Brazil - Results of the 12th Oil and Gas Licensing round
Brazil’s 12th oil and gas licensing round was held on 28 November 2013, offering 240 blocks in onshore mature and frontier basins, many of which are considered prospective for unconventional gas. The success of the round was mixed, with some basins attracting a flurry of interest while others received no offers at all. The round was dominated by state-controlled giant, Petrobras, with participation from a number of smaller independents.
Concession contracts will be similar to those awarded in the 11th licensing round. The term of the concession is up to 35 years, with an exploration phase of five to eight years and a development and production stage of 27 years. The criteria used to evaluate the bids were (i) the value of the signature bonus, (ii) the Minimum Exploration Programme to be applied on the block, and (iii) the percentage of local content to be applied in the exploration and production phases of the block. For further details, click here for our previous Law-Now on the tender protocol.
Blocks in the mature Sergipe-Alagoas and Recôncavo basins were acquired by Petrobras, GeoPark, Trayectoria Oil & Gas and Alvopetro as operators, with Cowan Oil & Gas, Ouro Preto, Nova Petróleo and GDF Suez acquiring stakes in consortia led by Petrobras.
Of the frontier basins, Paraná proved the most popular, with blocks acquired almost exclusively by Petrobras and Brazilian independent Petra Energia, both as sole operators and in consortia. Consortium partners included Cowan Oil & Gas, Copel, Bayar Empreendimentos and Tucumann Engenharia.
Despite having 32 blocks on offer and being one of the highlights of the 11th licensing round, the Parnaiba basin received just one bid for one block from Geopark. New frontier basin, Acre-Madre de Dios, also received just one bid, from Petrobras, whilst the Parecis and Sao Francisco basins received no offers at all. There were a total of 50 blocks offered in the latter two basins.
The round received interest from just 25 companies, compared with 64 for the 11th licensing round and most of the awarded blocks received just a single bid. Like the pre-salt Libra field auction in October (for which, please see previous Law-Now here), the round failed to attract the level of interest anticipated by the government and the international majors generally stayed away, albeit for different reasons. Whereas companies were dissuaded from participating in the pre-salt round by stringent contract terms, a huge signing bonus and scope for government interference, majors declined to participate in this round because of doubts about the attractiveness of the acreage on offer.
There are also concerns regarding the viability of developing Brazil’s shale gas reserves. Environmental licensing is already a source of severe delays in many Brazilian oil and gas projects and there is no certainty regarding the approach of environmental authorities to development of unconventional. High local content requirements and the elevated cost of onshore drilling in Brazil create doubts regarding the economic feasibility of shale gas development, as does the lack of gas transportation infrastructure in the frontier basins on offer.
The strength of Petrobras’ interest came as something of a surprise, given its huge capital requirements for massive projects under way in the pre-salt region. Petrobras acquired 49 out of the 50 blocks it had bid for either alone or in consortium. The company’s strategy is to increase its reserves and production of natural gas in the vicinity of existing production facilities, benefiting from synergies with existing infrastructure. It is also looking to expand its knowledge on Brazilian sedimentary basins and diversify its exploration investment. Some may also wonder whether Petrobras was under any pressure from its controlling shareholder, the Brazilian government, to underpin the licensing round and to ensure that it was not a complete flop.
One positive outcome was the participation of several new and young independents such as Trayectoria Oil & Gas, Nova Petróleo, Alvopetro and Bayar Empreendimentos. Alvopetro is a subsidiary of Petrominerales, which was recently acquired by Colombia’s largest independent crude producer Pacific Rubiales. Panama-based Trayectoria made its debut to the Brazilian market through this licensing round as did Brazilian independents Nova Petróleo and Bayar Empreendimentos.
GDF Suez also acquired its first exploration acreage through a Brazilian licensing round, in consortia with Petrobras, having recently entered the market through the acquisition of Vale’s interests in two exploration blocks in the Parnaiba basin.
In summary then, the results of this 12th licensing round are something of a mixed bag. The continuation of Brazil’s recent licensing activity is, in itself, a good thing. Although it did not attract the same level of interest as the 11th licensing round, the offer of new acreage in frontier regions and the introduction of new players will help to diversify the Brazilian oil and gas industry. However, the round does highlight the perceived difficulties of shale gas development in Brazil, so the government will need to consider whether this is a priority and, if so, what it can do to make extraction of unconventional gas more attractive and to attract the investment that it is looking for.
