Brazil’s Pre-salt Encore Flops

(Argus, 7.Nov.2019) — Brazil’s pre-salt auction today mirrored the lackluster results from yesterday’s much-hyped Transfer of Rights offer, raising questions about bonus pricing, the appeal of the country’s production-sharing terms and state-controlled Petrobras’ first-right mandate.

Petrobras teamed up with a Chinese partner to take just one of the five exploration blocks up for grabs in the sixth production-sharing round this morning. The TOR round awarded two of four blocks with established reserves, one to Petrobras and the other to Petrobras and Chinese partners.

Today’s outcome further reinforces the deep commercial ties between Brazil and China, which already accounts for three-quarters of Petrobras’ crude exports.

In both rounds, international oil companies that have previously featured prominently in Brazilian upstream tenders, including Shell, Equinor, Repsol-Sinopec and Portugal’s Galp, stayed away.

In today’s auction, Petrobras and China’s CNODC, a subsidiary of state-owned CNPC, bid unchallenged for Santos basin block Aram, which is estimated to hold 29bn bl of unrisked in place oil reserves. The pair offered the minimum 29.96pc share of profit oil and the fixed signing bonus R5.05bn ($1.24bn). Petrobras took an 80pc operating stake and CNODC 20pc. Aram is adjacent to the Equinor-operated BM-S-8 block, home to the giant Carcara discovery.

The two companies are already partnered in the 40,000 b/d Mero pre-salt field. In the TOR round, the pair joined fellow Chinese state-owned CNOOC to pick up the 350,000 b/d Buzios field with a record minimum signing bonus of R68bn.

The government says today’s round wraps up a pre-salt investment cycle that succeeded in diversifying Brazil’s upstream sector, long dominated by Petrobras. Pre-salt reserves are forecast to drive oil production to around 7mn b/d by 2030 from a current 3mn b/d.

IOCs complained that the assets offered in the back-to-back auctions this week were too pricey, and they have long argued in favor of concession terms rather than the PSC model that governs acreage within a pre-salt polygon.

“Financial resources aren’t infinite, but I remain optimistic,” a local oil executive said. “We are experiencing a repositioning and consolidation based on more abundant geologic data.”

Government officials grumbled that Petrobras had exercised its exclusive right of first refusal for three of the PSC blocks, but only bid for one.

“We always make an assessment of the condition of return, risk, financing. As there was no one participating, we ended up having no way to exercise the pre-emptive right,” Petrobras upstream director Carlos Alberto Pereira de Oliveira said on the sidelines of the auction, adding that the company was not obligated to bid.

Petrobras retained a right of first refusal after the 2016 removal of a rule that gave the company a minimum 30pc operating stake in all pre-salt assets.

The government said the right also stifled competition in yesterday’s TOR round. Renata Isfer, executive hydrocarbons secretary for the mines and energy ministry said, said the government supports ending Petrobras’ right of first refusal, but is not considering any radical changes to existing contract models.

Government officials have spoken publicly about scrapping the polygon and allowing national energy policy council CNPE to make case-by-case decisions on where PSCs should apply. Others are now talking more openly about pushing for legislative changes that would eliminate the production-sharing model, adopted during the left-leaning government in 2010.

Despite the absence of IOCs from this week’s dual auctions, industry executives say Brazil’s pre-salt play is just getting started, and recent hiccups had more to do with an ambitious auction schedule rather than a fading of investor enthusiasm.

“Now is the time to take returns out of these investments, this is normal,” Brazil’s head oil regulator Decio Oddone said today.

Three of the four blocks that failed to attract bids today are in the prolific Santos basin: Bumerangue, Cruzeiro do Sul and Sudoeste de Sagitário. In the Campos basin, Norte de Brava went unclaimed.

Government officials dismissed suggestions that an oil spill in the northeast and presidential hints of joining Opec impacted the two rounds.

“There is no cause and effect relationship between the spill and the auctions,” mines and energy minister Bento Alberqurque said today.

The government is likely to sweeten terms for all areas not awarded this week before re-offering them, likely alongside acreage included in four more upstream offers planned through 2021.

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