“Brazil is the country of the future…and always will be.” This quote can be traced back to 1947 and is as true today as it was then. However, the country is undergoing a serious cultural and economic transformation since the election in 2018 of right-wing president, Jair Bolsonaro. The country’s hydrocarbon industry is also at a similar crossroads as the current administration attempts to implement a series of free market reforms to attract outside investment and lessen the near monopoly power Petrobras continues to exert on the sector a full two decades after it was “opened.” The Bolsonaro administration is making bold and transformative moves to give the hydrocarbon sector a makeover. This could create unprecedented opportunities for players in the sector and could change Brazil from “the country of the future” into the country of opportunity for today’s hydrocarbon exploration and production industry.
PSL party candidate, Jair Bolsonaro, won Brazil’s presidential runoff election on October 28, 2018 with 55 percent of the vote, besting Fernando Haddad of the leftist workers party (PT) by about 10 percent. The PT governed Brazil from 2003 until 2014 under four consecutive terms of Lula and Dilma Rousseff.
The 2018 presidential election was unprecedented and highly polarized. Haddad was not confirmed as the PT party candidate until September replacing the PT party founder and former president Luiz Inacio Lula da Silva. Lula was the frontrunner in the election but declared ineligible to run due to serving a 12-year prison sentence for corruption. In short, Bolsonaro was elected amidst a prevailing mood of disgust by the electorate over corruption in the political system, economic stagnation, and a loss of faith in the liberal policies of the PT government and its allies.
Where’s the Beef?
Brazil is already the world’s eighth largest producer of hydrocarbon liquids and the third largest producer in the western hemisphere. However, the crown jewel of Brazilian resources remains the pre-salt, where other than Lula Field, production has barely started. A 2015 study of the pre-salt polygon, covering most of the Santos and Campos basins determined at that time that the area contained at least 176 Bboe of undiscovered, recoverable resources. The study was released by Cleveland Jones and Hernane Chaves of the National Institute of Oil and Gas (INOG) at Rio de Janeiro-State University. The figure was classified as P90 and a second P10 figure was also given as 273 Bbo. The INOG study estimate is the only major public assessment of the subsalt polygon’s potential. The 2015 INOG study estimate is 54 percent higher than the previous study by INOG in 2010 which estimated a P90 of 114 Bboe and a P10 of 288 Bboe. The average field size in the pre-salt polygon was also determined to be 246 MMboe.
Top 20 Producing oil wells in Brazil, all in pre-salt, 19 in Santos Basin
Upstream Rounds and Opportunities for All
Not all the opportunity in Brazil lies in the pre-salt. There are four different types of bid round offerings that will be held in Brazil in the second half of this year alone, in addition to the Petrobras divestment.
The most conventional of these rounds is ANP Round 16 to be held on October 10, 2019. The royalty tax regime round will offer 36 blocks in five offshore sedimentary basins (Campos, Camamu-Almada, Jacuípe, Pernambuco-Paraíba, and Santos) totaling 29,300 sq km. The Campos Basin with 13 blocks totaling 12,004 sq km is expected to draw the most interest. The region is attractive based on lots of oil gas infrastructure in place and pre-salt potential.
ANP Round 16 Offered Blocks in Campos and Santos Basins
Current Operators in Campos and Santos Basins
A new system just implemented by the ANP is referred to as Permanent Offer of Areas established for open acreage. The bid opening date is set for September 10, 2019 for the first cycle of blocks. The program will tender exploration blocks previously bid or returned, and it officially launched on June 27. The ANP expects to announce by August 16 the final lineup of approved sectors that will be part of the first cycle. At last report the bid had 600 exploration blocks and 14 areas with marginal accumulations to be offered with environmental approval.
The round is designed to attract investment in mature basins with an ongoing supply of available blocks, to encourage more small and medium companies in the sector to help develop the industry, and to stimulate exploration in new frontier basins. The Permanent Offer Round consists of the ANP setting a minimum price and work commitment for each block. With the publishing of a new decree recently, all onshore areas, including new blocks, will be offered via the Permanent Offer program. Companies can express interest in acquiring the block by paying the guarantee for its work program for each block they wish to acquire. If the registered company is the only one paying the guarantee, they will automatically acquire the block at the minimum set price and work program. If more than one qualified company pays the guarantee for a given block in the round, then a competitive bid process is held.
Two different rounds are planned for the pre-salt in 2019. In June the ANP approved Production Sharing Round 6 in the deepwater pre-salt and the contract model. The round will offer the Aram, Bumerangue, Cruzeiro do Sul, Sudoeste de Sagitário blocks, and the Norte de Brava Block in the Campos and Santos basins with a total of 8,640 sq km. All blocks are inside the pre-salt polygon. The signing of the final contracts is scheduled for March 2020. The bid will be held on November 7, 2019.
