Brazil now aiming for TOR auction in 2Q 2019

Brazil's volatile election race is thwarting the outgoing administration's push to open one of the country's biggest pre-salt clusters to foreign investors this year.

The Santos basin cluster, known as the transfer of rights (TOR) region, is estimated to hold up to 20bn boe of recoverable reserves, according to some studies, with state-controlled Petrobras already entitled to produce up to 5bn boe of that amount.

Resolving the TOR issue in congress is key to renegotiating a 2010 contract that directly awarded Petrobras the right to produce from the region, part of a watershed R75bn capitalization (worth $42bn at the time of the transaction).

The company and government agencies have been renegotiating the deal since January, but a final revised agreement depends on rules governing Petrobras' ability to sell part of its development rights and how the excess reserves will be handled.

Petrobras is likely to be a creditor of more than $12bn, considering the drop in in oil prices since the TOR region was declared commercial in 2014. The government is keen to auction the areas to satisfy the debt it is likely to owe the company.

In July, a bill that would allow Petrobras to sell 70pc of its production rights under the preferential TOR model and authorize the government to auction off the remaining rights under the production-sharing model was passed in the lower house. But the legislation is stuck in the senate and will not be voted in time to hold an auction this year, officials from the mines and energy ministry have conceded.

In an effort to ensure the round will be held in 2019, the national energy policy council CNPE approved a measure yesterday that would allow a draft notice of the auction to be sent to federal audit court TCU for review. Starting next year, the TCU will adopt more rigid licensing rules that risk delaying the round until 2020.

The CNPE measure is one among many the current administration is taking to try to sustain investment momentum in the oil and gas sector regardless of the outcome of next month's election.

The ministry hopes to hold the TOR auction in the second quarter of 2019. The senate is expected to take up the legislation passed in the lower house after general elections end on 28 October.

But the preparations are still subject to the wishes of the incoming administration, and a new president averse to pro-market reforms enacted by unpopular outgoing president Michel Temer could still disrupt upstream auctions planned through 2021.

One of the main presidential candidates, far-right Jair Bolsonaro, is still recovering from a recent assassination attempt, while imprisoned former president Luiz Inacio Lula da Silva, the former frontrunner, is barred from running because of a corruption conviction. Polls have yet to project a winner in the two-phase race that starts on 7 October. But leftist candidates Ciro Gomes and Lula stand-in Fernando Haddad have been gaining ground.