Brazil's first license round deemed a success

Winners in Brazil's E&P tender [61,620 bytes]

Although only 12 of the 27 blocks offered by Brazil's National Petroleum Agency (ANP) attracted bids during Brazil's first license round on June 15-16, the Brazilian government is happy with the result.

Bidders offered more than $180 million in initial bids for exploration and production rights to these blocks, with specific work investments expected to be much higher. ANP earlier predicted the round would result in work investments totaling $1.2 billion. The initial results were disclosed earlier this month (OGJ, June 21, 1999, Newsletter).

The government is "highly pleased by the market opening implicit in the sales," Mines and Energy Minister Rodolpho Tourinho said at a press conference after the results were announced.

"Now, we have 11 de facto oil companies instead of just one," the minister said. Prior to the auction, Petroleo Brasileiro SA (Petrobras) had enjoyed a 45-year monopoly over almost all upstream oil and gas activity in Brazil.

The new players in Brazilian E&P include: Agip SpA, YPF SA, Texaco Inc., British-Borneo Oil & Gas plc, Exxon Corp., Amerada Hess Ltd., Kerr-McGee Corp., Unocal Corp., BP Amoco plc, and Royal Dutch/Shell.

Top bidders

Taking a high profile at the auction was Rocco Valentinetti, president of Agip Oil do Brasil SA, a subsidiary of the Italian energy group ENI's Agip SpA unit, who personally placed his firm's closed-bid envelopes, the only company head to do so.

Agip won 4 of the 12 blocks that were sold (see table, this page, and map, OGJ, Jan. 25, 1999, p. 39). Valentinetti said, "Brazil is a priority market for us, with huge unexplored areas."

Another top winner in the license round was Argentina's YPF SA, which won four blocks in partnership with other companies. Joao Carlos de Luca, president of YPF's Brazilian unit, said the company intends to invest around $150 million alone or in partnerships during the first phase of operations.

The Campos basin offshore block BM C-4, which YPF won in partnership with Agip, is one of the most highly promising, because it is located near Roncador field. With Roncador, Petrobras recently established a world water-depth production record and estimated reserves at 2.7 billion bbl, said De Luca, who is a former Petrobras exploration and production director.

"The block we won has a geological continuity with the Roncador field, and this is the main reason why we are very optimistic about finding great quantities of oil and gas in that block," De Luca said.

Petrobras also was a big winner in the tender, winning five blocks, four of them in partnership with multinational oil companies. ANP Executive Director David Zylbersztajn attributed Petrobras's aggressive showing to its extensive knowledge of Brazil's sedimentary basins, its pioneering deepwater technology, and its ownership of 11 of Brazil's 13 refineries plus all the pipeline infrastructure in the country.

Petrobras first

Ironically, the first winning bid in the auction that marked the end to the Petrobras monopoly was put forth by a group led by the state oil company.

A consortium of Petrobras, Agip Oil do Brasil, and YPF was the sole bidder on Block BMC-3 in the offshore Campos basin, winning E&P rights there with a bid of about $3.43 million. The 1,660 sq km block lies in waters 2,500-3,000 m deep about 180 km off Rio de Janeiro state.

The consortium has committed to an exploratory phase of 8 years, with an initial investment of about $5 million in the first exploration period of 3 years to cover a 3,000 km area with 2D seismic.

The second phase is to last 3 years and entails drilling two wells. The third 2-year phase covers three more wells.

Petrobras has a 40% stake in the venture; Agip, 40%; and YPF, 20%.

ANP's view

Zylbersztajn noted that no local companies other than Petrobras entered the auction, because there are not yet any Brazilian companies interested in taking on the risks involved.

He also expressed disappointment that some international companies that had shown interest in the initial phases failed to make bids for any of the blocks. However, he said that, overall, the auction had gone very well.

Zylbersztajn admitted that Petrobras, as any state-owned oil company, suffers certain constraints in competing with private companies. He noted that Petrobras has its capital investment budget determined by the federal government and is unable to compete with the high wages paid by the private sector.

One oil consultant told OGJ that several major oil companies did not bid, despite their expertise in deepwater E&P, because the Brazilian government delayed until "almost the last minute" its steps to simplify the tender plan's cumbersome and costly oil tax system.

New incentives?

ANP and the Mines and Energy Ministry will study new incentive mechanisms for future tenders for onshore exploration areas, said Minister Tourinho.

"The fact that Paran state onshore blocks did not receive bids in the first licensing round may have occurred due to the lack of a temporary exemption of taxes, such as import taxes, sales taxes, and taxes on industrialized products for onshore oil equipment," said Tourinho.

The government exempted imported offshore oil equipment from these taxes, and the minister considers this a key factor in the success of the first licensing round.

"After the first licensing round, the winning companies are already negotiating new partnerships," Jean-Paul Prates, executive director of Expetro International, a prominent oil and gas Brazilian consulting group, told OGJ. "This initiative may change the configuration of some of the winning consortia, particularly those with few partners. This would be a way of diminishing costs."