For the production sharing contracts effective in this round, the signature bonuses are fixed, and the winning bidder is determined by the highest offered percentage of profit oil to the state. Petrobras on January 14, 2019, exercised its preferential right to operate three blocks in the round with 30 percent selecting the Aram, Norte de Brava, and Sudoeste de Sagitário blocks. Registration for the round is open until September 19.
ANP 6th PSC Round Offered Blocks
However, the truly impactful round that everyone in the industry is eyeing is the Onerous Assignment Surplus Production Rights Bid, also called the Transfer Rights area, in the Santos Basin pre-salt polygon where bids are due on November 6, 2019. The registration period for the round began on June 13. The round will offer the Atapu, Búzios, Itapu, and Sepia blocks. Petrobras has carried out significant activities in all fields and has started production in Buzios. The CNPE set the total signature bonus payments at 106.56 billion reais (US$ 26.73 billion), of which 68.2 billion reais (US$ 17 billion) is for Búzios, 22.86 billion reais (US$ 5.5 billion, first oil expected 2021) for Sépia, 13.74 billion reais (US$ 3.5 billion, first oil expected 2020) for Atapu, and 1.77 billion reais (US$ 440 million, first oil expected 2023) for Itapu. The signature bonus is fixed and does not affect the bid award criteria, which is solely based on the highest percentage of profit oil offered to the government. The current Onerous Assignment contract gave Petrobras a production cap of 5 Bboe for seven ultra-deepwater blocks in exchange for Petrobras stock. The round now offers private companies the rights to produce the surplus volumes above the production cap that Petrobras has discovered in the contract area. Those surplus volumes are estimated to be 6 Bboe or higher. In May 2019, Petrobras indicated to the CNPE that it wished to exercise its right of first refusal with a 30 percent interest on the Búzios and Itapu blocks.
The numbers here are staggering. Almost US$ 27 billion expected in signature bonus money and a minimum of 6 Bbo in partially developed oil reserves is sure to attract the attention of oil and gas majors the world over. However, substantial opportunities are also present in the Petrobras divestment and in the downstream, midstream, and gas market sectors.
Onerous Assignment Surplus Production Rights Bid Blocks (in orange)
On June 12, Petrobras CEO, Roberto Castello Branco announced an increase in the money the company expects to raise in its divestment program of non-core assets. The program is now projected to generate US$ 35 billion over the next five years. The upward revision by Petrobras took place just after the supreme court ruling that made it much easier for state companies to sell subsidiaries without the authorization of the legislature thereby boosting the divestment program. In January Petrobras announced it had resumed a process to divest about 70 percent of its 254 mature onshore and shelf fields.
Although divestment is targeted toward mature, onshore, and shelf and marginal producing assets, for the right price almost anything is on the table. Production and especially exploration have declined sharply in these assets over the past decade or more, due to underinvestment by Petrobras as the company struggled with debt and the need for large investments to develop its pre-salt discoveries. When put together, the following factors should provide the “perfect storm” of opportunity for some small to medium players in the sector.
- Recent favorable supreme court ruling
- Petrobras debt and high investment obligations in the pre-salt
- An administration that wants more diversity, free enterprise, and investment in the sector
- Underinvestment and relative neglect of mature producing properties
However, the opportunities don’t end here. The biggest opportunities may lie in the midstream, downstream, and gas market sectors where Petrobras has continued to hold monopoly power despite the opening of the sector 20 years ago. The current administration is making it a priority to change this.
On June 28, 2019, Petrobras announced some details regarding the divestment process for four of its refineries and associated assets. The first refineries to be sold are Rnest, Repar, Rlam, and Refap. Divestment of the other four Petrobras refineries is planned for launch in the second half of 2019. Experts in the sector have expressed the opinion that the Petrobras refineries will not attract the interest of big oil companies but will be more attractive to fuel distributors and refining specialists in the sector. On June 11, 2019, Petrobras committed to the 100 percent sale of eight oil refineries and related fuel transportation assets with a total capacity of 1.1 MMbo/d. When the sale is completed, Petrobras will have seven refineries remaining in Brazil.
Recent Pipeline Sales
On June13, 2019, Engie and Petrobras announced the conclusion of the sale of the Petrobras 90 percent stake in the gas pipeline company Transportadora Associada de Gas (TAG). The deal involved the acquisition of 90 percent of the share capital of TAG by the French company ENGIE valued at approximately US$ 8.1 billion. TAG has a gas pipeline network of 4,500km with a transport capacity of 2.612 MMcfg/d. With the completion of the deal, almost 70 percent of the domestic gas pipeline network of about 9,500km, is now controlled by two private companies. In 2017, Petrobras sold the New Transportadora do Sudeste (NTS) pipeline network of 2,000km to Brookfield. The completion of the sale of TAG was made possible by a recent decision from Brazil’s Federal Supreme Court allowing the sale of state-owned subsidiaries without congressional approval.
The biggest opportunity in Brazil’s hydrocarbon sector could involve the transformation and development of its natural gas market. As the country commits to reducing its carbon footprint, it will begin producing large amounts of associated gas with its pre-salt oil production and development. Much of it can be used for the country’s energy matrix where natural gas only accounts for 11 percent of current energy usage.
