Brazil Oil: Pre-Salt Success

Brazilian president Michel Temer’s policy changes are enticing investors back to the oil and gas sector, experts say. (Photo: Brazil Energy and Mining Ministry)

A change in local content rules attracts investors, improves outlook.

Inter-American Dialogue 

In its first oil auction since December 2015, Brazil last month saw mixed results, only selling one out of 76 offshore blocks on offer at the highly productive Santos basin, but selling 10 offshore blocks, including eight in the Campos basin, for a record $1.19 billion, to Exxon Mobil. Six of the blocks were sold to the consortium between the oil major and state-controlled oil company Petrobras. The auction was seen as a bellwether for the country’s oil sector following a massive corruption scandal at Petrobras and President Michel Temer’s market-friendly reforms aimed at attracting investment. What do the results mean for Brazil’s oil sector? Were Temer’s reforms successful? What will it take for Brazil to attract even more investment at future oil auctions?

Alexis Arthur, independent energy analyst: Brazil’s latest offshore auction has closed to mixed reviews. The press and government have been largely positive, noting that low turnout (only 13 percent of blocks were sold) was offset by high investment. Big hitters like Exxon, which purchased 10 blocks, will bring in more than $1 billion—a record for Brazil. It certainly suggests that President Temer’s policy changes are enticing investors back to the oil and gas sector. Whether Brazil can replicate this success in the two pre-salt auctions scheduled for this month, however, remains to be seen.

While a loosening of local-content laws was welcomed by investors, oil and gas extraction in the pre-salt remains an extremely expensive and risky endeavor. A lot has changed since Brazil discovered the pre-salt in 2006. At the time, President Lula da Silva declared it a ‘gift from god,’ and the pathway out of poverty and toward energy independence for Brazil. This outcome should be celebrated as a win for Brazil’s energy sector, which has struggled to fulfill its potential amid domestic political turmoil and oil price volatility at the global level.

Still, a rejuvenated oil and gas outlook is just one small piece of Brazil’s economic and energy future—one that will be shaped as much by the country’s response to the global shift toward renewables and the need to face the very real effects of climate change, as it will by selling its oil and gas prospects offshore.

Edmar Luiz Fagundes de Almeida, professor and member of the Energy Economics Group at the Universidade Federal do Rio de Janeiro: Brazil’s 14th oil auction can be considered a success. The action offered blocks outside the pre-salt area and attracted new players for Brazilian upstream, and the bonus offered for the blocks that have been acquired has reached a record amount.

This is surely a sign that recent reforms in the oil sector have been very well received by investors. Nevertheless, 95 percent of the bonuses offered are related to six oil blocks near the pre-salt area. The possibility of pre-salt oil discoveries in these blocks was the main reason for the interest in these blocks. This is good news for the two auctions scheduled for pre-salt blocks in late October.

Nevertheless, companies’ interest in the blocks offered in basins with no pre-salt prospects was very low. The Brazilian oil and gas industry is more and more focused on the pre-salt geology, and it is easy to understand why. If Brazilian energy policy aims at diversifying the exploratory effort, it will be necessary to review the regulatory frame-work and government take conditions for the onshore basins, as well as the offshore basins with no pre-salt prospects.

Mark S. Langevin, director of the Brazil Initiative and research professor at the Elliott School of International Affairs at The George Washington University: The auction was very successful by most standards. First, the auction attracted 20 firms with 17 acquiring both onshore and offshore blocks from the total of 287 blocks available. There were too many blocks up for bid, but there was significant interest, especially in the offshore Campos basin.

According to Brazil’s National Petroleum and Biofuels Agency (ANP), 37 blocks were acquired for exploration and production to bring in more than $1 billion in signature bonuses. The largest signature bonus was the just over $700 million offered for block C-M-346 in the Campos basin by the consortium formed by Petrobras (50 percent-operator) and ExxonMobil (50 percent). ExxonMobil bet big on Brazil by winning 10 blocks.

The company secured two blocks with 100 percent stakes in the Campos basin, along with eight others secured through consortia with state-controlled Petrobras, as well as Brazil’s private-sector oil company, Queiroz Galvão. ExxonMobil will pay out $600 million in signature bonuses. ExxonMobil’s aggressive bidding demonstrates its interest in developing the kind of strategic partnership with Petrobras now enjoyed by Statoil, Shell and Total. Later this month, the second and third rounds of the pre-salt offerings will be held and should also attract substantial participation from Petrobras, ExxonMobil and a host of foreign and small domestic firms. The rising interest in Brazil’s oil and gas reserves stems from recent liberalizing reforms, such as lessening local-content requirements. If the pre-salt auctions perform well, then expect another round of reforms and rule-making that focus on making the most from the emerging partnership model that Petrobras is developing with a select set of major oil and gas firms.

John Albuquerque Forman, director of J Forman Consultoria and former ANP director: The results for the 14th round represent the answer to changes brought by Temer’s government, by reviewing the pre-salt limitations, the demand for local content, the extension of Repetro that reduces taxes on exploration equipment, and by announcing a sequence of bidding rounds.

The industry’s reaction was very positive, as clear rules and a business-friendly environment, thanks to the changes made, brought international oil companies back to challenging but very promising targets, on deep and ultra-deep waters. It is notable that Petrobras, in association with ExxonMobil, took several blocks and gave the round its best results in terms of bonuses to be paid.

The association of the larger international oil companies should also be noted. There was an excess of onshore blocks, where prospects are smaller and appeal to medium or small companies, exactly those that are more affected by the economic and financial restrictions that resulted from the country’s crippling recession. The lower oil prices are also a factor that affects smaller productions with higher costs. The good news is that the government has announced that blocks once offered will remain available in the next rounds. The rounds for onshore and offshore will be done separately, as they represent different prospects that appeal to different sized companies.

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


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