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Landmark Brazilian auction falls flat

Enormous offshore pre-salt reserves fail to entice IOCs to the Transfer of Rights surplus bidding round

The build-up to the country’s so-called Transfer of Rights bidding round all augured well for the Brazilian government. After months of compensation negotiations with Brazil’s state-owned oil and gas company Petrobras over previous investments made in the deposits, the dispute was finally resolved and the auction promised to attract a multitude of international oil companies (IOCs) to the huge pre-salt oil reserves on offer—potentially generating at least R$106bn ($25.85bn) in signing bonuses.

But the narrative failed to follow the script. Of the four fields on offer only Buzios and Itapu were successfully auctioned, raising just under R$70bn, or 65pc of the total available bonuses. Both the Sepia and Atapu fields were entirely overlooked.

The exit of both BP and Total just days before the auction proved to be a harbinger of IOC participation. China’s state-owned Cnooc and a subsidiary of fellow China ‘big three’ firm CNPC were the only foreign firms to option a stake in any fields. Both firms joined a consortium with operator Petrobras (90pc), each acquiring a 5pc share in the Buzios field, collectively paying out 23.24pc in profit oil. They will now be required to negotiate with Petrobras compensation for investment previously made in the exploratory phase of development.

Buzios was by far the largest prize on offer, with 3.15bn bl oe of discovered resources and a signing bonus of R$68.19bn. Petrobras had already contracted four floating production storage and offloading vessels (FPSOs) for the field, today producing around 600,000bl/d, with another FPSO scheduled for 2021.

“For Buzios, Petrobras aimed to maintain the biggest and best asset available,” says Fernanda Delgado, research coordinator at Brazilian think-tank FGV Energia. “It is the largest ever discovered reservoir in the country. The field, which began production in April 2018 and has already produced about 100mn bl oe, is the largest discovered deepwater field in the world. It has light oil and proven high productivity wells at around 30,000bl/d per well.”

R$83.93bn – total signing bonuses from the year’s auctions

Petrobras says a production sharing agreement (PSA) for the surplus volumes must be signed by September 2021, with the option of increasing the Chinese firms’ stake by an additional 5pc each. 

Both companies already have an interest in Brazil’s offshore upstream. Cnooc and CNPC have a 10pc stake each in the Libra consortium, together with Petrobras (40pc), Shell (20pc) and Total (20pc). The consortium has scheduled an FPSO for 2022 at the ultra-deepwater Mero field within the Libra concession, in the Santos basin, which will have capacity of around 180,000bl/d.

The only other field optioned was Itapu, the smallest available with estimated reserves of 350mn bl oe. Petrobras increased its pre-emptive stake to become 100pc stakeholder and operator of the field. The company paid R$1.77bn in signing bonuses and agreed to 18.15pc profit oil. Petrobras will contract an FPSO to begin first production by 2023. 

Root causes

Expectations were high that unitisation opportunities might attract neighbouring block stakeholders. A consortium of Petrobras (80pc) and Portugal’s Petrogal (20pc) in the Sepia Leste field borders the Sepia field, while a consortium of Petrobras (42.5pc), Shell (25pc), Total (22.5pc) and Petrogal (10pc) in Atapu Oeste adjoins the Atapu field. All partners were registered as potential bidders for the auction.    

But, despite combined resources of at least 1.05bn bl oe from Atapu and Sepia, the fields failed to attract any bids. “The signing bonuses were supposedly too expensive, the production sharing contract regime may not be as attractive for smaller projects and there were uncertainties around the compensation payment to Petrobras,” says Felipe Feres, partner at Brazilian law firm Mattos Filho. “The combination of these three factors scared bidders off.”

600,000bl/d – Buzios production

A report from advisory firm Fitch Solutions identified the confusing fiscal regimes as a major deterrent. Winners of the blocks need to negotiate with Petrobras on compensation, among other terms, but only after the auction. The compensation will be based on the current market conditions and “by deferred production of the contracted volume”.

The ministerial guideline assumes compensation of around $72/bl for oil and $5/mn Btu for gas. Fitch Solutions says that this is above their oil and gas price projections over the next five years, potentially inflating compensation owed to Petrobras. If both parties fail to reach an agreement then Brazil’s National Petroleum Agency (ANP) will propose an arrangement, and, if both parties continue to disagree, the contract will be terminated. 

But while the results were not what the government hoped for, the auction could yet act as a guide for future pre-salt rounds. “The government had high expectations and the action clearly did not go as planned,” says Feres. “Lessons were learned, and they will probably try to re-auction Sepia and Atapu next year under a different regime. They need to lower the signing bonus, give more clarity on the compensation and probably grant the areas under the concession regime, not through PSCs.”

Second chance

On 7 November, Brazil had an opportunity to try to redeem the relative disappointment of the Transfer or Rights auction. A further five blocks in the pre-salt region were available in the sixth pre-salt bidding round, with 13 IOCs registered to participate and a minimum of R$7.85bn available in signing bonuses.

But Brazil’s final auction of the year again proved a let-down. Only the Aram block in the Santos basin received any bids. Petrobras will now be the operator of the block with an 80pc stake, joining a subsidiary of China’s CNPC with a 20pc stake. Combined, the consortium agreed to 29.96pc profit oil and generated R$5.05bn to the Brazilian government.    

“The government had high expectations and the action clearly did not go as planned” Feres, Mattos Filho

Prior to the auction, Petrobras had exercised its first right of refusal on the Aram, Sudoeste de Sagitario and Norte de Brava blocks.  But, during the auction, the company resolved to only bid on Aram. “We will continue our strategy of selectively bidding by focusing on the exploration and production of world-class deepwater and ultra-deepwater assets,” Petrobras said in a statement shortly after the auction. 

Pre-salt production has persisted to grow in importance in Brazil. In the third quarter, Petrobras achieved production of 1.37mn bl/d from the region, a 17pc increase over the second quarter and up by 40pc year-on-year. In October, the company also became operator of block C-M-477, joining consortium partner BP (with a 30pc stake) during the 16th Bidding Round. The auction successfully awarded 12 blocks from the 36 available, all within the Campos and Santos basins in the pre-salt.

Offshore blocks and fields from Brazil's latest auction rounds Source: Petroleum Economist
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