In late June 2019, Brazil’s National Council for Energy Policy (CNPE) presented 24 guidelines for the opening of the natural gas market as well as new annual targets for greenhouse gas emission reductions for fuels. The CNPE proposals aim to increase unbundling throughout the natural gas value chain and most of all, create conditions for access not just to gas pipelines, but also to all the essential infrastructures of the sector, such as outlets, processing units, and LNG terminals. The proposals are directed at opening the market and promoting competition.
Change = Opportunity
Whichever direction you turn and whatever your perspective on the industry in Brazil, one must realize that, “the times they are a changin.” Rarely do you have so many factors in play at the same time opening so many different doors in so many different areas as in the Brazilian hydrocarbon sector today. The large companies and majors have the pre-salt E&P with its huge investments and even larger rewards potential. As Petrobras is forced to focus on this aspect of the business and improve its balance sheet, it must sacrifice some smaller and neglected hydrocarbon assets to divestment. Meanwhile, the door to exploration and discovery of new resources is opened even wider by conventional bid rounds such as ANP Round 16 and a new program that could revolutionize the sector like the Permanent Offer of Areas which allows open acreage to be claimed by any company willing to pay the guarantee and perform the work commitments. On top of this a sympathetic, pro-business administration in power is taking action to dismantle long-standing pipeline, gas market, and refining monopolies by Petrobras in the country as well as an underdeveloped natural gas market that is virtually certain to expand. All of this adds up to the definite conclusion regarding Brazil that for hydrocarbons, “The future is now.”
Norwegian operator Equinor’s focus on Brazilian deepwater exploration continued through September 2018 with the spud of a new appraisal well in the Carcara Field in the pre-salt Santos Basin. The appraisal is being drilled on the back of a possible commercial discovery on the Guanxuma prospect announced July. The company is currently producing around 65,000 barrels of oil per from the Peregrino Field in the Campos Basin but is targeting 300,000 to 500,000 a day from the country by 2030 with US$ 15 billion of investments planned.
Fig 1 – Equinor Guanxuma & Carcara
Equinor, formerly Statoil, on 13 September 2018, spud the 3EQNR1SPS outpost well on the Norte de Carcara Block in the Santos Basin. The West Saturn rig is drilling the well in 2,052m of water. The well has a planned total depth of 6,669m and is called Carcara West based on its location to help define the western part of Carcara Field. Objectives of the well are assumed as the pre-salt Barra Velha Formation or the coquinas of the Itapema Formation. Equinor announced plans on 5 September 2018, to begin drilling on the Norte de Carcará Block by the end of 2018, after the drilling and testing phase on the Guanxuma sidetracks were finished. However, just eight days later the current outpost was spud on Norte de Carcara by the same rig being used for the Guanxuma program indicating that the sidetracks following the discovery may have been unsuccessful. The company received a license to drill up to five wells on the Norte de Carcara Block from Ibama in early September. These recently licensed wells can be added to the seven that have already been licensed in Carcará to make a possible 12 well drilling program for the field. The unification of the two blocks into a single field should be approved in 2019 or 2020, according to the Equinor senior VP. First oil is still scheduled for 2023 or 2024 but could be impacted by the final plans of Equinor to develop the Guanxuma discovery or not. The spud by Equinor of the first well in Norte de Carcara is also the first well drilled by the company or any company other than Petrobras, under the production sharing contract regime in Brazil. The Carcara Block is adjacent to Norte de Carcara, which was acquired in the second production sharing round in 2017.
In July 2018, Equinor announced the 1STAT10ASPS new field wildcat on the pre-salt BM-S-8 Block in the Santos Basin had discovered hydrocarbons, calling the discovery, “promising”. The well on the Guanxuma prospect was spud on 29 April and was drilled to 6,600m with Seadrill’s West Saturn drillship in 1,990m water depth. It is assumed to be suspended as a potential oil discovery since the rig began drilling a geologic sidetrack on 30 July, followed by a third well from the same surface location with the same planned total depth, indicating potential problems with the first sidetrack. Both sidetracks are now finished drilling and neither is yet on record as filing an oil or gas show report with the ANP which is mandatory if oil or gas shows are encountered. This could give credence to an unconfirmed rumor in the industry that the Guanxuma discovery was disappointing. Guanxuma had pre-drill estimates of 700 MMbo to 1.3 Bboe in recoverable reserves and is located on the other end of the BM-S-8 Block from the pre-salt Carcará Field, which is already estimated to have 2 Bboe recoverable. Equinor operates the block with 36.5% with partners ExxonMobil (36.5%), Petrogal (17%) and Barra Energia (10%). A unitization of the Carcará Block with the Norte de Carcará Block, which is currently undrilled but through seismic analysis is interpreted to include roughly half of the Carcara Field, is ultimately expected. Both Equinor and ExxonMobil are in the process of raising their stakes in the project to 40% before 2019, while Petrogal’s interest will climb to 20% and Barra Energia will leave.
