In February 2013 the Brazilian Government released drafts of the bid document and the concession agreement for the 11th National Petroleum Agency (ANP) Bid Round for onshore and offshore oil and gas blocks. The concession bid rounds had been suspended for more than four years. The government is now signalling it is ready to grant new concessions.
There are also new developments regarding Brazil's pre-salt layer and shale gas blocks. It was recently announced that there will be bid rounds for both in 2013. Currently there are 77 oil and gas companies operating in Brazil, 38 of those are foreign companies from 19 different countries. The government is confident the new bid rounds will attract more foreign investors.
1. Brazil's hybrid regime for awarding blocks
Brazil operates three separate regimes for the awarding of hydrocarbon blocks. A royalty concession regime, under which foreign investors can take operatorship, was introduced in 1995 (see text box below). This regime continues to apply to Brazil's non-pre-salt blocks, both onshore and offshore.
A production sharing contract (PSC) model has been adopted for the exploration and production of oil and gas assets in the deeper pre-salt strata. Under this regime, successful bidders enter into a PSC with Petrobras, who will act as the sole operator with a minimum 30% equity interest.
A third regime exists, whereby the Federal Government, the ANP and Petrobras enter into an "onerous assignment contract"1 to transfer exploration and production rights directly to Petrobras without a bid process, in return for Petrobras purchasing federal government bonds. In addition, the Federal Government is entitled to purchase shares in Petrobras.
2. Previous bid rounds for non-pre-salt concessions
The ANP2 has held ten bid rounds in the shallower non-pre-salt areas that resulted in the awarding of approximately 730 concessions of oil and gas exploration and production blocks, onshore and offshore. The last offshore bid round was in 2007 and the last deep water bid was in 2006. Onshore blocks were offered in the latest bid round in 2008.
The non-pre-salt concession regime
The concession regime for non-pre-salt areas was introduced by Law No. 8.987/1995. Concessions commence with a bid procedure conducted by the ANP. Following exhaustive financial, technical and legal analysis, the ANPs selection procedure is based on the best combination of: (i) signature bonus (40%) payable in full prior to the execution of the concession agreement (for the 11th Bid Round the amounts vary from approximately US$ 12,880.00 to US$ 6,9 million); (ii) minimum exploration programme (40%); and (iii) minimum local content offered (20%). The concession contract includes a variable exploration phase (that may vary, usually from three to seven years, divided in two periods) and a development and production stage of 27 years.
Under this regime, concessionaires may have to pay: (i) government royalties that may vary from 5% to 10% over the oil and gas production reference price; (ii) a special participation percentage that varies from 10% to 40%, based on progressive tables on net production revenues adjusted for royalties, exploration investments, operating costs, depreciation and taxes; (iii) an occupation or retention of area tax (that applies only to large production volumes); (iv) landlord cost percentages, applicable to onshore blocks only, that vary from 0.5% to 1% of the oil and gas production reference price.
The pre-salt PSC regime
In December 2010, the Brazilian Congress approved three separate bills of law in connection with the exploration and production of the Pre-Salt layer:
- pursuant to the Pre-Salt Law, the introduction of a production sharing contract regime to be applied for future licensing of the pre-salt area and certain other areas deemed as strategic by the government and the implementation of an oil fund to support social and economic development in Brazil;
- the creation of a new 100% state-owned company, named Empresa Brasileira de Administração de Petróleo e Gás Natural S.A. - Pré-sal Petróleo S.A. (PPSA); and
There have been a series of challenges and law suits questioning the bid rounds. The 8th Bid Round (which auctioned rights for 284 blocks in 14 different sectors, two onshore and 12 offshore) was suspended in November 2006 and cancelled in January 2013. The suspension was due to injunctions filed by Federal District courts questioning whether a provision in the bid documents that limited the number of bids one company could make in a particular sector of a basin breached the Brazilian Constitution. As it happened in the final stage of the bid proceedings, 23 companies had already been awarded with a total of 38 blocks.
The table below contains the blocks offered in each bidding round, according to information made available by the ANP.
