OTC: Brazil Energy Reforms Yield Big Lease Sales and Questions

Topics: Petroleum economics/production forecasting
Brazil is changing its rules to bringing in support to major investments in deepwater development, like the Pioneer Libra FPSO, which is moving from a shipyard in Singapore to the Libra Field offshore Brazil. Source: Petrobras.

Brazil launched a new effort at the Offshore Technology Conference to woo international investors under its reformed energy regulation system. But this new engine for exploration and production growth is still lacking some key parts.

On the plus side, there has been an array of changes opening up the oil and gas business to international oil companies. A series of 10 bid rounds over the next 3 years have the potential to add 2 million B/D of production on top of past finds that are expected to double the country’s production over the next decade.

“This is a historic opportunity for the global oil and gas industry,” said Decio Oddone, general director of the Brazilian National Petroleum Agency, known as ANP.

The rules move Brazil away from a system of tight government control that put chief Brazilian company Petrobras at the center of major developments, opening it up to international oil companies, investment firms, and service companies.

Camargo

The Brazilian oil and gas industry is working to “transform itself for the better,” said Jorge Camargo, president of IBP, at a breakfast panel that kicked off the announcement.

Now, international oil companies can be the operators on projects in places where previously only Petrobras could fill that role, and it will be easier for private investors to get involved. Strict local content rules have been loosened to reduce costs and encourage more service company competition, and many more properties will be coming up for lease than in years.

But Camargo noted there is unfinished business. The environmental licensing system remains unpredictable and time consuming, and there are tax levies that can make high-cost deepwater projects uncompetitive, Camargo said.

A pointed question after the presentation noted the significance of those lingering problems.

Shafe Alexander, president of BP Energy in Brazil, asked whether there was any changes in the works that could break the environmental review log jam.

Questions after the presentation discussed
the significance of lingering environmental
review problems.

BP Brazil was among the three winning bidders from the 11th bid round in 2013. The bid winners are still waiting for permits from environmental regulators to drill the 37 offshore exploration wells won in the auction. Time is running short to deliver on contracts promising drilling within 5 years of the award of leases.

“What stimulates growth is making discoveries. And you are not going to make any discoveries until you drill wells,” Alexander said.

The ANP has addressed the problem by offering 2-year extensions to operators unable to drill due to technical issues. Alexander pointed out that even that extended time frame is a tight deadline for operators, some of whom have yet to get a permit to shoot seismic.

At the root of the problem is the complex relationship between the officials managing offshore leasing and operations and those who issue the permits. Fixing that could require legislative action at a time when Brazilian lawmakers are grappling with a wave of reform laws addressing bigger issues confronting Brazil.

  Felix

“We are working on a new process for environmental permits in Brazil that is more reasonable and predictable,” said Marcio Felix, Secretary of Petroleum and Gas, Ministry of Mines and Energy, Brazil. Their goal had been to solve the problem last year.

“The government is doing its best to address” the issue, Comargo said. “If it were easy to solve they would have.”

Even with those downsides, Alexander described the changes so far as “a massive move forward.”

Among the changes is an effort to loosen local content rules, which had been a key criteria when evaluating competing bids.

  Filho

When asked about the status of rule changes, Fernando Coelho Filho, the Minister of Mines and Energy, described the issue as a “sensitive point.”

As a member of congress, he is aware of the political downside rolling back rules that favor Brazilian companies. But he said the days when the focus was ensuring the highest possible Brazilian role in projects has passed because things “are very different than when oil was going at USD 100–110/bbl and everything was possible.”

Brazil is competing for investment, as evidenced by the breakfast meeting in the next conference room where Mexico was making a similar pitch to investors.

Oddone’s presentation said the prospects offered in the bidding rounds over the next 3 years could result in the discovery of 10 billion bbl of recoverable oil and gas requiring 20 rigs working simultaneously to deliver 300 producing offshore wells.

While environmental permitting and taxes remain difficult issues, Comargo sees Brazil solving these difficult challenges. “I am not a political expert. But I am convinced we are entering into a path of no return,” he said.

OTC: Brazil Energy Reforms Yield Big Lease Sales and Questions

Stephen Rassenfoss, JPT Emerging Technology Senior Editor

02 May 2017