Fig 2 – Santos & Campos Basin production
Thoughts of Peru typically conjure up a land of mystery. From its most popular tourist destination of Machu Picchu high in the Andes Mountains, where visitors flock to witness the grandeur and beauty of the Incan culture and the magnificent ancient city constructed without the benefit of modern tools or technology, to the elaborate Nazca Lines in the deserts of the south, depicting huge figures that can only be seen from the air, people around the world see the country as an exotic and mysterious place. One would not expect this enigmatic quality to carry over to the country’s hydrocarbon industry but in many ways, it does.
Licensed acreage by operator
Since 2003, when the country overhauled its hydrocarbon law to attract investment, industry analysts have touted the country as an under-explored prospective area, and with some success. Peru held record-setting bid rounds in 2005, 2006 and 2007, licensing a large percentage of the country. However, many of those blocks have spent long periods suspended in force majeure, have seen little or no exploration and are now being relinquished. After the licensing boom of 2005-2007, five new exploration and production license contracts were awarded in 2011, and then none were awarded until 2017 when Anadarko signed three new offshore exploration and production license contracts in the Trujillo Basin as a newcomer to Peru. Later in early January 2018, it was announced that another newcomer to Peru, Tullow Oil, had agreed to terms and would soon be awarded five more exploration and production license contracts in the offshore.
It seems now the rush is on in Peru for offshore acreage, even though no one has ever drilled a commercial well in Peru in deeper than 200 meters of water. Meanwhile, 15 technical evaluation contracts were active at year’s end, with 13 of them awarded in 2017. On the other hand, 20 contracts were suspended due to active force majeure, with 10 relinquished exploration contracts and 18 active exploration licenses at year’s end 2017. So, what do we make of this muddled and contradictory picture? Are operators fleeing from Peru or flocking to it, and what is the rationale on both sides?
First consider those coming to Peru: Tullow and Anadarko. These license contracts for the offshore are obviously very exciting and enticing, offering large tracts of prospective frontier, virgin acreage in an attractive fiscal framework with reasonable terms and commitments. Why isn’t everyone chasing that acreage? In fact, Peru does not even have provisions in their hydrocarbon law for deepwater oil and gas operations. Legislation was submitted to Congress by center-right President Pedro Pablo Kuczynski in November to remedy this. This legislation also includes many other measures designed to make the sector more attractive. However, Congress is dominated by the opposition party Fuerza Popular, led by Keiko Fujimori, which has yet to address the legislation and may not consider it a priority.
It seems these operators are now looking at offshore Peru as a way to explore in the country while minimizing some of the issues with the prior consent law and the very difficult task of attempting to monetize discoveries in prospective basins in the jungles east of the Andes.
Regarding the 13 technical evaluation agreement (TEA) contracts awarded in 2017, operators seem to have found a good way to explore in Peru with minimal investment commitment. These two-year contracts carry no production or drilling rights and provide a way for operators to study the block with preferential rights to negotiate a license contract at the end of the TEA, if they like what they see. Eight of the TEAs were approved for Global Petroleum for blocks XLV, XLVI, XLVII, XLVIII, XLIX, L, LI and LII with a total area of 34,137 sq. km.
Most of these frontier blocks are concentrated in the south-central Andes and Titicaca Basin while one is in the Moquegua Basin. Repsol, a longtime Peru operator, was awarded the other five TEA contracts for 2017 in the frontier Pisco Basin of southern Peru. Repsol had been approved for eight TEA contract awards but has delayed the signing of three of them in the highly productive Ucayali Basin in proximity to the country’s world-class Camisea gas fields. Repsol may still sign for these blocks and get the awards, but Peru’s hydrocarbon regulator, Perupetro, has imposed a fast-approaching deadline to do this, and the company could miss out on what appear to be the most valuable TEA blocks in Peru’s most productive basin and area for unknown reasons.
TEA contracts awarded in 2017
After this abbreviated summary of the pro-Peru case for exploration and production in the country, it is also useful to look at the companies leaving the country and examine the whys in this scenario.
As stated earlier, Peru had great success with record-setting rounds in 2005, 2006 and 2007. However, these victories may have been less than they appeared to be at the time. Company qualification standards to bid in the round were quite low, enabling many small and undercapitalized companies to win blocks. These companies tended to underestimate the cost of their commitments in these Maranon and Ucayali basin blocks in the jungles east of the Andes.
For example, the comprehensive environmental impact statements (EIS) required before exploration activity can even begin on a block. These often require extensive benchmarking of parameters in both the rainy and dry seasons. They frequently take a minimum of 18 months to complete and may take another year to be approved by the government. This means a delay of 30 months and a few million dollars just to get started.
