Brazil has suspended its 17th licensing round which would have seen the state oil regulator ANP offering 128 offshore exploration blocks throughout the country, fearing that the plummeting oil prices and unprecedented declines in global crude demand entailing double-digit-percent CAPEX cuts will set the stage for another fiasco. With two failed pre-salt licensing rounds in November 2019 tarring the overall successful year of both Brazil and Petrobras, clouds are growing heavier around the upstream future of Brazil, once the leading deep-water investment hotspot of the Americas. This time it is not even the government’s fault – it has tried to redeem its past errors with a couple of new initiatives, however, coronavirus got in the way.
Up until November 2019, everything seemed to be going in the right way for Brazil – as recently as last October it had held a rather successful pre-salt auction when it managed to award 12 out of 36 blocks on offer, bringing in a record amount of signature bonuses ($2 billion). In a telling illustration of how competitive the auction was, the Brazilian NOC Petrobras managed to get only one block. With hopes riding high, no one really expected that the upcoming license rounds are to be distressingly bleak. Sure enough, the transfer of rights (TOR) auction had its fair share of peculiarities – for instance, the offers were to be bid on a part of 12.4 billion boe of recoverable resources, not the entire volume. The thing is that under a 2010 agreement Petrobras holds exclusive rights to the first 5 billion boe of recovered resources, whilst the auctioning were to be held only for the remaining 7.4 billion boe.
In the TOR bidding session Petrobras won all the „prime” blocks like Buzios and Itapu, with the Brazilian NOC bidding the minimum profit oil level and won in both cases. This garnered some $17.5 billion for the Federal government, although it remains questionable whether such a gambit of moving money from one pocket into another was actually worth it. The day after the TOR auctioning, the 6th Production Sharing Licensing Round took place, the purpose of which was to attract even more international majors who could provide new technological solutions to Petrobras’ already extensive deepwater expertise. Oddities have marred the prospects of 6th pre-salt rounds, too – Brazil’s National Energy Policy Council (CNPE) has increased the minimum state oil profit share by 5-6% just a couple months before the auction.
Moreover, 3 blocks in the pre-salt offering would have required unitization agreements with Petrobras as they’re adjacent to acreage held in adjacent Petrobras-operated blocks: in such cases international NOCs have little to no chance of acting as operators of the deepwater projects. If all 4 pre-salt and all 5 pre-salt blocks were to be allocated, the aggregate of signature bonuses going towards the Brazilian authorities would rise to a whopping $27 billion – roughly half would have gone to the Federal Government. Yet even though 14 international majors were approved to participate in the TOR offering, in the end none of them participated – only the Chinese CNODC and CNOOC took minor parts, with Petrobras essentially refinancing the Brazilian state with its applying for all the licenses taken.
If one is to judge all the developments taking place from November 2019 onwards, the palpable lack of foreign investment into Brazil’s oil and gas in terms of project financing might transform itself into a worrying trend – the Brazilian Ministry of Mines and Energy expects that the nation’s aggregate output would increase to 5.5mbpd by the end of this decade, yet it fails to mention that all big FIDs have already been take some time ago. The objectives set are nevertheless very ambitious. Following the development of the Buzios field (some $18 billion of upstream spending in 2020-2024, i.e. almost a third of Petrobras’ total), the production capacity of which should reach 1.86mbpd by the end of the 2020s, one can safely assume that the thrust of Brazil’s upstream future lies in its pre-salt basins, expected to represent 77% of aggregate national output by 2029.
Here comes the difficult part - at the end of 2019 Petrobras’ net debt stood at a whopping $79 billion. Although much better than the $105 billion five years ago thanks to an ambitious divestment and optimization program, the Brazilian NOC remains one of the world’s most indebted oil companies that still has a lot to do to knock the firm’s financials back into health. Briefly put, the heavy debt repayments commitments of the NOC might endanger Brazil’s assumed output surge and Petrobras needs external participation to cope with the ambitious goals. Needless to say, it seems that the time of major discoveries with reserves counting in the billions is gone for good – if Brazil wants to see the smaller assets being developed, it needs to give up some of the economic interest involved.
The Brazilian parliament has taken several steps in the right direction after the fiasco of the November auctions – primarily it had aimed to render pre-salt projects more accessible by means of revoking the pre-salt polygon status from the Santos and Campos basins. The main objective is to allow the national regulator to choose flexibly on the contract regime for any given pre-salt block (i.e. concession contracts instead of a fixed-regime production sharing contract) and to renounce on Petrobras’ „strategic status” in all matters related to pre-salt. Although a more frequent usage of concessions would most probably lead to respective governments having a bigger say in policy matters, they also present an opportunity for regional governments as they would receive a higher share of oil revenues (versus the federal government).