Brazil’s 14th Oil & Gas Licensing Round – Exploration Bounces Back

The 14th licensing round for the concession for oil and gas blocks in Brazil that took place on Wednesday September 27, 2017 in Rio de Janeiro was widely anticipated as the first bidding round after the Brazilian Government enacted a series of reforms aimed at attracting new investments into the oil and gas sector. See Brazil – 14th Oil & Gas Licensing Round Initial Tender Protocol Released for further background information.

After the very disappointing 13th licensing round in 2015, in which none of the major IOCs nor Petrobras participated, the Brazilian Government has been working to revise a number of issues that were seen as deterrents for new investments.

The Government has recently extended the REPETRO tax incentive regime until 2040 and broadened its application. This regime allows for the temporary importation of goods for use in oil and gas exploration and production in Brazil with suspension of import taxes, and it allows for the fictitious export and reimport of goods produced in Brazilian, in order to take advantage of the same benefit. REPETRO has underpinned the activities of the Brazilian oil and gas industry since its original enactment in 1999, but it was due to expire in 2019, until this recent extension.

The Government has also revised local content requirements, which oblige oil and gas concessionaires to guarantee a minimum percentage of Brazilian content in all services and products used in their operations, subject to very heavy penalties for non-compliance. These requirements had become increasingly complex and burdensome, to the point that they were undermining the competitiveness of Brazilian oil and gas developments. For the 14th licensing round, the local content rules have been simplified and the requirements percentages have been substantially reduced. See Brazil proposes relaxation of local content requirements for further details.

Results

Of the 287 blocks offered in nine different basins, 37 blocks were awarded - 24 onshore and 13 offshore. Although this means that less than 15% of the offered blocks were awarded, this 14th licensing round was notable due to the participation of most of the major IOCs, as well as the return of Petrobras. The winning bids offered a total of R$ 3.8 billion in signing bonuses. This is the highest amount ever achieved in a bidding round for oil and gas concessions in Brazil.

A large proportion of this (R$ 3.4 billion) came from just two blocks in the southern Campos basin, which were acquired by a 50/50 consortium of Petrobras and ExxonMobil. These blocks were the most competitive, also receiving bids from Shell, Repsol, Total, BP and CNOOC, although for much lower values. They are close to the pre-salt area where Petrobras has made giant discoveries in recent years, and it would seem that the winning bidders have considerable confidence in their geological potential.

ExxonMobil was the big winner in this round; acquiring two Campos basin blocks with a 100% stake (C-M-37 and C-M-67), and six more (C-M-210, C-M-277, C-M-344, C-M-346, C-M-411, C-M-413) in partnership with Petrobras, which will be the operator. ExxonMobil also acquired the operation of two blocks in the Sergipe-Alagoas basin, in partnership with Queiroz Galvão Exploração e Produção and new entrant, Murphy Oil.

Meanwhile, Repsol and CNOOC were each awarded one block in the Espirito Santo basin. Although they both have non-operated blocks in Brazil (in Repsol’s case, through its joint venture with Sinopec), these will be their only operated assets. Australian company, Karoon Gas, picked up the only block that was awarded in the Santos basin, where it has existing discoveries.

There were no offers for the six blocks in the Pelotas basin, offshore the south of Brazil.

Onshore, Parnaiba Gas Natural (a subsidiary of Eneva) added five blocks to its portfolio in the Parnaiba basin, where it already produces gas from three fields and generates power at its Parnaiba Thermoelectric Complex as part of a gas-to-wire project.

In total, 24 blocks were awarded from all the onshore basins on offer: Parnaiba, Potiguar, Reconcavo, Parana, Espirito Santo and Sergipe-Alagoas. The winning bidders were mainly independent Brazilian and international oil companies, with one block in the Parana basin going to Petrobras.

There was high expectation that more new international oil companies would enter Brazil through the 14th round, as six international newcomers were pre-qualified (Petronas of Malaysia, German companies DEA and Wintershall, US independents Murphy Oil and Petro-Victory, and the Indian company Capricorn). However, only Murphy Oil presented a bid.

Despite the timid participation of newcomers, and the relatively low number of blocks acquired, compared to the total number on offer, the 14th licensing round points to a solid recovery of the oil and gas industry in Brazil. The participation of most of the major IOCs demonstrates that recent regulatory reforms have been favourably received.

The competitiveness of bidding for some of the more prospective blocks, may be a sign of things to come. The pre-salt blocks on offer in the upcoming 2nd and 3rd bid rounds for production sharing contracts are thought to contain very large oil accumulations. With the recent recovery in the oil price and many large oil companies under pressure to replace their reserves and renew exploration activities, the timing of these rounds is propitious and may see stiff competition.

Blocks awarded