The regulator (and promoter of the round) added to these underestimations by the operators with unrealistically low cost estimates for some of the drilling commitments. For example, road infrastructure in Peru east of the Andes is virtually non-existent and the building of access roads to drill a well in those areas is usually prohibited. The process for most explorers in that region was to select the most favorable location and drill a well using a combination of river and helicopter transport to move the rig and supplies for drilling the well to the site, at a predicted cost of 100 million. However, this well-cost estimate was based on 10 years earlier when an operator in that region used a drill barge to target a prospect in or on the riverbank at maybe one-tenth of that cost.
This does not even address the cost of monetizing a discovery east of the Andes. This has not been done since the world-class Camisea gas fields in 1984, which took 20 years and was only completed after Shell abandoned the project after 14 years of getting nowhere. Two more recent examples of viable discoveries that have been abandoned were Gran Tierra on Block 95 in the Maranon Basin.
In early 2015, a potential 100 million bbl field was scaled back to 57 million and development plans halted after an appraisal encountered a productive zone much thinner than expected. In 2012 Pacific Rubiales, now Frontera, discovered oil in Ucayali Basin Block 126 with the Sheshea 1X. The Chonta Formation flowed 1,430 bo/d with no water cut and a reserve estimate of 14 to 140 MMbo (if structure filled to the spill point) for the discovery. However, the operator ultimately walked away without even drilling an appraisal well for the discovery. This was probably due mostly to the financial hardships of the operator, but it means there is a potential 140 MMbo of already-discovered oil out there waiting to be developed and marketed, and this may not be enough for a commercial onshore discovery.
In summary, the Peruvian government for the last 15 years has said and tried to do the right thing for the country’s hydrocarbon sector but for various and complex reasons has not always been able to deliver the desired results. The country remains vastly underexplored in its most prospective regions compared to, say, the United States.
However, some companies have recently identified opportunities in the offshore where giant discoveries are possible and which are likely to be much less impacted by the Prior Consultation Law and its resulting NGO leverage. This all leads back to the original question posed at the beginning of the article, “Is the glass in Peru half full or half empty?” Time may provide a clearer answer, but at this stage it is in the eye of the beholder.
After the disclosure in the Brazilian press on 17 May of tapes of President, Michel Temer encouraging the payment of “hush money” bribes to Eduardo Cunha, a former speaker of the lower house of congress who is currently serving a 15-year sentence for his role in the Petrobras scandal, observers of the country are asking, “When will it all end and will Brazil ever be able to recover from the Lavo Jato investigation?”. Lavo Jato is the Portuguese phrase for Car Wash in English and refers to a wide ranging investigation, often called the Operation Car Wash Investigation – centered on corruption, bribery and contract price fixing by national oil company Petrobras. The investigation has been ongoing for more than three years now and has already led to the impeachment and removal of former President Dilma Rousseff in 2016 and is widely attributed as the main cause for plunging Brazil into its worst recession in 50 years.
Operation Car Wash Investigation
The Brazilian supreme court recently authorized investigations into eight members of Temer’s cabinet, as well as three governors, 24 senators and 39 lower-house deputies for allegations related to the Lavo Jato investigation. However, until now Temer had personally avoided the scandal. The story of the tapes of Temer was broken by the newspaper, O Globo, which said in March the president met local businessman, Joesley Batista. Batista is reported to have told Temer that he had been paying Mr Cunha to stay quiet, while Temer is reported to have responded, “You need to keep that up, OK?”. The tapes are now evidence in a plea-bargain deal that Batista has struck with prosecutors. The tapes also are reported to show Temer advising Mr Batista to contact a congressman from his party, the Brazilian Democratic Movement to resolve a problem with his company. The congressman then received 500,000 reais (US$ 159,000) from Mr Batista which was captured on film. One of Temer’s aides, Rodrigo Rocha Loures, surrendered a bag filled with part of the alleged hush money meant for Eduardo Cunha. Loures is suspected of being Temer’s courier and sending funds to Cunha. Prosecutors have already released a video of Loures leaving a Sao Paulo restaurant with the bag and tape where he identifies himself as Temer’s middleman. The tapes were part of an elaborate sting investigation by police which involved placing tracking chips into bags of cash.
Temer fiercely denies any wrongdoing and is resisting calls to resign. However, Brazil has been thrown into political turmoil by the recent news. Immediately after the news broke, the opposition party filed a motion for impeachment and hundreds of protestors hit the streets in several of Brazil’s large cities to demand a new election, Brazil’s currency, the Real, dipped and so did the local stock market index. The latest revelations have the Brazilian Supreme Court opening investigations into Temer for obstruction of justice and involvement in passive corruption.
The market is worried that the new scandal will set back some of the free market reforms introduced by Temer and considered vital to economic progress and a turnaround in the country. He has already passed a constitutional amendment to freeze government spending in real terms for 20 years. He was also pushing hard to overhaul the Brazilian pension system, which analysts have deemed to be unsustainable, and some of its rigid labor laws. These reforms are not popular but are deemed necessary by many analysts to keep the country solvent and internationally competitive. The latest revelations will delay these reforms at best and may stop them.
