Industry Trend Analysis - Licensing Round Ramp-Up Offers Fresh Start For Brazil - JUNE 2017

BMI View: More frequent oil and gas licensing rounds across Brazil will offer the industry an opportunity to start anew. Increasingly business-friendly contract terms and favourable project economics will attract significant investment into the sector over the next three years.

After two volatile years, Brazil's oil and gas sector is preparing to restart. On April 11, the country's national energy policy council (CNPE) approved a timetable and acreage content for 10 upstream licensing rounds from 2017 through 2019. This strategy marks a significant change from years past when authorities would not disclose dates until shortly beforehand, reducing predictability while frustrating potential investors.

Approved O&G Licensing Rounds 2017-2019
Name Basins Type Date
Source: ANP
4th Marginal Field Round Potiguar, Reconcavo and Espirito Santo Onshore May-2017
14th Bidding Round Sergipe-Alagoas, Espirito Santo, Campos, Santos and Pelotas/Parnaiba, Parana, Potiguar, Reconcavo, Sergipe-Alagoas and Espirito Santo Onshore/Offshore Sep-2017
2nd Production Sharing Santos, Campos Offshore (presalt) Sep-2017
3rd Production Sharing Santos, Campos Offshore (presalt) Nov-2017
4th Production Sharing Santos, Campos Offshore (presalt) May-2018
15th Bidding Round Foz do Amazonas, Ceara, Potiguar, Campos, Santos Onshore/Offshore May-2018
5th Marginal Field Round TBD Onshore/Offshore H118
5th Production Sharing Santos Offshore (presalt) H219
16th Bidding Round Camamu-Almada, Jacuipe, Santos, Campos Onshore/Offshore H219
6th Marginal Field Round TBD Onshore/Offshore H219

The unravelling of the Lava Jato scandal combined with falling commodity prices and less-favourable licensing terms to drive the investment community away from Brazil's hydrocarbon sector. However, new leadership in both the government and at national oil company (NOC) Petrobras has ushered in a wave of industry-friendly regulatory change over the past six months, stimulating investor confidence in the process, including:

  • Easing local content requirements to around half of the level required in recent licensing rounds alleviating a significant obstacle to upstream development over the past several years.

  • Reducing Petrobras ' role in the presalt by revising the sole operator provision which mandated the NOC must hold a minimum of 30% stake and operate any new presalt deepwater project.

We believe more favourable terms, coupled with more stable oil prices, provides an opportune backdrop for the country to revive its licensing round process. We therefore believe forthcoming tenders will experience a more favourable outcome compared to the latest round in October 2015. Leading into the 13th licensing round, the country had yet to fully-account for the negative effects its more nationalistic terms would have on investor interest. Of the 266 blocks on offer, only 37 received bids and were licensed, representing a less than 14.0% success rate for the ANP.

We believe the four production sharing rounds in the presalt will attract the most interest due to the size of the resources on offer and increased efficiencies throughout the region which have lowered commercial costs. A licensing round has not been held in the presalt since October 2013, inhibiting further investment from the private sector.

Efficiencies Whetting Investor Appetite
Petrobras - Santos Basin Development Metrics Per Well
Source: Petrobras

Meanwhile, Brazil's ultra-deepwater acreage has been at the forefront of the NOC's upstream strategy for several years. This follows on multiple large-scale discoveries and the continued success of ongoing operations which now produce over 1.5mn boe/d ( see ' Petrobras: Sharpening Focusing On Upstream Strategy ' , March 31 2016).

The vast and largely untapped resources in the presalt will therefore attract significant investment beginning with the 2nd production sharing round in September. The Santos and Campos basins, which house the majority of the presalt, contain approximately 12.1bn barrels (bbl) of Brazil's proven (P1) crude and 336.7bn cubic metres (bcm) of natural gas reserves, or over 93.0% and 78.0% of the national total, respectively. However, cumulative possible (3P) reserves are much greater, at 23.2bn bbl of crude and 622.5bcm of gas, suggesting considerable upside potential within the ultra-deep acreage ( see 'Deepwater Potential Luring In Drillers', January 9).

Presalt Polygon Up For Grabs
Map of Brazilian Offshore Basins
Note: Libra is the only existing Production Sharing Contract in the presalt . Source: Petrobras, BMI

The Brazilian government expects to raise a minimum of USD7.65bn from the oil gas auctions through 2019, USD2.7bn of which is forecasted for this year. We caution that this value seems a bit ambitious given continued headwinds within the sector including prolonged oil price weakness and continued political tensions. However, we do not believe this figure is beyond the realm of possibility.

We caution that the impacts of these efforts will not materialise until the latter part of our forecast period given the long lead-times associated with upstream development. Nevertheless, we believe a growing reform drive represents a significant positive shift for the country, supporting our upbeat production forecast (see 'Presalt Reform Improves Long-Term Production Outlook', October 13 2016).