Brazil - Hotspot for Majors

I just read about 36 pages of information on Brazilian Taxation of O&G Companies and answers to the top 35 questions Oil & Gas companies want answers to before investing. I have worked in the O&G industry for 30 years in Finance (Canada and PNG) and it looks to me like Brazil is making significant improvements in the playing field and providing changes to taxation and local content rules to make it attractive to explore there. There is currently a rush to get in the door, which bodes well for Karoon finding a partner for its Echidna development. Once a partner is selected and agrees on a fair price, this will value the 128 million barrels of reserves (100% owned), which are currently valued by the market at MINUS 20 cents per share or negative $49,000,000.

With Google I learned that:

Before 1995 only Petrobras was allowed to explore for and produce in Brazil. As previously posted by STEVO (great work) they have many companies there now. They have been on a learning curve. They have ever only had 14 Land sales. Next one Mar 29-18
New Tax Laws to encourage investment came in on Jan 1, 2018 (right place - right time)
Concession Licenses are granted for 30 years, Pre Salt Licenses for 35 years
Typically the exploration phase lasts 2 to 8 years on a licence. Licence Round 14 (Mar 29-18) will have exploration phase limited to 5 to 7 years
Production Phase starts on the Declaration of Commerciality   
Royalties are normally 10% only (up to 25% in Canada) and can be lower if the geological risk is higher. They can be higher if the production and profitability is off the scale
Pre-Salt plays are covered by Production Sharing Agreements (15% Royalty, no Lease rental payments, no
Conventional plays are licenced via the issue of a Concession Agreement
Brazil has mostly heavy oil production but mainly Light Oil Refining capability (Karoon is Light oil I believe)
Brazil produced 450 million barrels of oil in 2000 and 890 million barrels of oil in 2015 (Pre-salt contributed most)
In 2015 Brazil's oil reserves were 13 billion barrels, 15th largest in world
ANP (Govt) confirmed in Dec 2015 - more than 100 O&G companies in Brazil348 blocks in Exploration phase, 71 fields under development and 371 fields were producing
Brazil gets their power from oil (37.3%) and gas (13.7%) rest from hydro, sugar cane, firewood and charcoal (room  for growth in O&G)
In 2015 Brazil IMPORTED 118.3 million barrels
93.4% of Brazilian production is off shore...

Those who choose to short a stock at $1.15 are taking an asymmetric risk - i.e. possibility of small return (limited by cash balance) for major downside risk on announcement of a partner on Echidna or purchase of 10,000+ Barrels of Production.

Here is the full text of only the Tax article:
Brazil's New Tax Rules for Oil and Gas Activities
CMS Cameron McKenna Nabarro Olswang LLP
Brazil January 3 2018
The new REPETRO law (Law no. 13.586/2017) was published on 29 December 2017, resulting from the conversion of the Presidential Provisional Measure no. 795/2017. The new law, and the Presidential Decree no. 9.128/2017 published in August last year, are part of a package of tax reforms, which have extended the term of the REPETRO regime until 2040, and introduced significant new tax rules for oil and gas activities in Brazil.
The new rules have been heavily debated in Brazil over the last four months, since the President enacted Provisional Measure no. 795/2017 in August last year. The new rules are part of the efforts of the Brazilian Government to stimulate investments in the oil and gas business and to attract E&P companies to participate in upcoming bidding rounds scheduled for 2018 and 2019. They create benefits for E&P companies, by clarifying certain issues that have been subject to court discussions in the past, and by creating new regimes and tax incentives in response to needs expressed by the market.
The new rules came into effect on 1 January 2018. We set out the main changes introduced by these new pieces of legislation below.

1. Changes to the REPETRO regime

REPETRO is a special customs regime for importation and exportation of goods destined for use in activities relating to the exploration and production of oil and natural gas in Brazil. Under the REPETRO regime, certain goods contained in a list created by the Federal Revenue Secretariat can be temporarily imported into Brazil to be employed in oil and natural gas exploration and production activities, with the suspension of the federal taxes that would otherwise be applicable upon importation. Presidential Decree no. 9.128/2017 introduced two relevant changes to the regime; one with respect to the term of the regime, and another in relation to the application of the regime to definitive importations.
Under the prior rules, REPETRO would have continued in force until 31 December 2020. Considering that this expiry date is fast approaching and the useful life of goods imported under REPETRO often extends beyond such date, there was a great concern in the industry whether the regime would be extended. The Presidential Decree extended REPETRO until 31 December 2040, signalling to the Government’s intention to maintain the current structure of importation benefits.
The second significant change is the possibility of applying the regime (i.e. the suspension of federal import taxes) to the definitive importation of goods. The list of goods for which REPETRO will apply upon definitive importation was published by the Federal Revenue Secretariat in September 2017, through the Normative Instruction no. 1.743/2017. Such Normative Instruction has created a new REPETRO regime called REPETRO-Sped to accommodate and regulate the changes introduced by the new pieces of legislation, i.e., the Presidential Decree no. 9.128/2017 and the Presidential Provisional Measure no. 795/2017, now converted into the Law no. 13.586/2017.
Under the prior rules, REPETRO only applied to goods temporarily imported into Brazil, and was subject to their subsequent re-exportation or destruction. The latest changes are welcomed by the industry, as there was concern regarding decommissioning certain equipment for exportation and/or destruction, due to environmental impacts and its logistical and economic implications. Like REPETRO upon temporary importation, REPETRO for permanent importation will be applicable until 31 December 2040.

