Expectations

The initial expectation from some market analysts with respect to the outcome of Brazil's 14th bidding round, which was held on September 27 2017 and led by the National Agency of Petroleum, Natural Gas and Biofuels (ANP), was to conservatively raise approximately R150 million ($50 million) with signature bonuses. For this bidding round, 287 blocks spread across nine sedimentary basins were offered by ANP. An offer up to R500 million ($167 million) was optimistically expected by some.

Record signature bonus

This initial forecast was seemed accurate close to the end of the public session, when the envelopes for the areas offered at the Campos Basin were opened and the bids reached a surprising level. Until that moment, 90% of the selected basins had been offered and approximately R187.5 million ($62.5 million) had been raised. The turning point was the joint offer (consortium) entered into between Petrobras and ExxonMobil. Both offered a total of R3.5 billion ($1.2 billion) as a signature bonus for two blocks – the largest total signature bonus in history for concession biddings – a signal that huge new investments in Brazil are yet to come.

The interest shown for Blocks C-M-346 and C-M-411 in the Campos Basin confirms the credibility of the hydrocarbon potential of an area that has historically proved successful. In particular, when financial and legal conditions of the concession contract are favourable for exploration, development and production activities in that region.

Importantly, the concession regime is well known and has been tested by economic agents since 1999. Concessionaires may drill a vertical depth without limits and explore reserves in the post and pre-salt stratigraphic layers.

Diversity of bidders

Notwithstanding ANP's success at raising R3.8 billion in the 14th bidding round, all new companies will strongly contribute to the expanding activity in this region, promoting the economy, creating new jobs and consolidating medium and long-term projects that benefit society as a whole. The work commitment to be fulfilled by all successful bidders was estimated at R845 million ($281 million). Noteworthy participants include:

  • Bertek;
  • BP Energy;
  • CNOOC;
  • ExxonMobil;
  • Geopark;
  • Great Energy;
  • Greenconsult;
  • Imetame;
  • Karoon;
  • Muncks;
  • Murphy;
  • Parnaíba Gás Natural;
  • Petroil;
  • Petrobras.
  • Queiroz Galvão;
  • RepsolYPF;
  • Shell;
  • Tek;
  • Total;
  • Vipetro;

Environmental licences and other challenges

This is just the incipient stage of a long journey ahead that will require:

  • deeper geological analysis;
  • new seismic shooting;
  • abbreviated environmental licence processes;
  • process simplicity;
  • economic viability assessments;
  • financial projects for goods and services, with the evaluation of local and national industries;
  • the development of human resources; and
  • safe and well-executed operations that respect the environment, communities and complexity of factors and actions being coordinated.

Any issues arising during the years which follow these concessions must be resolved. The financial returns from these projects could take over a decade to be accounted for; thus, it is important to attract new investment during this initial phase.

Comment

Brazil's current political turmoil and the downturn in the oil and gas sector were clearly factors that brought uncertainty in the outcome of the 14th bidding round.

However, it seems that the government's initiative to extend the special customs regime for the import of rigs, vessels and equipment (REPETRO) until 2040, as well as its adjustment of the rules in relation to local content requirements, were paramount in ensuring the success of the 14th bidding round and bringing more legal certainty to future rounds, including the one planned for the pre-salt reserves. Further improvements are required in important regulatory areas – mainly with respect to environmental licensing – which have received criticism due to lengthy bureaucratic procedures.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Godofredo Mendes Vianna or Jose Vicente Duncan de Miranda at Kincaid | Mendes Vianna Advogados by telephone (+55 21 2276 6200) or email (godofredo@kincaid.com.br or jose.vicente@kincaid.com.br). The Kincaid | Mendes Vianna Advogados website can be accessed at www.kincaid.com.br.