Brazil beckons with new oil auction
The first bid round in two years will test investor interest after a tumultuous period for the country
On 27 September, Brazil's government will hold its first major oil and natural gas rights auction in more than two years. The sale will be the first major test of investor interest in the industry following much-needed reforms to the country's petroleum laws after more than a decade of increasing nationalist intervention.
For the embattled government of President Michel Temer, the auction is about more than just kick-starting a once-booming industry hobbled by low oil prices and the Lava Jato corruption scandal. The oil industry is responsible for close to 15% of Brazil's gross domestic product. Reviving its health is central to turning around the world's seventh-largest economy as it struggles to claw out of its worst recession in nearly a century.
The 14th Round will offer exploration and production leases on 287 onshore and offshore blocks. Early signs of interest are promising for Brazil's government. Thirty-two companies have received approval to bid from the National Petroleum Agency (ANP), including ExxonMobil, France's Total, Britain's Shell and BP, China National Petroleum Corporation (CNPC) and Brazil's state-led Petrobras.
The stakes are high. The last three major auctions have all been flops, failing to both drum up more exploration and drilling activity and bring significant new revenue to the Brazilian treasury. The corruption scandal, falling oil prices and the costs associated with high domestic-content requirements scared away investors from the 12th Round concession auction and 1st pre-salt bid round in 2015. This limited the number and value of blocks sold, as well as the resources politicians promised Brazilians would flow from a bonanza of giant oil discoveries. Brazil's dominant player, Petrobras, financially crippled by the graft scandal, didn't bid at all.
287 - Blocks up for bidding in the 14th licensing round
The 11th Round in 2013, the hotly anticipated first auction of any kind in five years, looked like a rousing success at the time. But more than four years later, not a single winner has received the necessary licenses to begin exploration and drilling, forcing the government to extend concession terms earlier this year. Most recently, Total was denied an environmental licence to drill an offshore exploration well in the frontier Foz do Amazonas Basin.
To lure investors back and make up for Petrobras' still severely diminished, though improving, financial ability to take on new projects, the Temer Government has sharply reduced Brazil's oft-derided domestic content requirements. While Brazil has a large and sophisticated domestic service industry underpinned by domestic and international capital, protection and graft drove up their costs. Those costs, increasingly unmanageable when oil prices were above $100 a barrel, often became unbearable when oil fell below $60/b, though the industry is making strides in lowering its cost base. Not everyone in Brazil has survived the downturn though. Many local providers went bankrupt because of the sharp contraction in oil activity or because they were engulfed in the Lava Jato investigation.
Starting with the 14th Round, up-front local content commitments will no longer be a factor in calculating the value of a bid. They will instead be determined during negotiation of the final concession contract with winners. Moreover, the areas subject to specific minimum content commitments have been reduced to four from 75. Brazilian content minimums have been cut from as much as 65% to 25% for well construction; 40% for production risers, flow lines and pipelines; and 25% for production units such as oil platforms and floating production, storage and offloading ships, converted oil tankers known as FPSOs.
While the 14th Round will not offer any rights to fields in the pre-salt, it will offer acreage in some promising developing areas and frontier regions. Among the areas most likely to receive heavy bidding are the 11 offshore blocks in the Sergipe-Alagoas basin up for auction. The concessions are thought to hold at least 1bn barrels oil equivalent in recoverable resources and sit next to major Petrobras discoveries.
The 14th Round will also provide a clue about international interest in the even more important 2nd pre-salt production-sharing auction scheduled for 27 October. To entice more bids for these massive prospects, Temer's government transformed a requirement that Petrobras lead all pre-salt development with a minimum 30% operating stake in new projects into a right of first refusal.
With Petrobras unable to support all new pre-salt projects the government wants to see developed, the auction will open some of the world's largest and most promising offshore prospects for the first time in a decade.