Brazil's 15th Oil & Gas Licensing Round -Offshore Exceeds Expectations

Following hot on the heels of three successful bid rounds in 2017, Brazil held its 15th round for oil and gas concessions on 29 March 2018. This round was expected to be a test of the attractiveness of the Brazilian oil and gas regime; following just two days after a bid round in Mexico and eight days after the largest ever oil and gas lease sale in the U.S., with around 40 similar offers scheduled globally this year. If this was a test, Brazil passed with flying colours! Petrobras, ExxonMobil, BP, Statoil, Shell, Qatar Petroleum, Chevron, Repsol, Wintershall and others made significant additions to their Brazilian exploration portfolios. Winning bidders have made minimum investment commitments in excess of R$1.2bn (c. US$364m) and offered more than R$8bn (c. US$2.4bn) in signature bonuses, far exceeding the previous record of R$3.8bn set in the 14th round.

A total of 21 oil companies, including most of the international oil and gas majors, had qualified to participate in the 15th round, which offered 68 blocks in five basins offshore (Santos, Campos, Sergipe-Alagoas, Potiguar and Ceará) and two onshore (Paraná and Parnaíba). Most of them bid heavily and came away with at least something to show for their efforts; the notable exceptions being Total and Premier Oil, which were successful in the Mexico round earlier that week.

However, in the run up to the bid round, much of commentary was negative. The State Assembly of Rio de Janeiro was debating the withdrawal of tax incentives for oil and gas exploration and production, which industry executives were saying would put investments at risk. Then on the eve of the round, the National Accounts Court (Tribunal de Contas da União) required the removal of two of the most prospective blocks, on the outskirts of the prolific pre-salt province in the Campos basin, on the argument that the sale of such blocks under a concession regime, and not under a profit sharing agreement, would result in losses to the Brazilian Government. Without these blocks, the government was only expecting to earn between R$400m and R$450m in signature bonuses; an estimate that was exceeded by around 20 times!

In fact, ExxonMobil doubled down on its significant investments in the 2017 bid rounds (See Brazil’s 14th Oil & Gas Licensing Round – Exploration Bounces Back), acquiring interests in eight blocks in three different basins. It recent partnerships with Qatar Petroleum, Petrobras, Queiroz Galvao E&P and Murphy Petroleum. Petrobras maintained its recent record of investment, by acquiring interests in seven blocks and Chevron made a return to bidding, with four blocks. Perhaps the surprise package of this round was Wintershall, which had been absent from Brazil since 2005, but has returned in a big way, acquiring interests in seven blocks, four as operator, in four different sedimentary basins.

Blocks were awarded in all of the offshore basins on offer. However, competition was fiercest in the mature Campos basin, where all nine blocks were awarded, accounting for around R$7.5bn of the R$8bn in total signature bonuses. Sector SC-AP5 in this basin, was particularly attractive. This area was planned to be included in the 9th bid round in 2007, but was removed just 20 days prior to the bid, following Petrobras’ recent discoveries in the neighbouring pre-salt province. Those discoveries resulted in the introduction of a production sharing regime for the most prospective blocks in the so-called “pre-salt polygon”. However, despite its earlier withdrawal, and similar geological potential to the pre-salt polygon, this area was offered on the more favourable concession terms.

In the nearby Santos basin, three of six blocks were awarded. Seven of the 13 blocks in deep water Potiguar basin were awarded, with competition between Wintershall and Petrobras, which in partnered with Shell and Petrogal. The consortium of ExxonMobil, Queiroz Galvao E&P and Murphy Petroleum acquired two blocks in ultra-deep water Sergipe-Alagoas, Wintershall acquired the only block awarded, of 13 on offer, in deep waters of the Ceará basin.

Contrary to the enthusiasm regarding the offshore blocks, none of the 21 onshore blocks on offer received bids. This lack of interest may be partially explained by Petrobras’ ongoing divestment process, which is offering 69 onshore fields. Many of the smaller companies active in Brazil’s onshore oil and gas industry, lack sufficient scale of production and may be prioritising the producing assets offered by Petrobras over exploration opportunities at this time. Not only that, the difficulties and the uncertainties in relation to the environmental licensing for onshore blocks, specifically in those basins, may have also played an important role in keeping interest away. In 2017, concession agreements for blocks awarded during the 12th bid round in the same Paraná and Parnaíba basins were suspended (in Paraná) or annulled (in Parnaíba), as a result of a class action questioning the right of ANP to permit exploration and production activities through hydraulic fracturing (“fracking”) without a proper environmental study (even though no fracking occurs in Brazil). Although the blocks whose concession agreements were suspended or annulled are in different sectors of the Paraná and Parnaíba basins from those offered in the 15th round, the decision of ANP to offer blocks in these basins may have been premature, as full environmental studies for the region are not yet concluded.

Despite that, the results of the 15th bid round were widely celebrated. The success of this bid round shows that, with oil prices around US$70/bbl, the oil majors are keen to rebuild their exploration portfolios, having cut exploration investments dramatically while prices were low. It is also testament to the attractiveness of Brazilian offshore petroleum geology, not only in the well-known provinces around the pre-salt region, but also, to a certain extent, in the frontier exploration plays of the Atlantic Margin.

Over the last couple of years, the Brazilian government has also taken positive steps to improve the regulatory environment, reducing mandatory local content requirements (See Brazil proposes relaxation of local content requirements), extending REPETRO tax incentives (See Brazil's New Tax Rules for Oil and Gas Activities) and addressing industry concerns regarding arbitration provisions.

The government will be delighted with the value of signature bonuses offered, which will help to ease its growing budget deficit. Arguably more important in the long run will be the investment commitments of the large number of operators, who will need to strengthen and expand their operations, particularly in Rio de Janeiro. This should generate employment and tax revenues for the region, which has been hit hard by the industry downturn and the state government’s financial crisis.

The competitiveness of this bid round, and particularly for blocks close to the pre-salt area, should also bode well for the planned fourth offer of pre-salt production sharing contracts, which is due to take place on 7th June 2018.

*Denotes operator of the field