Round Results Promise High Interest Despite Regulatory Hurdle

BMI View: Results of Brazil's 11 th licensing round showed strong participation by international oil companies. The country's legal uncertainty triggered by the numerous debates surrounding the royalty law did little to prevent majors wishing to gain exposure to Brazil's below- ground potential. With a subsalt round expected in the coming October also likely to be well-received, prospects for a high rate of exploration activities create upside risks to both our reserves and production forecasts.

Results from Brazil's 11 th licensing round were announced at the beginning of June. The country's National Agency of Petroleum (ANP) was had offered 172 blocks covering onshore, shallow and deepwater acreage. These lie above the already explored Sergipe-Alagoas, Recôncavo, Potiguar and Espírito Santo basins and the underexplored Foz do Amazonas, Ceará, Pará-Maranhão, Barreirinhas, Potigua and Parnaíba basins.

ANP reported that a minimum level of around BRL6.9bn (US$3.2bn) in investment was committed to exploration activities - more than three times the amount pledged during any of the previous rounds. 142 of the blocks were purchased, with signing bonuses totalling BRL2.8bn (US$1.3bn). These were allocated among 30 different companies: 12 local and 18 foreign. Winners include international oil companies (IOC) such as BP, BG Group, Chevron, ExxonMobil, Total and Statoil, highlighting once again the interest that Brazil's below-ground potential draws.

Upside Risks From Exploration
Brazil's Oil Production, Consumption & Net Exports, '000 b/d

The strong attention given to the round despite regulatory uncertainty surrounding taxation of oil production in Brazil is a fairly positive development for Brazil's hydrocarbon sector A long legal battle has been brewing in Brazil over the equitable distribution of Brazil's oil wealth. Earlier in 2013, Congress had overturned President Dilma Vana Rousseff's veto of key aspects of the recent oil royalty bill, paving the way for a change in the country's tax regime and revenue redistribution.

Rousseff's veto had the intention of making the legislation applicable only to new oil production ( see '11th Licensing Round To Spread The Oil Wealth', February 21). He had signed the bill into law in mid-March, only for it to be contested by Brazil's Supreme Court. As such, the exact applicability of the royalty law remains uncertain; it could apply to already producing fields, as well as the winners of the 11 th licensing round.

Therefore, we believe that the large interest by IOCs in the round is a testimony that Brazil's below-ground prospects largely outweigh the risks of additional taxation. We are increasingly optimistic that there will be strong competition for the country's first subsalt round in October, with upcoming exploration expected from access to new acreage creating large upside risks to both our reserves and production forecasts.

This article is tagged to:
Sector: Oil & Gas
Geography: Brazil