Brazil's state-controlled Petrobras and Chinese state-owned firms swept today's highly anticipated Transfer of Rights auction focused on the giant Buzios field, with other international oil companies conspicuously absent from the bidding.
The outcome reinforces the dominant role of Petrobras in Brazil's non-Opec supply rush, and China's role as both a strategic producer and the main market for the country's skyrocketing output.
China's state-owned CNOOC and CNPC subsidiary CNODC partnered with Petrobras to bid unchallenged for the Buzios field—the biggest area on offer—with a fixed R68.2bn ($17.1bn) signing bonus and the required minimum of around 23.24pc of profit oil for the federal government. The Chinese companies are already partnered with Petrobras, along with Shell and Total, at the 8bn-12bn bl Libra pre-salt project awarded in 2013.
Petrobras is currently producing around 350,000 b/d of 28°API crude from four platforms at Buzios, with most output heading to Chinese refiners. A fifth 150,000 b/d platform is scheduled to start up in 2022.
National energy policy council CNPE has established a July 2021 deadline for Petrobras and its partners to resolve reimbursement plans, with negotiations are expected to get underway in 2020. Head oil regulator Decio Oddone said after today's bidding that "the need for some consortium to have to negotiate a billion dollar indemnity for Petrobras in the future" dampened interest in the auction.
In today's auction, Petrobras fulfilled its pledge to spend the full $9.1bn it received from the federal government as part of a renegotiation of a 2010 contract directly granting the company rights to produce up to 5bn bl of oil equivalent from the TOR areas.
Petrobras went solo for the Itapu block with a fixed signing bonus of R1.77bn and the minimum 18.15pc in profit oil. Itapu is scheduled to come on stream in 2023, according to Petrobras' current five-year business plan.
The company had earlier exercised its controversial right of first refusal for both Buzios and Itapu.
The Sepia and Atapu fields did not attract any bids, largely reflecting complex overlapping contract models. The blocks are expected to be included in a production-sharing bid round in 2020, possibly with revised terms, government officials say.
Atapu had a 26.23pc profit oil minimum and R13.7bn fixed signing bonus. The field is estimated to hold around 5bn boe of recoverable reserves and is slated to receive its first definitive 150,000 b/d FPSO in 2020. Sepia had a R22.9bn signing bonus and minimum profit oil of 27.88pc. The field is slated to receive a 180,000 b/d FPSO in 2021.
At the Buzios field, the only asset that attracted a joint bid, Petrobras' share of production is capped at 3.15bn boe, out of a total estimated 13bn boe, over the 40-year life of the contract. At Itapu, Petrobras is limited to 350mn boe from Itapu. The caps are intended to protect the investment of potential partners in the field, a government official tells Argus.
More bidding tomorrow
In a disappointment for the government, BP and Total had dropped out of the process weeks before it started, and other pre-qualified firms that already have deep pre-salt footprints in Brazil, such as Shell, ExxonMobil and Portugal's Galp, remained on the sidelines as well.
Shell deemed the blocks too pricey. "We have a very positive position with the blocks already acquired and the blocks today did not pass our approval cut. Shell has been adopting in 2019 a very strict investment discipline and our decision was taken after a very good process," Shell Brasil president Andre Araujo said.
With two of four fields unclaimed, today's auction fell short of the R106.5bn signing bonus goal the government had set. Mines and energy minister Bento Albuquerque nonetheless described the auction as "remarkable, symbolic and very successful" and said Brazil is on the right track.
There is no sign that the industry has lost appetite for Brazilian reserves. The TOR auction follows a record-breaking concession model offer on 10 October that netted around $2.2bn in signing bonuses. Tomorrow the government looks to collect another $2bn from five pre-salt blocks on offer in a sixth production-sharing round.
But today's tepid auction outcome has revived questions about the effectiveness of the production-sharing model, which awards acreage based on how much profit oil—production less cost—is shared with the federal government.
"Brazil has many complexities in the matter of regulating the oil industry. This will be the subject of discussion and I hope that these complexities will be eliminated," Petrobras chief executive Roberto Castello Branco said today.
The government says it is working with lawmakers on a proposal that could remove the geographic designation known as the pre-salt polygon—one of the changes on the industry's wish list. Areas within the polygon are governed by the production-sharing model while areas outside by the industry-preferred concession model.
The TOR auction also drew criticism over Petrobras' right of first refusal for pre-salt acreage. A rule that limited operatorship of pre-salt assets to Petrobras was scrapped in 2016, but the company was left with an option to claim a 30pc operating stake in any pre-salt assets—a rule that stymies competition, government officials say.
Petrobras has already exercised its right for three of the five areas to be auctioned tomorrow.
In 2010, the federal government directly awarded Petrobras 5bn boe in production rights from the six Santos basin areas that make up the TOR region. The deal worth R75bn ($42bn at the time of the transaction) allowed Petrobras to raise around R120.25bn through a massive offering of common and preferred shares.
The TOR auction took place against the backdrop of a massive oil spill in northeastern Brazil that has occupied much industry attention in recent days. Government discussions about possibly joining Opec have also proved a distraction.
A last-minute effort by Brazil's main oil union to secure a court injunction to stop the TOR auction was unsuccessful.