3. The 11th bid round for non-pre-salt concessions
The 11th ANP Bid Round will offer 289 offshore blocks, to be awarded to the parties under the concession regime. The deadline for submission of the qualification documents and payment of the participation fee is 26 March and 26 April for the submission of bid bonds. The bid is scheduled to occur on 14 and 15 May 2013.
The blocks are located in 11 sedimentary basins, namely: (i) Barreirinhas; (ii) Ceará; (iii) Espírito Santo; (iv) Foz do Amazonas; (v) Pará-Maranhão; (vi) Parnaíba; (vii) Pernambuco-Paraíba; (viii) Potiguar; (ix) Recôncavo; (x) Sergipe-Alagoas; and (xi) Tucano Sul.
Some of the blocks are located in the Equatorial Margin, an area that has been under the spotlight. Some analysts believe its geology to be similar to that of offshore West Africa, where large oil discoveries have been made in recent years.
Pre-qualified companies may bid as a consortium or individually. All groups must be made up entirely of pre-qualified companies with at least one pre-qualified operator holding a minimum 30% interest. Each bidding company and bidding consortium must pay a participation fee of R$15,000 per block (or R$125,000 for all sectors in an area) in order to access data packages for the blocks. All concession holders must be Brazilian entities, so successful foreign companies will be required to incorporate or designate a Brazilian subsidiary which has its main office and management in Brazil.
4. Main changes to the Concession Agreement
Many oil and gas companies will be familiar with the form of concession agreements used on previous rounds. Although the Brazilian Government has not published a final version of the form of concession agreement and tender document to be used for this round, a draft version is available and the ANP has confirmed that both documents are unlikely to have any substantial changes before the bid date.
Whilst the agreement is an evolution of previous forms rather than a wholesale revision, there are some significant changes including:
- Work programme
There is a mechanism for allowing exploration efforts during the first phase of the exploration programme to count towards the fulfilment of the second phase obligations.
- Research and development
The draft agreement envisages the establishment of a technical-scientific committee responsible for preparing an annual list of most important activities and areas for research and development. The committee would be set up by the ANP.
- The so-called "Frade" clause
Named after the Frade block incident of 2011, this clause, amongst other provisions, requires the operator to maintain fluent Portuguese speaking staff in Brazil, able to provide quick responses to the agency in case any incidents occur. The operator must also set up a monitoring centre responsible for the close supervision of compliance of environmental and health and safety standards by the concessionaire. Other obligations include providing unrestricted access to ANP representatives for the proper assessment of operational incidents. The Frade clause does not seem to be particularly onerous on international oil companies as most of them already have Portuguese speaking staff in Brazil and the setting up of a monitoring centre is not likely to be costly.
- Unitisation provisions
The previous concession agreements included a detailed procedure for unitisation situations, which has been removed from the draft and replaced by reference to article 34 of the Pre-Salt Law (Law No. 12,351/2010). The Pre-Salt Law has broad provisions that empower the ANP to prescribe the unitisation procedures to be adopted.
Although unitisation is regulated in article 27 of the Brazilian Oil Law (Law No. 9.478 of 1997) and concessionaires generally have an obligation to pool, the negotiations involving the first unitisation agreements in Brazil have been controversial mostly because the concessionaires had to reach an agreement in a certain amount of time and have had difficulties reaching agreement in the timeframe established by the ANP.
Under the Pre-Salt Law (which now also governs unitisation in the post-salt layer) if no agreement is reached regarding unitisation, the contract for the entire block may be cancelled by the ANP. There also seems to be no official guidance as to how concessionaires should harmonise their different local content requirements.
- Local content requirements
According to the ANP, the purpose of the local content requirement in Brazil is to increase, on a competitive basis, the share of the domestic manufacturers and service firms in the oil and gas supply chain. The local content component in the concession agreement would then permit the growth of segments of domestic manufacturing companies, technical development of the sector and the training of local human resources, resulting in more jobs and income for locals.
