The Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) of Brazil has now published the initial tender protocol and draft concession contract for its 12th licensing round and plans to hold the auction on November 28 and 29 in Rio de Janeiro. The auction will include conventional oil and natural gas rights, but the primary focus is on the country’s shale reserves. This auction follows the success of the 11th round in May and continues Brazil’s ambitious licensing programme, being scheduled just one month after the country’s first auction of pre-salt exploration rights and ahead of another round for marginal fields, planned for February 2014. The protocol contains details of the 240 onshore blocks on offer, in mature basins (Recôncavo and Sergipe-Alagoas) and frontier basins (Acre-Madre de Dios, Paraná, Parecis, Parnaíba, Recôncavo, São Francisco).
The protocol for the 12th licensing round also sets out pre-qualification requirements, bid procedures and the main commercial terms of the concession contracts on offer. Pre-qualification documents are required to be submitted by 11 October 2013. In a change from the 11th round, the ANP now requires interested parties to submit qualification documents in three separate stages (expression of interest; satisfaction of qualification criteria; and evidence of payment of the participation fee(s)) rather than in one complete set. The protocol also attempts to clarify certain aspects that caused confusion during the 11th round, particularly in relation to foreign bidders and potential difficulties in meeting certain criteria where there is no foreign equivalent to the requested Brazilian document. The ANP has attempted to simplify the process further for companies which have recently been through the licensing process, so that companies who qualified for the earlier 2013 licensing rounds may request that the ANP refer to the documents previously submitted.
Similar to the previous licensing rounds, to pre-qualify, the ultimate parent company of a proposed concession holder must demonstrate its technical and financial capability. Successful applicants may qualify as an ‘A’, ‘B’ or ‘C’ operator or a non-operator depending on their level of technical experience and their net equity position. The differing categories of operator, and criteria to qualify for each category, match those of the 11th licensing round – deepwater blocks require ‘A’ operators, other offshore blocks may be operated by ‘B’ operators and ‘C’ operators may only operate designated onshore blocks. All blocks available in this licensing round may be operated by ‘C’ operators, other than the nine blocks in the Acre-Madre de Dios basin, which require ‘B’ operator status.
Pre-qualified companies may bid individually or in consortia. All consortia must consist entirely of pre-qualified companies, with at least one pre-qualified operator holding at least a 30% interest and each consortium member holding at least 5%. Each bidding company and each member of a bidding consortium must pay a participation fee of R$15,000 or R$30,000 per sector or R$270,000 for all sectors, which will give them access to data packages covering the relevant blocks.
Where a bidding company is a non-Brazilian entity, it is required to incorporate or designate a Brazilian subsidiary with its main office and administration in Brazil to hold the concession. In this case, the pre-qualified bidder must guarantee the obligations of its Brazilian subsidiary.
Bids will be assessed by the ANP according to the: (a) signature bonus (40%); (b) mandatory exploration programme (40%); and (c) minimum local content requirement (20%) offered by the bidder. Of the minimum local content requirement, 5% will be allocated for the exploration phase and 15% will be allocated to the development phase.
The draft concession contract is largely the same as that used for the 11th licensing round. The term of the concession is up to 35 years, with an exploration phase of five to eight years and a development and production stage of 27 years. One addition to the contract is that the concessionaire may obtain a special extension of the exploration phase if a discovery of non-conventional reserves is made. If so, the phase may be extended by up to six years, in three two-year sections. There are also additional requirements relating to the appraisal of non-conventional areas and broadly worded environmental controls related to such areas, particularly in relation to fracking.
Other significant terms of the concession include a government royalty of 10% and annual surface rental of between R$34.39/km2 and R$161.20/km2 during the initial exploration phase. The latter will be increased by 100% during any extension to the exploration phase and during development and by 900% during production. Concession holders will be subject to Brazilian taxes, including the “Special Participation”, which is calculated according to the volume of production, location and year of production. Finally, the concession holder will be liable for payment of 1% of production to the landowner, as well as the cost of any rights of way or easements necessary to obtain access to the land.
Currently, Petrobras is responsible for the vast majority of oil and gas production in Brazil and owns all major gas pipelines and LNG facilities. This severely restricts competition, particularly in the natural gas market, where prices are high. However, with Petrobras declaring that shale gas is not a priority, and the Brazilian National Development Bank (BNDES) launching a new credit line for shale gas exploration as part of the Inova Empresa programme, it is hoped that this auction may kick start shale gas development by a range of companies and eventually lead to a more competitive natural gas market. Odebrecht, Petra, OGX, HRT, Orteng and Cemig have openly expressed interest and both Shell and Statoil are expected to consider bidding given their presence in Brazil and their interests in shale blocks in the US.
The US has demonstrated that shale gas has the potential to revolutionise industry by offering low cost fuel and feedstock to energy intensive industries such as petrochemicals and fertilizer manufacturing, as well as electricity generation. However, the success of shale gas exploration in Brazil is contingent on many factors. Many prospective exploration blocks are in remote areas, with little transportation or pipeline infrastructure. It will be necessary to get rigs, crews, equipment and materials to such sites and, in case of commercial discoveries, to get the gas to market many miles away. Local content requirements may also be a challenge, given the lack of shale experience in the country.
Despite the challenges, the upcoming auction has the potential to open up a new frontier in Brazilian oil and gas exploration and create opportunities for new players in this major energy market. If significant reserves are discovered and efficiently exploited, the country as a whole may also benefit from reduced energy costs and increased industrial competitiveness.