Brazil looks to 11th licensing round to spur local, foreign investment

In late January, and for the first time since 2008, Brazil's Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) announced its intention to auction oil and natural gas rights. This will be the 11th licensing round for such rights since Brazil opened its oil and natural gas market to private investors in 1997. Bidding will take place on May 14 and 15 in Rio de Janeiro, with potential bidders required to have submitted qualification documents by March 26. The ANP published an initial tender protocol setting out the pre-qualification and bidding criteria and a draft concession contract to which bidders will be required to become party if they are awarded any rights following the auction process.

Bids are assessed by taking into account the signature bonus (40%), the mandatory exploration program (40%), and the minimum local content requirement (20%) offered by each bidder. Concessions will be awarded for up to 35 years, with an exploration phase of five to eight years, and a development and production stage of 27 years. The government royalty is 10% and concession holders are required to pay a surface rental, as well as a fee equivalent to 1% of production to any landowner, and Brazilian taxes including a "Special Participation," calculated according to the volume of production, location, and year of production.

Oil and gas licensing had been postponed by President Dilma Rousseff, during a protracted debate in Brazil's Parliament regarding the allocation of oil revenue between the different branches of government. However, late last year a new royalties bill was passed which will increase the share of oil revenues received by non-producing states in Brazil. Originally the bill was drafted to apply retroactively and thereby require revenues under existing concession contracts to be reallocated. Such an action would have led to a loss of revenue for Rio de Janeiro and other major oil-producing states, amounting to billions of Reais. The president vetoed the retroactive part of the bill, although the veto may still be reversed by Congress. The rules for revenue distribution going forward will apply to those concession contracts entered into as part of the 11th licensing round.

When first published, the initial tender protocol provided for the auction of 172 blocks, but this is expected to be increased to 289 blocks after an announcement by the president in February. The original 172 blocks are in mature onshore and frontier offshore basins. The frontier basins in Brazil's Equatorial Margin are considered to be prospective due to geological similarities with the Gulf of Guinea, where substantial reserves have recently been discovered offshore Ghana and Cote d'Ivoire. However, the inclusion of the additional 117 blocks remains subject to approval by the National Energy Policy Council (CNPE).

The 11th licensing round will not include any blocks in the much vaunted "presalt" area, such as the Santos basin where recent giant discoveries, such as Lula and Sapinhoá, are under development. It is expected that a separate auction for "presalt" rights will take place in November and any awards will be governed by production-sharing contracts rather than concession contracts. The Brazilian government has also indicated that there will be an auction in October which will include onshore shale gas rights. Although the majority of the country's electricity comes from hydroelectric dams, natural gas is used when hydro-power cannot satisfy the demand. Currently, this natural gas is either imported or originates from expensive offshore fields. As a result, the onshore shale auction is viewed as an answer to Brazil's desire for cheaper gas to supply the rapidly increasing demand, as has been achieved in the United States. The government also recently announced plans to hold annual auctions for rights to mature and marginal exploration areas that junior and independent producers may be interested in buying. No dates have been set for the first of these auctions.

There is some skepticism over whether the government's ambitious plans for 2013 will be fully realized, given the delays in implementing the 11th licensing round and the considerable work that needs to be completed to implement the proposed presalt production-sharing regime. Production-sharing contracts have not been used in Brazil before, so further regulation is required to detail how these will work, and a new public oil company needs to be established to manage the Brazilian government's interest.

However, the government does seem to have significantly changed its posture over the last few months. Pressure from the industry was really mounting to re-open exploration in the country and even Petrobras proclaimed the need to renew its own portfolio. With 2012 registering very disappointing oil and gas production and GDP growth in Brazil, the government may also have recognized the importance of continued private investment in the oil industry to its economic prospects.

The president's announcements of the various auctions planned for 2013 were well received by the members of the oil and gas industry already operating in Brazil, as well as potential new investors in the region. It is hoped that this will result in another surge of investment in the sector, as well as diversification in the local oil industry. This will be key for the government as it seeks to maintain economic momentum and take advantage of international interest in Brazil, in the face of a continuing global economic slowdown.

Ted Rhodes
Managing Partner, CMS Cameron McKenna
Rio de Janeiro

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