Transfer of Rights mega-auction not so mega

After months – maybe even years – of hype, Brazil’s Transfer of Rights finally hit the auction block this morning, with only two of the four development blocks on offer being scooped up and the Brazilian government bringing in only R$68.37 billion or approximately US$16.77 billion in signing bonuses (fixed). With the auction being production sharing (but with no exploratory risk as the blocks have confirmed commercial reserves), the big question was how much black gold the world’s biggest oil majors would be willing to doll out to the government for the right to pump. And the answer was not much. The auction included four development areas in the Santos Basin (Atapu, Búzios, ltapu and Sépia) and fourteen companies signed up to participate. However, competition was weak, with only two blocks receiving bids (none receiving more than one) and everything staying in the hands of Petrobras (and, in one case, its partners).

• Buzios was up first, only receiving one offer from a consortium made up of Petrobras (90%), CNODC Brasil (5%) and CNOOC (5%). The group took home the block with an excess oil offer of 23.24% (the minimum offer established by ANP for the block).
• Itapu went next, also receiving a sole offer from Petrobras (100%). In the end, the block brought in an excess oil offer of 18.15% (again the minimum offer established by ANP).
• Third to hit the auction block was Sepia, which received no interest.
• And last but not least was Atapu, which also received no bids.

All in all, competition was weak, with no blocks receiving more than one bid and two not even receiving that. However, the results were not that surprising, as many of the registered bidders had already indicated their participation was unlikely. BP, for instance, had announced last week that it was not going to participate, although stressing that it is still very interested in Brazil, citing its participation in previous rounds. As for Total, it had previously announced it would sit this one out because it only offered up minority stakes and would not allow for it to take over as the operator of the blocks. Although Exxon had not specifically said it would not participate in the run-up to the auction, it does not come as a big surprise considering it already has expressive E&P campaigns in the country and the high asking price for the TOR blocks.

Our Take on the Results

In our view, today’s results reminded us a lot of the Libra field in the 1st pre-salt bidding round in 2013. We believe the TOR results indicate the unfavorable macroeconomic conditions and probably represent a message from the market that the production sharing regime was not satisfactory in this case and that the signing bonuses were excessive considering the remaining reserves. In addition, there was a lot of uncertainty regarding the back-costs to be paid to Petrobras and the future CAPEX requirements. Lastly, the size of the Full-Cycle Development and Production projects could have been to large for an oil major to accept without being the operator.

Backstory

As you may know, Petrobras was initially granted the right to extract 5 billion boe from the area, but with additional massive oil finds taking place over the subsequent years, the government decided to put the excess oil on the auction block for other players. The auction was a combination of two regimes: royalties and production sharing (excess oil), with excess oil referring to the share of production to be repatriated to the federal government (total extracted volume minus the royalties owed and the costs in oil).

Source: ANP/G1