On 18 September, Brazil’s President Dilma Rousseff announced the long-awaited approval of the 11th licensing round for oil and gas concessions. This announcement represents a shift from the inertia which has characterised Brazil’s oil and gas sector since the last licensing round in December 2008.

The 11th licensing round was approved by the National Council of Energy Policy (Conselho Nacional de Politica Energética or CNPE) in April 2011, an executive body responsible for formulating Brazil’s energy policy. However, President Rousseff delayed her approval, despite numerous calls from the industry for a swift resumption of oil and gas licensing. There had not been any offshore licensing since the 9th round, held in 2007. After a delay of five years, the licensed exploration acreage in the country is being rapidly reduced by relinquishments under the terms of existing concession, and some major oil and gas companies were withdrawing from the upstream sector for lack of opportunities.

There were a number of reasons for the delay in approving the 11th licensing round. Edison Lobão, Minister of Mines and Energy, ascribed the delay the failure of the political branches of government to agree on the allocation of oil revenues. The government’s royalties bill aims to reform the current revenue regime, where nine oil producing states receive the bulk of royalty revenues, and instead split such revenues broadly at the federal, state and municipal levels amongst oil producing and non producing states. The royalties bill has been fiercely resisted by oil producing states and municipalities, including Rio de Janeiro, but it has been approved by the Senate and is currently awaiting final deliberation by Congress.

The delay is also understood to have been motivated by concerns regarding local content and the capacity of Petrobras, the Brazilian state controlled oil company. Brazilian oil and gas concessions require operators to ensure that a certain percentage of goods and services required for exploration and development operations are acquired from local suppliers. These requirements have become steadily more demanding over the years and the recent rapid increase in oil and gas activity, prompted by pre-salt discoveries, has seen a lack of capacity in large parts of the Brazilian oil and gas supply chain.

Its pre-salt discoveries have also put huge demands on the capital and other resources of Petrobras. It was widely believed that Petrobras was in no rush for another licensing round, because its participation would necessarily be limited by financing and other capacity restrictions. Only recently has Maria das Gracas Foster, Petrobras’ President, joined in industry calls for the resumption of licensing; telling a Senate panel that her company needed to start renewing its exploration portfolio. That call seems to have been a significant prompt for the recent government announcement.

However, the significance of the announcement is open to some doubt. It was timed to coincide with the biennial Rio Oil & Gas Conference, when the eyes of the oil and gas world are upon Brazil, and there may be some pressure for good news, or at least to deflect mounting criticism of licensing delays. Minister Lobão did not set a date for the licensing round, but suggested that it would be held in May next year. However, he did specify that this was subject to prior approval of the royalties bill, in order to avoid subsequent legal challenge. This is now expected to be voted on later this year, following October’s municipal elections.

In accordance with the earlier 2011 announcement by the CNPE, a total of 174 blocks will be up for auction in 2013 (split equally between 87 offshore and 87 onshore blocks). The majority will be in so-called “New Frontier” areas, particularly in the north eastern equatorial margin, an area thought to share geological characteristics with parts of West Africa where significant oil discoveries have been made. Other blocks will be in mature onshore production areas, in the Potiguar, Espírito Santo, Sergipe and Recôncavo basins.

Minister Lobão also announced that a first bidding round would be held for production sharing contracts in Brazil’s pre-salt province in November 2013. Huge, multi-billion barrel discoveries, such as the Lula and Cernambi fields have been made in this area, which is widely expected to contain 50 to 100 billion barrels of oil equivalent, trapped beneath a thick layer of salt in ultra deep waters far from Brazil’s coast. Much of the area is unlicensed and, given the potential rewards, the Brazilian government has decided to change the licensing regime to a model based on production sharing agreements (PSAs). Although the law enacting this model has been passed by the Brazilian parliament, the model requires significant further regulation, including a final form of PSA and agreement on the distribution of revenues between Brazilian states, municipalities and the federal government.

Although these reserves could eventually turn Brazil into one of the world’s leading oil producers, the immediate result of their discovery has been to unravel political consensus concerning oil and gas regulation in Brazil and to delay further exploration of the country’s largely uncharted sedimentary basins. It is to be hoped that these political differences can be overcome and that the government’s recent announcement marks the opening of a new era of investment in oil and gas exploration in Brazil.