça (BM-C-36 Block),
where part of the deposit that extends to a Non-Contracted Area will be leased on the Second Bid Round
for Exploration and Production of oil and gas (ANP, 2017). The Shared Deposit of Tartaruga Mestiça will
share with Tartaruga Verde production assets. This will require an ASA to govern the shared use of these
assets. Therefore, this contract will coexist in Tartaruga Verde, with a Concession contract, and in unitized
area - Non-Contracted Area of Tartaruga Mestiça - with a Production Sharing contract.
Thus, unitized areas (satellite fields) will need to share existing infrastructure and ASAs should be
adapted to coexist with multiple exploitation and production rights regimes (Weaver and Asmus, 2006).

Final Considerations
It is likely that Asset Sharing Agreements become a growing contractual practice in Brazil. This article
addressed the main drivers – both technical and economical – for asset sharing between host and satellite
producers: reducing idle capacity, OPEX and CAPEX, extending economic life of shared asset, postponing
abandonment and making marginal accumulations economically viable. In addition, with the increase in
number of unitizations in Brazil, asset sharing will be a necessary alternative to these new mandatory
partnerships. In addition, unitizations that involve multiple E&P regimes (Concession, PSC and Onerous
Transfer).
There are two types of arrangements for ASAs commonly used by industry: tariff or cost sharing. The
tariff charged by host producer will consider the expenses with CAPEX and OPEX, for the purpose of
cost recovering. In cost sharing solutions, the intention is to divide operational costs (OPEX) between the
producing parties. Depending on the number of producing parties involved, stage of field development
and current production cost, a tariff or cost-sharing arrangement may be more appropriate than another, as
approached by Willigers et al. (2010).
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It was shown that in Brazil some hurdles related to fiscal and contractual issues might arise due to
asset sharing. These should be dealt with in the agreements, such as: SPF, REPETRO, tax inefficiency in
hydrocarbons mixture compensation and unitizations between different regimes.
The collection of additional SPF on revenue earned from the tariff or related to unification of fields, due
to asset sharing, may, to a certain extent, discourage or prevent production of marginal accumulations as
discussed in section 4.1. Thus, Brazilian legislation should consider the possible revision of Article 56 of
ANP Ordinance 10/99, so that all economic agents involved –companies, government and society – can
gain from asset sharing in long term. Likewise, REPETRO regime should be reviewed, in order to make
clear the conditions for asset sharing, so that host producer eliminates the risk of benefit loss.
Lastly, in the case of commingled oil and gas production, industry would react positively if Brazilian
government stablishes a fiscal frameworkthat minimizes fiscal inefficiencies, avoiding tax collection when
volumetric or financial compensation between companies is required.

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