Pre-Salt Operatorship Hinges on Brazil Presidential Elections

The result of Brazil's presidential elections this fall could determine whether operatorship of Brazil's pre-salt areas will be opened to companies other than Petrobras.

Operatorship in Brazil’s pre-salt areas will be opened up to other companies besides state energy company Petrobras ASA if either Senator Aecio Neves or former governor Eduardo Campos are elected in Brazil’s presidential elections in October, a Brazil-based legal representative told attendees at the Ninth Annual Mayer Brown Global Energy Conference in Houston May 15.

Bid rounds under concession regime and in the pre-salt area will occur annually, and government control of gasoline prices will end if either Aecio or Eduardo are elected, Alexandre R. Chequer, partner with Mayer Brown, T&C, told conference attendees.

If current President Dilma Rousseff is re-elected, bid rounds under the concession regime will take place next year, and bid rounds will take place for Brazil’s offshore pre-salt areas in 2016. Under Rousseff, Petrobras may remain the operator in all pre-salt areas, and possible flexibilization of government control over gas prices may occur, said Chequer.

In 2013, Brazil conducted its first pre-salt bidding round for the Libra area, which has estimated reserves of up to 15 billion barrels, in the offshore Santos Basin. One consortium – of which Petrobras is the operator with 40 percent interest – won the bidding round.

Petrobras and partners Royal Dutch Shell plc, Total S.A., China National Offshore Oil Corp. (CNOOC) and China National Petroleum Corporation, plan to drill six wells and conduct one extended well test.  An estimated $181.8 billion will be invested in developing Libra over a 35-year period. The Brazilian government’s take from Libra production will be 41.65 percent.

Rousseff’s popularity has declined in opinion polls, falling from 44 percent in February of this year to 37 percent this month, while Aecio and Eduardo have seen their popularity rise from 16 and 9 percent in February to 20 percent and 11 percent this month, Chequer said.

Reuters reported May 3 that many of investors are weary of Rousseff’s left-leaning policies, and believe either of her more centrist opponents would govern in a more business-friendly way. However, many political analysts anticipate Rousseff will win the Oct. 5 vote, thanks to continued strong support from Brazil’s poor, who have benefited from social welfare programs.

The five-year gap in bidding rounds – with Brazil Round 10 taking place in December 2008 and Round 11 in May 2013 – was bad for the oil and gas industry in Brazil, a fact that leftists and other political parties in Brazil recognize, said Chequer. Like previous president Lula – whose leftist politics raised concerns that the Brazilian government wouldn’t honor contracts, but who was smart enough to know that Brazil needed foreign investment – Brazilian’s current political officials also know that things need to change to advance development of its pre-salt resources, which could boost Brazil’s estimated reserve base from 10 to 50 billion barrels.

The Brazilian government also realizes it made a mistake requiring Petrobras to be the sole operator of pre-salt development, which has delayed development of Brazil’s oil and gas industry. Chequer said the Brazilian government didn’t believe the capacity exists in the global market to offer more than one area of the pre-salt for bidding due to the huge investment needed. But more could be offered in the future if existing pre-salt bidding laws didn’t require Petrobras to be the operator.

Despite the government’s decision in 2009 to halt bidding rounds while it created a new bidding model for the pre-salt, Brazil’s oil and gas industry still saw plenty of farm-in and farm-out activity, rising from 30 transactions in 2009 to over 40 in 2010 and around 70 in 2011 and 2012. Chequer attributed the decline in these transactions to 20 in 2013 to the focus of oil and gas companies on last year’s bidding round.

Last year, three bidding rounds were held, including one for Libra, another for onshore assets and one for offshore blocks. The most recent round saw 289 onshore and offshore blocks offered and 142 blocks awarded. Bidding activity for the onshore and offshore blocks outside the pre-salt were focused on the Equatorial Margin in Brazil, Chequer said. Bidding Round 11 attracted 12 Brazilian national companies and 18 foreign companies, including the majors, and raised $4.3 billion, including $1.3 billion worth of signing bonuses and $3.1 billion in minimum exploration program investment.

By comparison, 130 onshore blocks and 54 offshore blocks were awarded in Round 10, which attracted 11 national and six foreign companies, primarily small and medium-sized companies. Round 10 raised $316.4 million in investment, including $276.2 million in signing bonuses and $40.4 million in minimum exploration investment, Chequer noted.

The roster of exploration and production companies currently working in Brazil include Exxon Mobil Corp., Chevron Corp., BP plc, Shell, INPEX Corporation, Anadarko Petroleum Corp., Statoil ASA, Maersk and Karoon Gas Australia Ltd.

Significant investment will be needed in Brazil to fully develop its oil and gas resources. An estimated $400 billion will be needed for equipment and services until 2020. Currently 48 floating production storage and offloading (FPSO) vessels, 57 drilling rigs, and 55 oil tankers are operating in Brazil, Chequer said, adding that 68 more FPSOs, 65 more drilling rigs and 65 more oil tankers will be needed in Brazil.

Petrobras plans to spend $220.6 billion from 2014 to 2018, including $153.9 billion for exploration and production, $38.7 billion on its downstream operations and $9.7 billion on its international business, Chequer said. However, the company is struggling to implement this five-year plan as government fuel-price controls and soaring costs starve the company of cash, which will likely result in the company’s first quarter profit falling from the same period in 2013, Reuters reported May 9.

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