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Brazil 15th pre-salt oil bidding round, big expectations with a late minute shadow over


The ANP to hold Thursday, march 29, 2018, the 15th Round of Bids for the Exploration and Production of Oil and Natural Gas, under the concession regime.

By Petroleumworld

Petroleumworld 03 29 2018

All eyes will be on Brazil this Thursday going into Concession Round 15.

Brazil will hold what could be one of its last oil and gas licensing round before presidential elections. The country will offer Thursday some of the most potentially lucrative acreage in the Pre-Salt area.

Brazilian ANP oil regulator (Agência Nacional do Petróleo) will auction on March 29 some 70 blocks for exploration and production.

The 15th round will offer 70 blocks in the Parana and Parnaiba basins.

49 blocks in the offshore basins of Ceará, Potiguar, Sergipe-Alagoas, Campos and Santos and 21 blocks in the onshore basins of Parnaíba and Paraná, totaling 95,5 thousand km² of area.

Some 21 companies, including oil super majors Chevron, BP, Shell, Statoil, Total and ExxonMobil have registered to bid in Brazil.

However, a late Brazilian court decision has blocked the inclusion of top quality blocks in the oil auction on Thursday, the mining and oil ministry said on Wednesday, adding that it plans to include the areas in future auctions this year.

The two blocks withdrawn are located in the offshore Santos basin and were to be auctioned on Thursday with minimum signing bonuses of 1.65 billion reais ($494.34 million) and 1.9 billion reias each, according to Reuters report.

The move casts a big shadow over the concession-style auction by removing some of its most sought-after acreage.

Both areas were thought to include geology from Brazil's coveted pre-salt play, where billions of barrels of oil are buried under thousands of feet of salt beneath the ocean floor. The blocks also lie close to the Saturno block which is slated to be auctioned in June.

By law, blocks within the pre-salt polygon must be auctioned through so-called production-sharing agreements, where companies compete to offer the government the biggest share of so-called profit oil after costs.

Oil Secretary Marcio Felix said the government would seek to undo the decision, without providing details. But he said success was unlikely before the round on Thursday, which will grant companies concessions to explore and produce in the areas.

Felix said the court's rationale was centered on the fact that the government could make more money if it auctioned off the two areas through production sharing arrangements instead of concessions.

Leftist presidential candidate

Another bump in the round will be the leftist contender for the December presidential elections, Ciro Gomes who has pledged to reverse or slow the process in the country.

Gomes, has warned off potential oil company bidders, saying he would expropriate energy assets bought by private investors if he wins the October election. Gomes, a former governor, is trailing rightist candidate Jair Bolsonaro in polls where former President Luiz Inacio Lula da Silva, who has vowed to run but is likely to be barred due to a corruption investigation, is not offered as a candidate, Reuters reported.

15th round potential

The competition for Brazil's pre-salt rounds is heating up

According to a report from Wood Mackenzie, Brazil's record oil auctions last year were very successful companies winning some of the most prospective pre-salt offshore acreage.

Brazil's pre-salt is one of the most relevant of those deepwater plays and strong competition here could ultimately make some of the world's most coveted prospects uneconomic.

Horacio Cuenca, Research Director for Upstream Latin America

What happened last time?

In Concession Round 14 held in September 2017, the average winning bid for most offshore blocks was 2.6 times the minimum, while one of the pre-salt prone Campos basin blocks received a bid 90 times the minimum required. The competition seen in that round had a knock-on effect pushing government profit-share bids in the Production Sharing Contract (PSC) Rounds 2 and 3 in October last year to record highs. While minimums were set between 10-20% by the government and bids were expected to stay under 50%, winning bids averaged 65% with some reaching 77%.

Will the pre-salt rounds see the same overpayment on blocks?

Heated pre-salt competition is expected again this year at Brazil's two bid rounds closing in late March (Concession Round 15) and early June (PSC Round 4). The two rounds put more than 40,000 square kilometers of prime offshore acreage on the auction block, including 22 pre-salt prone blocks. According to Brazil's regulatory agency, more than 35 billion barrels of oil equivalent (boe) of prospective in-place resources have been identified in the Campos and Santos acreage alone.

As with last year's bid rounds, the results of the concession round will likely influence bidding strategies in the following PSC round. With round rules placing no caps on profit-share bids, aggressive bidding for a few key blocks in Concession Round 15 could drive up PSC profit-share rates to new record highs, permanently impacting development economics and putting at risk future rates of return and value creation.

This could lead to blocks being relinquished or discoveries left undeveloped
Blocks at these profit share levels will require extremely optimistic assumptions to break even in full-cycle terms. This would erode profit margins and also set high government profit oil rates as the new norm for future pre-salt projects; something the Brazilian government will want to avoid along with undeveloped projects which would make the country miss out out on their long-term economic benefits.

So how will the government avoid those scenarios?

Brazil could adopt measures used in Mexico's recent deepwater rounds to address the threat of overbidding. In Mexico's Round 2.4 a cap was set on royalty bids with a cash payment acting as a tie-breaker. This cap limited the likelihood of intense competition making contracts uneconomic. The tiebreaker cash payment ensured the government still captured the full value of a block from the keenest bidders in the form of an up front payment that will later become a sunk cost for operators.

However, with the long-term success of its coveted pre-salt play at stake, Brazil should be cautious of calling the round a success purely on a revenue-collection basis if the bidding concentrates once again around the pre-salt blocks only.

Source: Reuters/Wood Mackenzie/ANP

Writing Elio Ohep from Petroleumworld /
03 29 2018

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