1. Local industry - raw materials, intermediary products and packaging materials

The REPETRO regime required that foreign goods be imported into Brazil (temporarily, or, as per the new rules, definitively), or that goods manufactured in Brazil were subject to a fictitious exportation from Brazil and re-importation under the regime. Thus, the regime did not benefit the local industry, unless their products were included in a fictitious exportation and re-importation.
The new REPETRO law, in order to benefit local industry, has conceded the suspension of federal taxes due upon the importation or local acquisition of raw materials, intermediary products and packaging materials. The taxes that may be suspended are Import Tax (”II”), Tax on Manufactured Products (“IPI”), PIS/Pasep-Importacao, Confins-Importacao, PIS-Pasep and Cofins.
The suspension lasts for one year, extendable for up to five years, and shall be converted into a final exemption (i.e. zero rate for PIS-Pasep and Cofins, and exemption for the II and IPI), if and when:
(a) the raw materials, intermediary products and/or packaging materials are consumed in the production of a final product, and
(b) such final product is employed in exploration and/or production activities for oil and/or gas in Brazil.

1. Withholding income tax on charter payments

The new REPETRO law changed Law no. 9.481/1997 with respect to withholding income tax on payments remitted abroad, when there is simultaneous performance by related entities of a vessel charter contract, and a services contract, for exploration and production of oil or natural gas. The charter element of such arrangements is generally subject to withholding income tax at a zero rate, whereas the service element is taxed heavily. This encouraged service providers to maximise the value attributed to the charter.
As of 1 January 2018, the maximum value of the charter element, in proportion to the combined value of the charter and the services contracts, shall be:
I- 70% for FPSOs (previously 85%);
II- 65% for drilling, completion and well maintenance rigs (previously 80%);
III- 50% for other vessels types (previously 65%).
The new percentages shall not apply, however:

1. a) to maritime support vessels, which shall be still subject to the prior percentage of 65%, and
2. b) when there is simultaneous performance of charter and services contracts by related entities for the transportation, moving, transfer, storage and regasification of LNG, where the zero rate of withholding income tax shall apply upon 60% of the total value of the contracts.

The new REPETRO law also amended the definition of “related entities” for the purposes of applying the limits for the zero rate withholding tax on the charter payments, as such limits shall only apply if the charter and services contracts are with related entities. Prior legislation contained a confused definition of related entities, which has now been clarified.

1. Amnesty for penalties on income tax debts incurred until 31 December 2014

One of the most criticised and discussed matters included in the new law was the waiver granted for 100% of penalties for delay in paying withholding income tax debts incurred until 31 December 2014.
In order to benefit from this amnesty: (a) the debt, including interest, must be paid in January 2018 in full, or paid in up to 12 monthly instalments, with the first one due and paid by 31 January 2018; and (b) the debtor must expressly and irrevocably waive all court and administrative proceedings involving those debts, including the renunciation of any legal arguments supporting such lawsuits.
Although Congress approved an express amnesty for other taxes applicable on remittances abroad for the payment of services (i.e., CIDE, PIS/Pasep-Importacao, and COFINS-Importacao), the President vetoed that amnesty. The President’s veto was based on two arguments. On the one hand, the President stated that the since the nature of the charter contract remained unchanged, there was no incidence of the taxes due on the importation of services, such as CIDE, PIS/Pasep-Importacao, and COFINS-Importacao. Therefore, the vetoed provision was not necessary. On the other hand, the President argued that, if the express waiver was necessary, it would mean a waiver of over R$15 billion, which should have been included in the budget law for 2018, and a study of the financial and budgetary impact should have been concluded.
This uncertainty regarding the extent of the amnesty may impact its effectiveness. If the other taxes are not included in the amnesty, but oil companies are required to waive all legal arguments underlying existing lawsuits, this may prejudice their ability to contest the imposition of these other taxes. The tax authorities have required the payment of these taxes previously on understanding that the charter agreements for vessels used in oil and gas activities were, in fact, service agreements and should be taxed as such. Petrobras, which is the company most affected by these changes, has already indicated that the President’s veto may prevent the settlement of existing litigation in this area.

1. Deduction of exploration and production costs from tax base for income tax and CSLL

Another change introduced by the new law is the express permission to deduct costs incurred in oil and gas exploration and production from the tax base for calculation of corporate income tax (on an actual profit basis) and the social contribution on net profit (“Contribuição Social sobre o Lucro Líquido – CSLL”).
Before this provision was enacted, there was no express determination allowing such deduction. There was only a provision in Decree-Law no. 62/1966, which referred exclusively to Petrobras, which was, at that time, the only entity permitted oil exploration and production in Brazil. The new law has revoked that provision and substituted it with a general and clearer permission to deduct these costs from corporate income tax and CSLL.
In addition, the new Law provides that expenses incurred in the development of oil and gas fields shall be included as assets, and their depreciation deducted from net profits for calculation of corporate income tax and CSLL. This depreciation is permitted at an accelerated rate.
This provision aims to clarify a current controversy with respect to the nature of costs incurred in the development of oil fields, which has generated various disputes between oil companies and the Brazilian Government. According to some oil companies, those costs are part of the production phase of the Concession Contracts, and should be fully deductible from the corporate income tax and CSLL. On the other hand, the Government’s understanding was that those costs are pre-operational, and so should be accounted for as assets and be subject to depreciation. The new law affirms the Government’s position, but benefits oil companies through the possibility of accelerated depreciation, aiming to reduce litigation regarding this matter.

Second article 35 questions/answer was more than Hot CDOpeer would allow. It started ....

Describe, in general terms, the key commercial aspects of the oil sector in your country.

Before 1995, the exploration and exploitation of oil and gas reserves were government monopolies carried out exclusively by Petróleo Brasileiro SA (Petrobras). The enactment of Constitutional Amendment No. 09/1995 loosened the federal government’s monopoly over such activities, allowing the federal government to contract these from state-owned or private companies.