Brazil says Shell must negotiate encroaching oil reservoir

By Sabrina Lorenzi

RIO DE JANEIRO, Jan 27 (Reuters) - Brazil's ANP (KOSDAQ: 121600.KQ - news) oil regulator said Royal Dutch Shell (Xetra: R6C1.DE - news) needs to negotiate with the Brazilian government on an oil reservoir that exceeds the limits of the concession block it controls with France's Total (NYSE: TOT - news) , according to an ANP document seen by Reuters on Monday.

The oil reserve, located in Shell (LSE: RDSB.L - news) 's BM-S-54 block, encroaches on areas controlled by the Brazilian government that have not yet been auctioned.

The ANP recommended that Shell open negotiations with Brazil's new federal oil company, known as Pré-Sal Petróleo SA (PPSA) and responsible for managing the subsalt oil reserves off the country's southern coast.

Shell confirmed on Monday that the reservoir in fact exceeded the limits of its concession block but gave no additional details about its plans when asked by Reuters.

Shell controls 80 percent and Total the remaining 20 percent stake in BM-S-54, which is situated in one of the most promising oil frontiers in the world, Brazil's subsalt region. The companies registered discoveries in the block in 2010.

In accordance with Brazilian oil law, Shell and Total will need to go through the process known as unitization with the PPSA or eventual owner of the area into which the reservoir encroaches.

The unitization process attempts to give preference to the geological and engineering dynamics of extracting oil and gas most efficiently from a reservoir, regardless of manmade parameters of oil concession blocks. But it also tries to allot equitable stakes in the production to the various concession holders involved.

"Shell could ask for authorization to use the entire reservoir, dividing up the production from it with the PPSA, that represents the government as owner of part of this deposit," a source with direct knowledge of the subject said.

If undertaken, it would be the first case of unitization with Brazil's PPSA. Other cases of unitization have occurred in the past when reservoirs spanned various blocks controlled by different concession holders.

Shell and Total's BM-S-54 is located in between important subsalt areas such as Florim and the Paraty (BM-S-10), both of which the state oil company Petrobras (Berlin: PJXC.BE - news) operates.

Shell could request permission from the PPSA to drill a well outside its concession block and divvy out the revenue or oil from the production in accordance with estimates of how much lies in each area.

Shell and Total are already familiar with doing business with the PPSA. In October, Total and Shell were part of the consortium led by state-owned Petrobras that won the massive Libra subsalt field that could hold as much as 12 billion barrels of recoverable oil. The Libra is in the same area as BM-S-54.