In the last few days the Brazilian National Council for Energy Policy and the regulator, ANP, has released significant extra information in relation to the upcoming 1st Pre-Salt Bid Round (the "Round"), including the draft tender protocol, draft PSC, an indicative bid time table and further information on the bid requirements. This Briefing brings the latest announcements together.

1. Background

The Round is Brazil's first offering of participation in the ultra-deep offshore pre-salt oil reserves. As is widely known, this will be Brazil's first use of the production sharing contract ("PSC") model as opposed to the established concession contract model and the Round will require that Petrobras be the sole operator under the PSC and at all times hold a minimum mandatory 30% equity participation in the PSC. The Round has only one prospect on offer, the Libra Prospect in the Santos Basin. According to ANP the Prospect holds between 8 and 12 billion barrels of oil.

2. Round Timetable

Whilst subject to revision, the indicative timetable for the Round is set out below:

  • Pre-tender protocol and draft PSC published: 9 July
  • Expressions of interest to be registered: 9 July to 9 September
  • Public hearing on the Round: 22 July
  • ANP technical, tax, legal and environmental seminar (Rio): 28 August
  • Technical, financial and valuation and bidder pre-qualification: 24 September
  • Bid bonds due: 7 October
  • Bids due: 21 October
  • PSC signed: November

3. Bid requirements

The Ministry of Mines and Energy Ordinance No. 218 on 20 June 2013 set the framework for the Round requiring: (i) qualification parameters for potential bidders, allowing only those who are qualified as "operator A" – the highest qualification standard for Brazilian E&P operators – to bid during the Round; (ii) benchmarks to be taken into consideration for the underlying profit sharing contract (the "PSC"), which draft is still to be provided by ANP including a benchmark range for the price for barrels of oil produced to be offered to the Government under the PSC; (iii) a thirty five year term for the PSC; and (iv) formal basic procedures in connection with the bidding mechanics.

Resolution No. 5, published on 4 July, has clarified this framework and indicates that the Round will be significantly different from the Brazilian 11th Bid Round held earlier in the year. Significantly, all usual bid parameters have been set by the ANP, with the only figure which bidders are required to give in their bids being the percentage of oil production they are prepared to give to the Government.

4. Signing bonuses, work programme and local content requirements fixed

In line with informal statements by both the Brazilian President and the Brazilian Minister of Mining and Energy during the past months, the signature bonus to be paid by the successful bidder or consortium of bidders is a fixed amount of R$ 15 billion (approximately £4.4 billion).

The minimum work obligations, to be carried out in the first 4 years of the PSC, are 1547km2 of seismic and two wells.

Unlike previous bid rounds, including the 11th, the local content requirements for the Round are set by ANP rather than being bid:

  • 37% for the Exploration Phase (15% for long term well testing)
  • 55% per-cent for Development Phase modules that start production on or before 2021
  • 59% per-cent for Development Phase modules that start production from 2022

The requirements for local content in the exploration phase are much lower than in the 11th Round as bidders will rely on foreign bespoke technology to perform the highly challenging activities inherent to the pre-salt area. Indeed that need for technology, as much as the need for capital, is one of the main reasons for the Round and Petrobras' appointment as mandatory operator. However, though lower they will need to be adhered to since public announcements indicate that the supervision process for compliance with commitments made by the successful bidders will likely be taken much more seriously by authorities than has been the case in the past.

5. The bid criterion – percentage Government share

The draft tender protocol and draft PSC published today contain a table to calculate the total Government share of the oil produced. The table is progressive, increasing with daily production volumes and the price of Brent up to US$160. Bidders are asked to bid at least a minimum percentage of production to be offered by the bidders to the Government of 40% assuming Brent at US$ 105 and daily production at 12,000 barrels per day.

The cost oil calculation is still pending further clarification and will be addressed in more detail in upcoming ANP resolutions. Most significantly, bidders eagerly await the publication of a draft of the PSC. However, the ANP has indicated that associated gas will not fall within the Government share and will therefore constitute "upside" for investors.

6. Cost recovery

Pursuant to Resolution No. 5, capex and opex may be recovered from cost oil on a monthly basis during the life of the PSC but cost recovery is limited to 50% of the gross value of the production during its first two years of production and then 30% for the remaining life of the PSC. A more fundamental point at a conceptual level regarding cost recovery is the definition of the expenses subject to recovery, which shall be approved by the operating committee. At this stage although it is still unclear what will be the mechanics for approval by the committee and if they will follow default position under industry standard agreements, or if there will be interference by local authorities regarding this issue.

7. Consortia

The draft PSC published on 9 July 2013, provides that the PSC consortium may consist of no more than seven bidders.

Further and more detailed information on the Round will be made available by the ANP in the weeks to come.

8. Comment

After the success of the 11th Bid Round, ANP has constructed a very different pre-salt bidding regime that gives bidders very narrow parameters in which to bid. The Round is rather unusual since, unlike most licence rounds which license unexplored areas, the area being bid for has been surveyed and drilled to some extent and so the question for bidders is how much oil can be recovered and at what cost, rather than whether there is anything there at all. To that extent, Brazil's offering is unique, and a bid process that requires a single number is at the same time simple and immensely challenging. From a commercial point of view, much will turn on the analysis of the draft PSC when this is available. A clear assessment of the robustness of the Brent based Government share algorithm and its underlying assumptions over the lifetime of a 35 year contract will be vital to any bidder, as will a clear understanding of the room for tax and other adjustments over time that could affect the modelling.