Tenders Disappoint but Petrobras Advances Central Role in Pre-salt

In early November, the National Petroleum Agency (ANP) held the highly anticipated transfer-of-rights (TOR) and 6th pre-salt tenders. However, the results disappointed policymakers, who were counting on historic signing bonuses of over $27bn to ease the government’s fiscal pains. In fact, a constitutional amendment to divide the take among the federal, state and municipal governments had been enacted not long before. The expensive signing bonuses and the TOR’s complex requirement for co-participation with Petrobras, including payments to the NOC for prior exploratory work, discouraged IOCs from investing in the low-risk pre-salt play. Only Petrobras, along with its Chinese consortium partners CNODC and CNOOC, offered bids.

In the TOR tender, Petrobras won the rights to the coveted Buzios block and the smaller Itapu block. The NOC exercised its preference for both blocks (guaranteeing a minimum 30% interest for itself). CNODC and CNOOC participated with 5% stakes each in the Buzios consortium, while Petrobras was the sole bidder for Itapu. The two additional blocks offered under the TOR auction, Atapu and Sepia, did not attract bids. The lack of competition disappointed ANP Executive Director Decio Oddone, but he pointed to the historic signing bonuses of $17bn paid for Buzios and Itapu as more than enough to make the tender a success.

The 6th pre-salt round, held on 7 November, also fell short of policymakers’ expectations. Petrobras took the biggest field, the Aram block, with CNODC participating with a 20% stake. The remaining four blocks (Bumeranque, Cruzeiro do Sul, Norte de Brava and Sudoeste de Sagitario) did not receive bids, even though Petrobras exercised its preference over the Norte de Brava and Sudoeste de Sagistario blocks. Aram’s $1.2bn signing bonus also assured the round’s relative historical success even though it fell short of tendering all blocks.

Policymakers were quick to criticize Petrobras for exercising its preference without submitting bids on two of the blocks offered in the 6th pre-salt round. Many used the occasion to announce their support for the elimination of the NOC’s preferential rights over pre-salt tenders. Oddone also criticized Petrobras but cautioned that it is important to understand why the NOC did not act on its stated preference. Secretary of Oil and Gas Renata Isfer confirmed that the government’s position is in favor of eliminating Petrobras’ preferential rights but not the production sharing regime. Minister of Mines and Energy Bento Albuquerque stated that it does not make sense to preserve the NOC’s preference over pre-salt fields if the government wishes to increase competition for pre-salt tenders and diversify the number of operators.

On the other hand, Petrobras Director of Exploration and Production Carlos Alberto Pereira de Oliveira defended the decision and stated that the NOC is not obliged to offer a bid, only to participate with a minimum 30% stake in a consortium choosing to bid. He added that the company would have followed through with 30% stakes had consortia formed to bid on the Norte de Brava and Sudoeste de Sagitario fields.

While policymakers criticized Petrobras, many industry analysts argued that the signing bonuses were too high in a flat global market for crude. In addition, IOCs were discouraged from the TOR tender due to the imposed co-participation model that requires winning bidders to compensate Petrobras for past development work in the Santos Basin’s pre-salt fields.

Senator Jose Serra (PSDB) sharply criticized Petrobras for jeopardizing national interests and discouraging competition in the tenders through its bidding decisions. President Jair Bolsonaro’s government will now likely seek passage of Serra’s legislative initiative, PL 3178/2019, which would eliminate Petrobras’ pre-emptive rights over the pre-salt fields and authorize the National Energy Policy Council (CNPE) to choose between the concessionary or production sharing regimes for future pre-salt tenders. Horizon expects the government, led by Secretary Isfer and ANP Executive Director Oddone, to consult with IOCs before pushing any E&P policy changes in Congress. PL 3178 is currently under consideration at the committee level, but we expect congressional leaders to wait until 2020 before negotiating amendments and scheduling floor votes.