Brazilian Pre-salt Oil Auction Collects Only R$70 Billion; New Auction Today

RIO DE JANEIRO, BRAZIL – Regarded as the largest auction in the oil and gas sector in history, the Bidding Round of the Surplus Transfer of Rights was held yesterday, November 6th, in Rio de Janeiro by the National Agency of Petroleum, Natural Gas and Biofuels (ANP).

It was expected by the federal government and the regulatory agency that the auction might raise up to R$106.6 billion (US$26.6 billion) in signing bonuses, which will be shared between Petrobras, the federal government, states and municipalities. In the event, however, the signing bonuses were R$69.9 billion (US$18.5 billion) covering two blocks on offer.

The signing bonus is the amount paid by the companies to the federal government to sign the contracts. In the case of pre-salt auctions, the amount to be paid is fixed, since the contracts follow the rules of the Sharing Regime.

In these auctions, the proposals’ assessment criterion is the oil surplus, also known as profit oil. This means that the companies commit to share with the Brazilian government a part of what is extracted from the blocks, and this percentage is calculated only after discounting the costs of operation and royalties. The winning bid will be the one in which the federal government will receive the largest share.

In yesterday’s auction, companies were to offer shares equal to or higher than the following minimum profit oil percentages: 26.23 percent in the Atapu block, 23.24 percent in Búzios, 18.15 percent in Itapu and 27.88 percent in Sepia.

Two of these locks, however — Atapu and Sepia — received no bids. Petrobras submitted the winning bid for Búzios, in a consortium with two Chinese operators, and also successfully bid for Itapu on its own.

With the two areas auctioned, the round has a subscription bonus collection almost eight times higher than the R$8.9 billion obtained in the 16th Concession Round, held last month. The ANP also noted that the amount exceeds the R$60 billion collected with the signing bonus of all auctions already made since the creation of the regulatory agency.

The four blocks available in the auction were Atapu, Búzios, ltapu, and Sépia, which are in the pre-salt polygon, in the Santos Basin, in an area off Rio de Janeiro’s coast. These areas were assigned to Petrobras in 2010 through the Transfer of Rights Agreement signed with the Federal Government.

To be entitled to extract up to 5 billion barrels of oil equivalent from these reserves for 40 years, Petrobras paid the government R$74.8 billion, but even greater reserves were found in the areas. As a result, the auction is referred to as the Bidding Round of the Surplus Transfer of Rights – the right to extract the quantities that exceed this limit of five billion reserved for Petrobras is what is auctioned.

Petrobras Preference

The investments made in the areas of onerous cession since 2010 have made it possible to estimate that the reserves present there may exceed by up to three times the 5 billion barrels initially forecast, reaching 15 billion barrels of oil equivalent.

The determination of what to do with this surplus reserve depended on the discussion of an addendum to the contract with Petrobras, since the state-owned company requested an adjustment in 2013 due to the devaluation of the price of the oil barrel, a parameter that was used to calculate the more than R$70 billion paid for the transfer of rights in 2010.

In addition, the reimbursement to Petrobras of part of its expenses with research and development in the area was also under discussion, since these investments will benefit future bidders.

After years of negotiation, the deadlock was solved with an agreement signed in April this year. It was defined that Petrobras would receive US$9.058 billion, which paved the way for the auction in which the state-owned company was also guaranteed the right to bid in the auction.

The company then expressed preference for two areas, Itapu and Búzios, which have the largest oil reserve ever found in Brazil, and therefore provides a signing bonus of R$68.2 billion. To this end, Petrobras has already reported that it intends to use the US$9 billion received (about R$34 billion) in the auction itself.

In practice, Petrobras’ demonstration meant that there was already interests in two blocks. As a result, the collection of signature bonuses would reach close to R$70 billion, since the Itapu block provides a minimum bonus of R$1.8 billion.

Sector giants stay away

Such high amounts of reserves and investments should have attracted some of the world’s largest oil companies to the auction, which had 14 companies eligible to participate; however, of these, only two — CNODC Brasil Petróleo e Gás Ltda. (China) and CNOOC Petroleum Brasil Ltda. (China) — entered the fray, in consortium with Petrobras for the Búzios field.

The deadline for the payment of the signature bonus depends on how much the winning bids exceed the minimum percentage of oil profit. This difference is called premium and, since it was less than five percent, the payment must be made by December 27th, 2019.

The distribution of this money among the federated states and municipalities was defined in a discussion in the National Congress and sanctioned by President Jair Bolsonaro. Of the R$106.6 billion, R$34.6 billion will be retained by Petrobras due to the addendum agreed with the federal government. Of the remainder, 67 percent will be for the federal government, 15 percent will go to the states, 15 percent to municipalities, and three percent to Rio de Janeiro, the producing state.

Sixth Sharing Round

Today, November 7th, the ANP will hold another auction to allow the exploration and production of oil and gas in the pre-salt layer. It will be the 6th Production Sharing Bidding Round, which will offer the Aram, Bumerangue, Cruzeiro do Sul and Sudoeste de Sagitário blocks, in the Santos Basin. The Norte de Brava block will also be auctioned, the only one on the list that is located in the pre-salt of the Campos Basin.

The auction’s maximum total signing bonus will be R$7.9 billion and, as in yesterday’s bid, the registered companies will compete through bids with percentages of excess oil to be shared with the federal government.

In all, 17 companies were qualified to take part in the auction, including foreign state and private companies and the Brazilian companies Petrobras and Enauta Energia.