Brazil Oil Auction: Lukewarm Interest

External and local concerns – including content requirements – dampen interest.

BY ENERGY ADVISOR
Inter-American Dialogue 

Brazilian officials expect oil companies to invest nearly $900 million to complete minimum exploration work at concessions Brazil plans to auction in October, Bloomberg News reported last month. Facing a beleaguered economy and low prices for oil and gas globally, Brazil will offer 266 blocks—182 onshore and 84 offshore —in what will be the country’s 13th round. How strong is investor sentiment ahead of Brazil’s next oil auction? Have giant deposits of oil discovered last decade in the so-called pre-salt region in deep waters proven to be as productive as Brazilians hoped? Does Brazil have the right regulations and business climate in place to maximize return on its natural resources?

Alexis Arthur, energy policy associate at the Institute of the Americas: Brazil is having a tough year. Corruption scandals have reached deep into the nation’s energy sector, with casualties adding up. President Dilma Rousseff is facing calls for her impeachment, and the economy is heading into recession.

The 13th bid round provides an opportunity for the country to focus on keeping the economy moving. Thirty-nine companies have registered their interest in the bid round, which is set to be adjudicated in October. This is an improvement on the pre-salt bid round in October 2013, in which 26 companies registered their interest and just one contract was awarded to a fi ve-company consortium. There are also more big names on this year’s list, which reportedly includes majors BP and Exxon Mobil, Russia’s Rosneft, and China’s CNOOC, among local companies. Still, a better marker for success would be a comparison with the 2013 general oil and gas auction, which drew bids from 39 companies totaling $1.4 billion. Brazil is not just facing domestic pressure. In a low oil price environment, energy companies have slashed exploration budgets, increasing competition particularly in more expensive or higher risk areas. Brazil also faces new competition from Mexico, and those interested in the deepwater may choose to wait for 2016 when Mexico will open areas on its side of the Gulf of Mexico for the fi rst time. It is too soon to tell how successful Brazil’s Round 13 will ultimately be, particularly as concerns ranging from local content requirements to political uncertainty add up. And with no pre-salt blocks on the menu, it remains to be seen whether the array of areas onshore and offshore, mature and frontier, will attract the kind of investment Brazil needs to reboot its oil and gas sector.

Paulo Valois Pires, partner at Schmidt, Valois, Miranda, Ferreira & Agel Advogados in Rio de Janeiro: Oil companies seem not to be bullish about the 13th bidding round. A series of internal and external factors have been adversely affecting the oil companies’ interest in the upcoming bid such as decreasing oil prices, weak results in Mexico’s tender, Petrobras’ current financial status and the macroeconomic situation of Brazil, which may lose its investment-grade rating depending on the government’s policy results. Besides, recent changes in the general terms and conditions of the concession contracts introduced by the National Agency of Petroleum (ANP) do not seem attractive to prospective bidders. On top of that, one may say that there are still important farm-in opportunities competing with Round 13 arising from Petrobras’ divestiture program and from the assignment

of exploration areas currently held by other concessionaires which intend to monetize their investments. In the medium run, pre-salt will be productive, but the level of productivity will depend on a new range

of oil prices and on the assignment of the operatorship in the pre-salt areas to other oil companies. Local content policy proved to be unfeasible and disconnected from the oil and gas supply market. This needs to be urgently reviewed to improve attractiveness of the model.

John M. Albuquerque Forman, president of J Forman Consultoria in Rio de Janeiro:

The Brazilian government has announced the 13th bid round, and since that first announcement has reduced the number of blocks and amount of bonuses to be repaid. This is in part a response to an industry that is voicing complaints via media and conferences and seminars. The industry has a number of complaints like mandatory local content percentages, violations of which result in fines, and it has also asked for a change in the law to permit Petrobras to decide whether it participates on bids on the pre-salt area. (Currently, Petrobras is legally required to have at least 30 percent participation on any pre-salt bid, and it has to be the operator.) The industry also wants the rules for the unitization of blocks revised and clarified. The government has stated, however, that everything is fine and that no changes are necessary. There will be offers for blocks on the best known and promising basins, but not for all the blocks on offer. As far as known up to now, production from pre-salt reservoirs has been good to excellent excellent, although some problems are present. The production of gas, as it is associated gas, will be governed by the oil-production demand. Reinjection is the priority in order to enhance production. The presence of CO2 also has to be addressed.

Mark Langevin, director of BrazilWorks in Washington: Brazil’s concession-based auction does not include pre-salt blocks, but it does include a broad range of opportunities for both large and small companies. These factors contribute to heightened interest and more credentialed bidders, but the results of the auction will likely be modest. More importantly, and with the exception of 2013, Brazil’s petroleum production continues to rise, boosted by the success of the pre-salt exploration. Today, pre-salt production has surpassed 500,000 barrels a day and composes approximately 22 percent of national production. In short, pre-salt production has been a success, albeit downplayed because of low prices and the Petrobras kickback scandal. Expect these national production figures to continue to rise during the second half of the decade to reach 3 million barrels per day by 2020. Brazil’s economic and political crises have sparked new calls for reform of the production-sharing regime, but the positive pre-salt numbers do not necessarily indicate that a reform is necessary at this juncture. Petrobras is largely succeeding, and it remains the most important enterprise in Brazil. While the company needs corporate governance reforms to guarantee external credibility, its operational productivity continues to impress. However, if President Dilma falls and a new governing coalition emerges from Congress, the pre-salt production-sharing regime may be reformed, but this is unlikely in the short term.

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor