In Class Action, Four Individuals Seek to Prevent Pre-salt Mega-auction

RIO DE JANEIRO, BRAZIL – A class action brought by individuals seeks to prevent the pre-salt mega-auction, scheduled by the government for next Wednesday, November 6th. The action was brought in the Federal Court of São Paulo on Friday, October 30th, and seeks an injunction to suspend the bid.

In the action, the plaintiffs allege that the rules are detrimental to public property and that there is no legal provision for the admission of new companies into the areas, which were granted to Petrobras in 2010, as part of the capitalization process of the state-owned company.

At the auction, the government will be offering the rights to produce oil and gas in excess of the five billion barrels that Petrobras gained in exchange for the stock offering to the federal government in the capitalization, in a contract known as a transfer of rights.

Four areas will be offered, which may hold up to 20.2 billion barrels in reserves, according to the most optimistic projections of a certification company hired by the National Agency of Petroleum, Gas, and Biofuels (ANP), in what is regarded as the largest offer of oil ever made in the world.

For the plaintiffs in this action, the auction “will cause irreparable damage or damage that is difficult to repair to public property, while the legal and constitutional rules that are currently intended to ensure State rights over the natural resources under this action are not complied with”.

The action was filed by Garcez Law Office, on behalf of Luiz Felipe Grubba, Mario Alberto Dal Zot, José Antônio Moraes, and Fernando Siqueira – the former three linked to oil companies’ labor unions and the latter to the Association of Petrobras’ Engineers (AEPET).

They are seeking an injunction to suspend this Wednesday’s auction, at the risk of a fine of R$1 million (US$250,000). They also want a ruling on the illegality of the legislation stipulating the rules for the bid, nullifying the notice for the mega-auction of the transfer of rights.

Lawyers Maximiliano Garcez and Rodrigo Salgado argue that there is no legal provision for the partnership agreement, an instrument devised by the government to allow the auction winners to partner with Petrobras in these areas.

The auction winners will be required to reimburse Petrobras for investments it has already made and, on the other hand, will earn the right to part of the production of platforms either in operation or planned. The largest area on offer, the Búzios field, currently has four drilling platforms and is the second-largest producer in Brazil, with 406,000 barrels per day.

According to the plaintiffs, the transfer of rights contract did not provide for the option of transferring shares to other companies; further, this type of contract’s economic terms are more beneficial than in other models for the concession of oil areas in the country.

“Thus, the contract does not provide for a review of the title of the assignee, even because it would be a contradiction. The process of transfer of rights was designed to capitalize Petrobras, offering the advantages resulting from this process exclusively to the state-owned company,” states the action.

The plaintiffs argue that the formula for calculating federal taxes (IRPJ and CSLL) under the production sharing system – through which surpluses will be auctioned – is detrimental to the government and “could lead to a loss of R$223 billion in revenue over the lifespan of projects”. The financial losses, however, are much greater.

“The oil surplus share of the federal government, which should be the main source of revenue for the Social Fund, will be derisory, as will the revenues for the areas of education and health, particularly in the first years of production,” adds the text.

The auction rules were assessed by the Federal Audit Court (TCU), which approved their terms, with reservations that the government acknowledged, so as not to prevent the bid from being carried out. Should all four areas be sold, the proceeds will reach R$106 billion.

In pre-salt auctions, the signing bonus is fixed and the dispute is won by whoever undertakes to deliver more oil to the federal government during the projects’ useful life.

Of the total revenue, R$34 billion will be transferred to Petrobras as compensation for the drop in oil prices from the signing of the contract of transfer of rights. The remainder will be divided between states and municipalities, according to the apportionment rule negotiated with Congress.

Petrobras itself is eligible to bid, and the state-owned company says it will dispute two areas, Búzios and Itapu, ensuring a minimum collection of R$70 billion.

Source: Folhapress