On April 15, 2013, Brazil’s Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) confirmed its authorization of 64 companies to participate in the 11th oil and gas licensing round.1 Such companies are able to bid provided that they submit the required bid bonds by April 26, 2013, as prescribed by the Tender Protocol.

Successful applicants have been classified by ANP as A, B or C Operator or non-operator based upon a demonstration of their net equity and technical capability. The onshore blocks may be operated by C Operators whilst blocks in shallow water require a B Operator and deep and ultra deep water blocks require an A Operator.

Pre-qualified companies may bid individually or as part of a consortium. Each member of a consortium must be a pre-qualified company and have a minimum interest of 5%. Further, each consortium must have at least one pre-qualified operator in the relevant category holding at least a 30% interest. Where a bidder is incorporated outside of Brazil, it must undertake to incorporate or appoint a Brazilian subsidiary with its main office in Brazil to hold the concession. In this case, the pre-qualified bidder must also guarantee the obligations of its Brazilian subsidiary.

Due to factors including the resources and capital expenditure required to explore and develop the acreage on offer, as well as the qualification restrictions imposed under the tender, it is anticipated that joint bids and the formation of new strategic joint ventures will be a key characteristic of the upcoming bid rounds. Brazilian partners, such as HRT, OGX and QGEP who all qualified as A Operators, bring local knowledge and operational experience whilst major international energy companies may see their involvement and partnering opportunities as a step toward participation in the pre-salt.

Areas on Offer

This bid round includes 289 blocks covering onshore and offshore sedimentary basins (Barreirinhas, Ceará, Espírito Santo, Foz do Amazonas, Pará-Maranhão, Parnaíba, Pernambuco-Paraíba, Potiguar, Recôncavo, Sergipe-Alagoas and Tucano Sul). Such areas include the equatorial margin in the north and north-east of Brazil, which lays claim to geological similarities with the vast oil reserves off Africa's west coast.

The bid round marks the first auction to be held in Brazil for five years. At that time, 48 companies were pre-qualified but only 17 picked up concession interests - perhaps as a result of the government’s decision to exclude all offshore acreage pending review of the licensing regime. New legislation was enacted at the end of 2012 introducing an additional regulatory regime for upstream activities performed in the pre-salt and strategic areas. Under the new production sharing regime, Petrobras will be obliged by law to take a 30% stake in each block and act as operator. A separate licensing round for the pre-salt areas is anticipated to take place towards the end of 2013.

However, disputes over royalties have resulted in continuing uncertainty. In recent developments Brazil’s Supreme Court postponed the implementation of the new law for distribution of oil royalties to regional governments after Rio de Janeiro, São Paulo and Espírito Santo claimed that the rule breached the country's Constitution - maintaining that only royalties from future oil contracts should be shared. Whilst the distribution of royalties does not directly affect oil companies, the government may not resume auctions until the issue is resolved.

11th Bid Round Focus

According to ANP, the blocks on offer in the 11th bid round were selected in frontier exploration and mature basins with the aim of expanding Brazil’s reserves, increasing knowledge of the sedimentary basins, decentralizing exploratory investment in the country and securing investment by national and foreign companies.

ANP will assess the bids based on signature bonus (40%), mandatory exploration program (40%) and local content commitment (20%). Other terms of the concession include a government royalty of 10%, an annual surface rental per square kilometer, Brazilian taxes (including “special participation” based upon the volume of production, location and year of production) and payment of 1% of production to the landowner.

The bid round appears to have attracted a wide range of bidders notwithstanding that some companies will undoubtedly have their attention focused on Brazil's first unconventional and pre-salt exploration licensing rounds, scheduled for October and November respectively. It remains to be seen which of the pre-qualified companies will elect to bid on May 14 and 15, 2013 and which strategic alliances may form as the new bid rounds open up investment opportunities in Brazil’s upstream.