Various ANP Resolutions together with the Local Content Primer (Cartilha de Conteúdo Local), which was developed by Brazil's Programme for the mobilisation of the national oil and gas industry (Prominp), establish criteria for the hiring of Brazilian services. They are the legal driver of local content in Brazil and are used by operators and concessionaires in order to demonstrate that they have fulfilled the local content requirements set out in concession agreement.
Previous concession agreements provided for exemptions from local content requirements where: (i) prices from local suppliers were excessively high; (ii) products or services would not be delivered in a timely manner; or (iii) the concessionaire was using a technology not offered by the Brazilian industry. However, the provisions have been criticised frequently as being unclear, a position made more uncomfortable by ANP's recent attitude towards enforcement.
The local content requirements in the 11th Bid Round draft concession agreement clarify the exemption of local content requirements and contain a more detailed clause that gives more information on how local content requirements will be assessed during the concession, allowing concessionaires to request adjustments to their initial proposed local content milestones.
The ANP retains the exemption regime of previous rounds, but describes exemptions in greater detail and has set out a procedure for the concessionaire to request a waiver of local content requirements. In essence, the clause will bring more clarity as to how the regulator will check compliance with local content. The inclusion of percentages to define if the goods or services may count towards the local content requirement sets an objective parameter that will give both parties more certainty as to how to realistically achieve their milestones.
Previous concession agreements submitted all disputes to ad hoc arbitration, but mentioned that the rules established by the Regulations of the International Chamber of Commerce (ICC) Arbitration Rules should be used as a parameter. The new draft makes reference to the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules to be used as a parameter but also gives the parties the option of referring disputes to the ICC or any other well-known arbitral court chosen by the parties. These changes are likely to have been inserted because many companies have strong preferences on arbitral rules, such as those issued by the Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada or the FGV Chamber of Conciliation and Arbitration.
5. The first pre-salt ANP bid round
The Brazilian Government recently announced that the first pre-salt ANP bid round is scheduled to occur on 28 November 2013 and draft documents are expected to be published around July.
As stated above, the pre-salt blocks will be subject to a production sharing regime, pursuant to the Pre-Salt Law, under which Petrobras will be the sole operator with a minimum 30% equity interest. Petrobras also has the possibility of acting alone, if directly contracted by the Federal Government and if the CNPE considers it essential to the preservation of the national interest.
Although the draft bid document and related production sharing agreement have not yet been published, the ANP has stated that blocks will be awarded to parties that offer the largest percentage of profit oil to the Brazilian Government. The signature bonus, minimum exploration programme and the local content levels will be set out in the concession agreement. The royalties are slightly higher than those payable under the concession regime and are set at 15%.
One of the major concerns for international oil companies is how they will negotiate and discuss a business plan with Petrobras as their co-venturer. The ANP has stated that the terms of the JOA will be made available with the PSC and bid documents, so that companies will know the terms of the JOA beforehand. They have also stated that the agreements will be in accordance with AIPN standards and that the establishment of an operational committee will ensure that Petrobras will not have unilateral decision powers. It is not yet clear how much scope there will be, if any, for bidders to amend the terms of these JOAs as part of the bid process.
6. 12th bid round – Unconventional Gas
Initial exploration in South America suggests that sizable shale gas deposits lie beneath several countries including Argentina, Brazil, Colombia and others. Indeed, shale reserves in Brazil are estimated to be the second biggest in the region after the United States.
The precise regulatory framework and draft agreements for the shale gas auction are yet to be established and discussions with the environmental authorities are ongoing which may impact the proposed timing. However, the Ministry of Mines and Energy has recently signalled that a special onshore shale deposits auction will potentially be held on the 30 and 31 October. This will constitute the 12th concession bid round.
In terms of scale of numbers of blocks and the breadth of different types of block being licensed, the 2013 Brazilian bid rounds represent a hugely ambitious project. The announcement of these bid rounds have been welcomed by national and international oil companies, keen to access new exploration and development opportunities in Brazil. Hopefully these investments will result in the development and growth of the oil and gas industry and the Government will continue the bid rounds without interruptions.