However, don’t expect that Mr Temer will soon be forced out of office. The motion to impeach must be accepted by the speaker of the lower house, Rodrigo Maia, who is a strong supporter of Temer. After that it would still need to pass through both houses of congress with two-thirds majorities while Temer still has strong support in congress. The Brazilian constitution does not allow for a new election under these circumstances. When a president leaves office with less than two years left in a term and has no vice-president to succeed him, congress is called upon to choose the next president and Temer currently has 19 months left to serve to the end of 2018 while no clear successor has yet to emerge. Temer’s approval rating was recently gauged at about 20%. The political atmosphere is bound to get more toxic before it gets better.
Reforms Here to Stay
In the oil and gas sector, reforms do not seem to be in danger of being repealed if Temer is removed. Since taking over permanently after the impeachment of Rousseff in August 2016, Temer has been working to institute reforms to the sector to make it more competitive and attractive to foreign investment. These include a reduction in local content requirements to about 50% of previous levels. However, the most significant of these changes passed by Temer is a revision of the pre-salt production sharing contract legal framework. The law previously required the mandatory participation of Petrobras as operator with a minimum of 30% in all new contracts within the pre-salt polygon covering large parts of the Campos and Santos basins.
The law, enacted in 2010, was intended to support Petrobras but wound up placing a huge debt burden on the company and placing it in an untenable position where it could not control its own budget. The situation became much worse when the company was hit with both the Operation Car Wash scandal and the steep drop in oil prices in 2014. Petrobras now has the option of whether it want to participate or not in any of the offered blocks in the pre-salt polygon and can choose its level of participation.
Temer signed it into law in November 2016. The new legislation was eagerly anticipated by both oil and service companies in the sector based on the belief that the relaxed rules would bolster investment in the sector as well boosting Petrobras by saving them from financial obligations that they cannot always afford. Industry experts predicted that after the passage of the bill, annual investment in the oil sector would rise from around US$ 20 billion in 2016 to about US$ 50 billion. Temer’s administration was hoping that the reforms would boost the economy, pull the Brazilian economy out of a severe recession and reduce a large government deficit. Industry observers believe that other reforms are still needed such as reinstating the Repetro special customs regime which exempts companies from high taxes on specialized equipment used in oil exploration and production. While the market reforms of Temer may not be in danger of repeal, there is a definite risk that they will not progress further or that the country could descend into chaos, gridlock or even a collapse of the government.
Before the latest scandal with President Temer, Brazil was in the process of testing the waters regarding these reforms with the holding of an unprecedented four different bids rounds in 2017 and there is no reason to believe these rounds will not proceed as scheduled. The first of these has already been conducted. Marginal Fields Round Four was held on 11 May and was deemed a big success raising US$ 2.54 million in signature bonus funds with an average premium of 1991.52%. It was the highest total ever for a marginal round in the country. In addition to the bonus, investments of US$ 2.9 million are forecast for the eight of the nine claimed bid blocks in round. The winning bidders were Brazilian entities, achieving another goal of the country to open the sector to smaller and medium sized operators. However, in the grand scheme of things this is all small potatoes and does not compare to the other three rounds which are currently in launch process.
On 18 May 2017 the ANP published a draft of bidding rules for ANP Round 14. 27 September 2017 is the bid due date and the round offers 287 exploratory blocks in nine sedimentary basins covering 122,600 sq km. The published draft rules for Round 14 allow companies to make suggestions and comments as part of the consultation process until June 19, with a public hearing to be held eight days later. For onshore exploration, the local content for Round 14 will be 50%. For the offshore blocks, the minimum local content required will be set to 18% in the exploration phase, 25% for well drilling and construction, 40% for collection and drainage systems and for offshore platforms local content will be 25%. Some changes in the draft rules are a single period of exploration, five to seven years in length and a reduction in minimum commitments which are biddable.
The round will offer blocks in the Campos and Santos basins for the first time in ten years. The Santos basin has 76 offered blocks, Campos basin 10 blocks, Sergipe-Alagoas offshore basin 11 blocks, Pelotas basin 6 blocks and Espírito Santo basin 7 blocks. The onshore basins include the Parana with 11 blocks, Parnaiba 12 blocks, Potiguar 62 blocks, Sergipe-Alagoas 46 blocks, Reconcavo 27 blocks and Espirito Santo 19 blocks. The draft rules also call for the removal of local content as a biddable item and a reduction in royalties for frontier areas with higher risk. The minimum signature bonus required has also been significantly reduced. The ANP also incorporated the idea of offering blocks with an exploratory upside near areas that are already partially explored or developed by Petrobras. This round is meant to appeal to some of the world’s major oil companies with ExxonMobil, Shell, Total and Statoil among the interested companies.
