Round 8 Cancellation Could Impact NatGas Supply Increase Efforts

The cancellation of Brazil's 8th hydrocarbons exploration licensing round could hurt efforts to reduce the country's dependence on imported Bolivian gas, hydrocarbons regulator ANP president Haroldo Lima told reporters in Rio de Janeiro.

The 284 blocks to be offered in the auction were in areas with a high likelihood of natural gas reserves. The auction was announced in the first half as part of the country efforts to increase domestic natural gas production.

Brazil consumes some 42Mm3/d, of which some 26Mm3/d is imported from Bolivia.

The government mobilized ANP and federal energy company Petrobras (NYSE: PBR) to increase domestic production as natural gas demand is expected to increase 17% annually in coming years and there is no short-term possibility of increasing Bolivian imports because of the nationalization in that country.

President Luis Inacio Lula da Silva went as far as announcing that Brazil could be self sufficient in natural gas after 2010.

"The cancellation of this round hurts the possibility of reducing our dependence on imported gas in the medium term," said Lima.


The country's image also was hurt by the legal dispute that led to the auction's cancellation.

"Brazil was thought of a country with stable rules and solid institutions," the regulator head said. "Although this is part of democracy and everything was done within democratic and legal rules, what happened will downgrade Brazil [in the eyes of investors]."

ANP and companies bidding in the tender now have to demobilize personnel and financial resources set aside for the tender, which, according to Lima, will be one of the biggest financial losses.

Norwegian oil company Norsk Hydro spent US$70mn-80mn in preparation for the tender, including buying seismic studies for the 79 Santos basin blocks that were to be offered, business development VP Luis Amorim told reporters.

Although the company was awarded three blocks in the Santos basin, the company wanted more, Amorim said.

"Brazil is a core business area for Norsk Hydro and we will continue investing in Brazil," the executive added. "What happened is a shame but I don't think this will affect Brazil's image because it has strong institutions."

Petrobras, one of the most aggressive companies in round eight after winning interests in 21 of the 38 blocks awarded while the auction lasted, lamented the lost chance to renew its portfolio.

"We need to add 1Bb/y to our reserves, which is why this round was important to us," Petrobras E&P executive manager Francisco Nepomuceno told reporters. "But this should not hurt our production targets since blocks won in this round were scheduled to come on line in 2012 and 2013 and we have an extensive exploration program."

Petrobras aims to produce 3.5Mboe by 2015 from the current 2.3Mboe. Company output stood at 13Bboe at end-2005.

Petrobras has been the company that has won the most blocks in yearly bidding rounds. In round 7 in 2005, the company picked up 95 blocks of the 251 awarded.

In of the 21 blocks it won, Petrobras was operator in eight as it had to adapt to rules that limited companies bidding as operator of three or four blocks in an exploration area.

"This determined our strategy to form partnerships," said Nepomuceno. "But we won't question the rules."

Oil companies waiting for other blocks to be offered in Wednesday afternoon had to pack their bags and restudy their strategy.

"I can't say anything now," Ricardo Peixoto, Brazil manager of Portuguese oil company Petrogal told BNamericas. "We will meet today to decide what to do."

Others simply expressed their frustration at not having had the opportunity to bid at all.

"This is lamentable," Devon Energy's Brazil manager Murilo Marroquim told BNamericas. "We will wait for the next round and I hope it happens as quickly as possible."

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