The Brazilian Agency for Petroleum, Natural Gas and Biofuels (ANP) has launched a public consultation on drafts of the tender protocol and the concession agreement for the 13th bidding round for the exploration and production of oil and natural gas blocks in Brazil. A public hearing was held on July 9 2015. Final versions of the bidding round documents are expected to be issued by August 6 2015.

13th bidding round

Oil and gas players have welcomed this new bidding round in the aftermath of concerns regarding the credibility of state-owned company Petrobras. The round will offer 266 onshore and offshore blocks, which will be distributed in 10 sedimentary basins (ie, Amazonas, Parnaiba, Potiguar, Reconcavo, Sergipe-Alagoas, Jacuipe, Camamu-Almada, Espirito Santo, Campos and Pelotas). It will offer a mix of high potential areas, new exploitation frontiers and mature basins, creating opportunities for small, medium and large companies.

The 13th bidding round will be held under the concession model. Until the enactment of the pre-salt bills in 2010, this was the only regime available under Brazilian law. Under this regime, the winning bidder for an exploration and production block has the right to explore and produce in the block, and becomes the owner of any extracted oil or gas, subject to royalties.

The significant opportunities available in the pre-salt area led to the enactment of a new regime, which is applied solely in this area. Instead of concessions, the pre-salt area must be explored using production sharing contracts (PSCs), under which oil companies and the federal government split the resulting production according to contracted terms.

Oil companies may have an increased interest in this latest round, given that no PSC bids are expected. Congress is reviewing an important debate concerning the PSC regime (Bill 131/2015, proposed by Senator Jose Serra), which may change Petrobras's role as the sole operator in the pre-salt area.

However, unless this amendment to the legislation is passed, Petrobras will continue to be responsible for at least 30% of the investments in any pre-salt block. Considering Petrobras's financial situation, it is unlikely that new PSC rounds will take place before the company invests the substantial amounts required for this area. Therefore, the only ways to acquire new exploration and production blocks in Brazil are through:

  • the assignments of rights, via farm-in/farm-out agreements; or
  • the acquisition of rights in concession bidding rounds.

During the consultation period for the 13th bidding round, the local content requirements were criticised by representatives of oil and gas companies. The requirements oblige concessionaires to contract services and equipment from Brazilian providers, subject to heavy penalties for non-compliance. Under the preliminary bid protocol, minimum local content requirements range from 37% (exploration phase) to 55% (production development phase) for offshore blocks, and from 70% (exploration phase) to 77% (development phase) for onshore blocks.

According to feedback received by ANP, the oil and gas market is subject to fluctuations that make committing to a long-term local content level an inefficient and costly requirement. The players involved have also challenged the convenience of having minimum local content levels for practically the entire supply chain, instead of focusing on items in which Brazil is more competitive. Finally, oil and gas companies have observed that the local content requirement during the development phase is unreasonable, as production development may not occur if the exploration phase demonstrates that commercial production is unfeasible.

Comment

The federal government's launch of the 13th bidding round is a milestone in the history of the Brazilian oil and gas sector. A successful round will demonstrate that the sector is focusing on the long term, despite the pessimism surrounding Brazil and the difficulties affecting the oil industry worldwide.

The upcoming bidding round may confirm international oil companies' desire to invest in Brazil and test the oil and gas market and legal regime in a completely different environment – one in which Petrobras (which is usually the major bidder) is enforcing an aggressive divestment programme and significantly cutting its expenditures due to cash-flow challenges.

For further information on this topic please contact Godofredo Mendes Vianna or Jose Augusto Dias de Castro at Kincaid | Mendes Vianna Advogados by telephone (+55 21 2276 6200) or email (godofredo@kincaid.com.br or jose.castro@kincaid.com.br). The Kincaid | Mendes Vianna Advogados website can be accessed at www.kincaid.com.br.

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