However, the real hot properties in Brazil will be bid on 27 October 2017 when the ANP holds the 2nd and 3rd Pre-salt Bid Rounds offering eight areas. The 2nd pre-salt bid round offers four utilizable areas and could raise between US$ 379 million and US$ 1.5 billion in bonus payments, according to a government forecast in early March 2017. Areas adjacent to the Carcara (Norte de Carcara), Sapinhoa (Entorno de Sapinhoa) and Tartaruga Verde fields (Sudoeste de Tartaruga Verde) operated by Petrobras and the Gato do Mato field (Sul de Gato do Mato) operated by Shell will be offered. The second round blocks consist of fields that require unitization and are open area blocks adjacent to existing field and discovery concessions. The ANP 3rd Pre-salt Round will offer the areas of Pau Brazil, Peroba, Alto de Cabo Frio-Oeste and Alto de Cabo Frio-Central. Both offerings will be held under a modified version of the production sharing contract (PSC) framework. The winner of the bids in this scenario is the company that offers the government the highest share of profits.
The terms and conditions for the rounds have not received final authorization yet. On 27 April 2017, the CNPE published preliminary bidding terms and conditions for the 3rd Pre-salt Bid Round. The signature bonuses were set for the round totaling US$ 1.36 billion including US$ 469 million for Pau Brasil, US$ 625 million for Peroba, US$ 109 million for Alto de Cabo Frio Oeste and US$ 156 million for Alto de Cabo Frio Central. If Brent oil has an average price of US$ 50 per bbl and the average production per active well is 12,000 bo/d, the government’s minimum profit shares will be 14.4% for Pau Brasil, 13.89% for Peroba, 22.87% for Alto de Cabo Frio Oeste and 21.88% for Alto de Cabo Frio Central. The ANP in 2014 revised upwards recoverable oil reserve estimates for the pre-salt Pau Brasil prospect in the Santos Basin. The estimate was increased about five fold from about 500 MMbo to about 2.5 Bbo. With an effective date of 10 February 2014, Petrobras relinquished the Peroba Block back to the ANP. The undrilled Peroba Block was held in reserve by Petrobras which still holds six blocks in the contract often referred to as either the Transfer Rights area or Onerous Assignment contract. The Peroba Block contains an estimated 360 MMb of recoverable oil.
The pervasive scandal uncovered by Operation Car Wash has hurt Brazil economically as well as being a source of shame and anger for its citizens. But it can also be argued that the scandal is a good thing and that cleaning up the country on the political and corporate levels, despite the pain in the short term, will make the country a better place. This represents the way many Brazilian feel about the investigation. Whatever direction the scandal and investigation takes in the next few years, two things seem to be a good bet. One is that Brazilian society is no longer willing to tolerate the systemic corruption uncovered by Operation Car Wash. Another is that Brazil has just begun its history as a major oil producing country.
Land of the Giants
The Brazilian pre-salt polygon, covering most of the Santos and Campos basins contains at least 176 Bboe of undiscovered, recoverable resources according to a 2015 study by the National Institute of Oil and Gas (INOG) at Rio de Janeiro-State University. The figure is more than four times the 30 to 40 Bboe already discovered in the area. It is classified as P90 meaning there is a 90% chance that the true amount is this much or higher. A second P10 figure was also given as 273 Bbo. The pre-salt has already yielded some of the world’s largest oil discoveries in recent years and wells drilled there typically flow at rates between 10,000 and 40,000 bo/d with almost no drop in reservoir pressures or water cut, even for wells that have flowed for years. The INOG study estimate is the only major public assessment of the subsalt polygon’s potential and the 2015 INOG study estimate is 54% higher than the previous study the group did in 2010 which estimated a P90 of 114 Bboe and a P10 of 288 Bboe. The study uses industry-accepted methods and also determined the average field size in the pre-salt polygon was 246 MMboe using the most conservative estimate methods. With numbers like these, it is easy to see why the pre-salt has attracted the attention of the majors and the Brazilian pre-salt is one of the few remaining places in the world where the elusive giant field is not only present but expected.
14 May 2013 would prove to be a crucial moment for Brazil oil and gas. The country conducted its Eleventh Bid Round, and its first round in five years.
Hopes were high for the Brazilians and the stakes were high as well.
Probably a billion dollars or so would change hands on bonus money payments with maybe a few more billion being committed for required work program investments. Jobs, careers, fates and fortunes of companies and even the fate of the slowing economy in Brazil affecting over 200 million people could be impacted by the round.
Despite having been an editor for ten years, this was my first time covering a large, high profile bid round. I was not even sure if I would be allowed to attend in person, so I decided to use the live internet feed with simultaneous translation.
Up for Grabs
There were 289 blocks offered in the round and I was surprised at how fast the bidding went. The first sector offered was the SPN-SE, comprised of 13 blocks in the Parnaiba Basin, a frontier gas prone basin in the north central part of the country just beginning to be developed. Blocks were not bid individually, but rather the companies were asked to place envelopes with their offers for blocks within a given sector. This usually only took about five minutes.
Then the bids were read out loud and posted, and a winner was declared for each block. The whole thing only took about 10 minutes to preliminarily award 13 blocks.
