November Pre-Salt Bidding Rounds in Brazil Will Feature Intense Competition Among Major Global Operators

Although Petrobras May Exercise Its Right of First Refusal, Major Global Operators Are Already Formulating Strategies to Acquire Blocks in the Coveted Búzios Field and Other Assets

The upcoming licensing auctions taking place in three rounds in Brazil’s pre-salt area include four enormous discovered resource opportunities (DROs) between two high-level exploration rounds. The deadline for this round is set for November 6, 2019, said Wood Mackenzie, an industry analyst, in a report released this Tuesday.

“We anticipate the Concession Round in the first part of our series of exploration bidding rounds for Brazil 2019. The main cultivated areas in Brazil’s pre-salt, in the Santos and Campos basins, result in low-cost exploration, with record high signature bonus costs. The reservoirs in the basins have depth oil of excellent quality, with wells capable of producing up to 50 kbd,” said Wood Mac.

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The three upcoming bidding rounds share a common limiting factor: incredibly high entry costs. And with the schedule to try to place the three bidding rounds within weeks, it gives players little time to adjust their bidding strategies throughout the process to reflect the results of previous rounds. This means that participating companies must plan ahead for all possible scenarios in the three rounds or focus on a specific round. The rounds are very different by nature – Round 16 includes concessions and explorations, while Round 6 offers PSC and exploration.

The DRO will offer 10 billion boe, which corresponds to the excess discovered volume of the Transfer of Rights Contract (TOR) of 5 billion boe from Petrobras. The DRO will be offered under a production-sharing contract, which includes a signature bonus of US$ 26 billion.

Brazilian Pre-Salt DROs: Surrounded by Complexity

Wood Mac stated that there is no more than Brazil’s TOR surplus for one of the most perplexing contract structures known in the oil industry.

“Covering six high-quality pre-salt fields found between 2010 and 2013, the TOR areas hold 15 billion boe, of which 5 billion boe were allocated to Petrobras for the price of US$ 42.5 billion. This year’s 10 billion boe TOR bidding round comprises resources that exceed Petrobras’ volumes in four of the six areas. A recent highlight is the Búzios field, which began commercial production in 2018 and is also the largest for a long time,” said the analyst.

Petrobras Exercises Right of First Refusal

In May, Petrobras expressed interest in operating the Búzios and Itapu fields. The fields are two of the four areas offered in the TOR surplus. Petrobras will spend at least 30% of the US$ 18 billion signature bonus.

“We expect a single bid for Búzios, given the high bonus and co-participation in the upfront payment. Itapu was unexpected, as it has the lowest signature bonus and minimal profit share in the round. An FPSO is planned for this area in 2023,” said Wood Mac.

Brazil’s Pre-Salt Occupies a Prime Area with Massive Reserves

What is being auctioned? The right to all resources in each field that is an excess of the original volume attributed by Petrobras in the 2010 TOR contract.

The reserves will be auctioned under a production-sharing contract for the excess volume between 6 billion and 15 billion boe. Wood Mac’s estimate is a midpoint of 10.6 billion boe, which is equivalent to one third of the country’s remaining commercial reserves.

The assets are prime pre-salt areas with some of the highest-producing wells in the world, peaking at 50 kbd in the best Búzios wells.