This content is from: Local Insights

Pre-salt up for auction in Brazil

Pedro Dittrich
Having not held auctions of areas for exploration and production of oil and gas since 2008, the Brazilian government decided to hold three bidding rounds in 2013: the 11th bidding round, which took place in May; the first pre-salt bidding round, to be held on October 22, certainly the biggest auction to be held in the sector; and the 12th bidding round, focused on the production of unconventional gas. Such initiatives have affected substantially all aspects of the oil and gas industry, creating various investment opportunities in the country.

The 11th round presented very good results. Thirty winning companies, of which 18 were foreign, auctioned 144 onshore and offshore blocks in 11 sedimentary basins. Many records were achieved, such as the record number of 63 qualified companies to submit proposals, a record signing bonus ($1.4 billion in total), and the highest bid for a single block ever offered in Brazil ($172.5 million). All these numbers show the confidence of investors in the Brazilian opportunities for oil and gas.

The 12th round will also be held under the concession regime, being the first national round with specific focus on onshore gas production, particularly unconventional gas. According to the Brazilian National Agency of Petroleum (ANP), 300 blocks in six different regions of Brazil will be offered to bids. One of the government's intentions is to raise the knowledge of onshore sedimentary basins and its unconventional gas reserves, estimated at 14.3 trillion cubic meters. This auction should also provide a supply shock of natural gas to the market, encourage the development of transportation infrastructure, the increase in thermoelectric power generation based on natural gas, and stimulate the development of the consumer market for natural gas, both residential and industrial. Therefore, considering that the unconventional gas industry is still new in Brazil, the entire supply chain of this industry is expected to go through a very significant development, bringing many investment opportunities with it.

Despite the fact that nearly 600 blocks are being offered during the 11th and 12th rounds altogether, it is the first pre-salt bidding round that has drawn most attention, as it is expected to offer one single area under the new regime of production sharing. According to the ANP, Libra is estimated to have between 26 and 42 million barrels in situ, and a recovery factor of around 30%, which represents an amount of recoverable oil that could reach 12 billion barrels of oil.

In the new production sharing regime, Petrobras will be the sole operator and will have at least a 30% stake in the consortium to be formed with the winning bidders. According to preliminary information from the ANP, the company intending to bid should have at least a 10% minimum stake in the consortium. The winner will be the one that offers the highest share of profit oil to the government, unlike with a concession, where the winner is the one with the highest score in an equation involving signing bonuses, local content and minimum exploration programme.

In the production sharing regime, those factors are fixed. For this particular first pre-salt bidding round, it is expected that the signing bonus will be set at around $5 billion and the local content at 35% during the exploration phase, and 55% to 65% during the development phase. The royalties will be set at 15% of the production value, with the special participation excluded.

Finally, considering the numbers involved, only large international oil and gas companies are expected to participate, and depending on the technical requirements of the tender, other players might only provide financial support to the operation.

Pedro Dittrich

Instant access to all of our content. Membership Options | One Week Trial