Later I learned many of the companies adopted a special technique to take advantage of the format of this bid round. They had two envelopes ready for each planned sector bid. When the bid time was called they watched to see which companies and how many were bidding on a particular sector. They would then decide whether to submit the high bid or the low bid envelope. I found the use of this strategy ingenious and a bit dubious, but veterans of the bid round saw nothing extraordinary about it.
All 13 blocks were claimed in the first bid sector. Seven companies bid and six won something. 39,000 sq km of land changed hands, with a work commitment of over US$ 220 million and bonus money paid of over US$ 30 million. “Hey this is pretty exciting,” I thought.
Then it happened.
The internet connection started going up and down. After trying briefly to improve the problem, I realized I was getting nowhere and at that point I knew I had to get to the bid round.
I figured it was highly likely I could show up and talk them out of a press pass. Although I could follow very little about what was going on through the sporadic internet feed before heading out, I did pick up on the fact that after less than one half day, Round 11 was already well on the way to setting a record for the total offered bonuses. I got in a cab to head for the bid round hotel, arrived and got my press pass just in time for the start of the lunch break.
Coming up to Speed
Before the afternoon session started I spied a friend from Houston. He was the New Ventures Team Leader for a major oil company and he filled me in on some of what I had missed.
The hottest bidding he told me had taken place for a Foz do Amazonas Basin sector where his company had been beaten by a group led by Total. This indeed turned out to be the case as 17 companies bid in the sector claiming eight of nine offered blocks and offering about US$ 375 million in bonuses and US$ 750 million in work commitments for 6,131 sq km.
In the end, the ANP Brazilian Eleventh Licensing Round successfully was closed in one day, instead of the two days that were planned. The round set a new record in Brazil for bonuses collected at about US$ 1.4 billion, breaking the previous record set in 2007 with the Ninth round collecting around US$ 1.1 billion.
In total of the 289 offered blocks, 142 were given preliminary awards, an average signing bonus of US$13.450 million per block. The highest single bid was just under 346 million Reais or about US$ 169.5 million for Block FZA-M-57 in the Foz do Amazonas Basin which was won by a consortium of Total 40%, BP 30% and Petrobras 30%.
The FZA-M-57 Block was hotly contested with six bidders including BHP Billiton, a consortium of ExxonMobil, Kosmos and OGX, a consortium of Chevron, ConocoPhillips and Mitsubishi, a consortium of Repsol and Ecopetrol and Shell Oil among the losers for the block.
Big Winners in Brazil Oil and Gas
From a company standpoint, Petrobras, as in all previous rounds, was again the leader gaining 34 new blocks where they held interests. However, the company was not as comprehensive or as aggressive in the bidding as in previous rounds. Petrobras also placed 21 non-winning bids in the round and was much more likely to be involved in bidding groups than in the past.
In second place for new company interests was Petra Energia with 28 new positions, all but 4 of these are operated and 100% ownership. The company seems intent on continuing its course of acquiring land in over looked frontier basins with 15 blocks in the Tucano Sul Basin, 9 in the Parnaiba Basin and 4 in the Pernambuco-Paraiba Basin.
OGX won 13 new blocks in the bidding, showing that recent financial problems for the company have not deterred it from the aggressive bidding for which it is well known. The positions are spread out with two blocks in the Potiguar offshore, four in the Parnaiba Basin, three blocks each in the Ceara and Barreirinhas basins and one in the Foz do Amazonas.
BG and Total were also certainly among the big winners in the round with each company acquiring ten block interests. BG acquired 10 blocks, 6 for 100% and 4 for 50% in the Barreirinhas Basin, another very hotly contested area. The company won 10 of the 12 total bids it made and pledged to invest US$ 200 million in signature bonuses and US$ 700 million in work commitment investments. Total won five blocks in the Foz do Amazonas Basin, three in the Espirito Santo Basin and one each in the Ceara and Barreirinhas basin. Total always bid as a consortium member and will be the operator on the Foz do Amazonas Basin blocks where it has 40%.
Some other notable companies in the round included BP, winners of eight blocks and always bidding in a group and ExxonMobil with blocks in the offshore Potiguar and Ceara basins bidding in a group. The company also had four losing bids.
Petrogal and Queiroz Galvao each also acquired positions in nine and eight blocks respectively.
The round was Brazil’s first since 2008, but will also be the country’s first of three rounds in 2013 with the Onshore Gas Round scheduled in November and a the first Pre-salt Round to be held in October. The final award contracts for the Eleventh Round are expected to be finalized in August and will offer up to eight years in the exploration phase and thirty years in the production phase. And if this round is any indication, 2013 is shaping up to be a banner year for Brazil oil and gas.
What is your opinion on Brazil’s Round 11? Will the frontier equatorial margin regions open up new commercial production areas? How will Round 11 compare with the upcoming First Pre-Salt Round and the 12th Round featuring onshore gas and the first unconventional plays? Please, leave your thoughts in the comments below.