Don’t Shoot the Messenger
The huge expectations for last week’s Transfer of Rights (TOR) and 6th Pre-Salt bidding round came crashing down as global oil majors opted to sit them out. It started on Wednesday, when the TOR auction that had been hyped for months turned into a flop, with only two of the four blocks being scooped up by Brazil’s state-run Petrobras. In response, regulators pushed the blame onto the contractual complexities associated with the area. Then, during the 6th Pre-Salt bidding round on Thursday, global oil majors turned their backs yet again, sending a clear message that they felt enough had not been done to truly open up Brazil’s E&P market to foreign players.
So, in light of the disappointing week for Brazil’s E&P market, we thought it might be helpful to shed some light on the issues that probably impacted the decision of global players to stay on the sidelines.
The Transfer of Rights auction included four blocks in Brazil’s pre-salt polygon (Buzios, Itapu, Sepia, Atapu) that are already in production. They are operated by Petrobras, which was initially granted the right to produce up to 5 billion boe in the area. With this number already having long been surpassed, the government decided to auction off the surplus oil in hopes of attracting foreign players and generating resources to strengthen public accounts. So, what went wrong?
Petrobras’s Preemptive Right to Act as Operator: Petrobras was granted the right to decide if it would remain the operator of the blocks even if it did not present the winning bids. Essentially, this meant that winning groups would have to negotiate with the company in order to compensate it for back costs that had been spent on the development of the fields, leaving huge uncertainty about what the final cost of the blocks would actually be.
Huge Price Tags: Many big players had voiced concerns on the issue in the weeks leading up to the auction. In their view, the prices were far too high for minority stakes that would not guarantee them the right to operate the blocks.
Actual Reserves: All the reserve and production data provided to the registered bidders came from Petrobras, essentially meaning foreign players would be acting on faith in estimating how much viable oil production was actually left in the ground. Considering the massive signing bonuses, this was probably a risk that many were unwilling to take.
Production Sharing Agreement: Under Brazilian law, all blocks in the pre-salt polygon must be offered via production sharing agreements (PSA). However, with the issues mentioned above, PSA may not have been an attractive option for oil majors, which could have found it difficult to accurately measure the final costs and true economic viability of the blocks under this regime. As a result, they may have found it more appropriate to wait for the blocks to be repackaged under more attractive terms in future auctions.
Timing: With the slew of auctions in Brazil over recent months and years, many oil majors have already snapped up significant E&P portfolios in the country. As such, with all the uncertainty in global oil markets these days, as well as the call from investors for stronger capital control from oil majors, the auction may have simply suffered from bad timing.