Brazil
Analysis

6th pre-salt round prompts rethink of contract models

Bnamericas Published: Thursday, November 07, 2019
6th pre-salt round prompts rethink of contract models

Brazil awarded just one of the five blocks on offer in its 6th pre-salt round, repeating the disappointing results of the transfer-of-rights surplus auction held just one day earlier.

State-run Petrobras submitted the only bid in a consortium with a 20% participation of Chinese CNODC for the Aram block. The block, in Santos basin and at a depth of 1,800m, is close to the Carcará discovery, which holds estimated recoverable oil reserves of more than 2Bb. It was the most expensive block in the auction, with a 5.05bn-real signature bonus payment, the third-largest in the history of Brazilian pre-salt auctions, behind only the Libra and Búzios areas.

Petrobras and CNODC agreed to pay a 50bn-real (US$12.2bn) signature bonus for the asset, with investments estimated at over 278mn reais. Petrobras had exercised its pre-emptive right for two other areas but did not present bids, surprising the authorities.

“Petrobras’ decision to exercise its pre-emptive right naturally reduced competitiveness. It does not look good to maintain a system like the current one,” energy minister Bento Albuquerque said in a press conference after the tender.

Specialists said the production-sharing contract model was the main reasons for the lack of interest in the assets because of legal uncertainties surrounding the model. These include the need to coordinate with state-run PPSA, which manages the oil share the government is entitled to according to such contracts.

“It would be more interesting to bid [on] those areas again under another model. The production-sharing model is certainly linked to those [bad] results. Of course, there is a capital limitation, but companies were interested in the assets and, in the transfer-of-rights tender, for example, they gave up when they saw the systematics,” Giovani Loss, a lawyer specializing in oil and gas at Mattos Filho law firm, told BNamericas.

The lack of clarity over the country’s fiscal regime could also have clouded the results.

“We live in a world where there is a focus on capital discipline and on value instead of volume. And with the energy transition on the horizon, there is no appetite for an oil carnival at any cost,” the head of Latin America upstream research at consultancy Wood Mackenzie, Marcelo de Assis, said in a statement.

NEW INVESTMENT PHASE

The director of regulator ANP, Décio Oddone, said the results of the latest tenders suggest Brazil could be entering a new investment phase, where oil firms will focus on activities in areas they already have instead of acquiring new blocks. He added that the results of the latest tenders do not affect the exploration and production investment forecasts for the coming years, which amount to hundreds of well drillings and 60 new platforms.

“We are starting to see a change in firms’ priorities. They have a big portfolio of areas and now it is time for them to seize the investments they already made and start to drill. The era of high signature bonuses in auctions for pre-salt areas is coming to an end," Oddone added.

Still, government authorities agree that some regulatory policies need a review, especially those regarding the pre-salt polygon and the obligation of using the production-sharing contract for blocks in that region and the end of Petrobras’ pre-emption rights. The secretary for oil, natural gas, and mining at the energy ministry, Renata Isfer, said the government will support a bill presented by senator José Serra of PSDB party and currently under discussion in the upper house that supports those changes.

“There are areas inside the pre-salt polygon that are not feasible under the production-sharing model. What we are evaluating is not the end of this contract model, but the allowance to choose to offer areas through the concession model within this region,” Isfer said.

Such changes, however, are not expected to affect the 2020 tender schedule, since the 18th concession round and the 7th pre-salt tender are due to take place only in the second half of the year. Also, the areas that were not awarded in the last two days could be offered again.

“We need to learn from the auctions that were made this year,” Oddone said.

CHINESE PARTICIPATION

Chinese interest in the assets awarded in the last two days was already expected. Limited competition and the chance to have non-operating stakes on assets with high chances of good results fit in the profile usually sought by such firms.

“In addition to the partnership, the Chinese could also have financing opportunities with Petrobras, which has used such resources before,” Loss added.

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