TOGY talks to
E&P that works for BrazilAugust 22, 2018
Décio Oddone, general director of the National Agency of Petroleum, Natural Gas and Biofuels (ANP), talks to TOGY about the development of the domestic upstream sector, results of recent E&P tenders and the outlook for future bidding rounds. As Brazil’s independent oil and gas regulatory agency, the ANP awards E&P licences and issues non-statutory regulations.
• On great expectations: “We haven’t explored the pre-salt reserves the way we should have, but now we will do that. We anticipate Brazilian oil production growing to around 5.5 million bopd by 2027-2028. We estimate that we will install around 40 new production platforms on the Brazilian coastline, generating around BRL 100 billion [USD 26.4 billion] every year in government revenues and bringing almost BRL 1 trillion [USD 264 billion] in investments in exploration and development.”
• On mature fields: “We want to increase the recovery factor in our fields, which is low. Globally, the average recovery rate is about 35%, and in Brazil it is around 21%. We see enormous opportunity there, so we are working on a series of measures to extend contracts.”
• On fuel prices: “It is not our intention to interfere with the way companies price their products. In Brazil, that is free by law and will continue to be. We would like to see more competition and a functioning market because that’s the way to get the best prices for consumers.”
Most TOGY interviews are published exclusively on our business intelligence platform, TOGYiN, but you can find the full interview with Décio Oddone below.
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How did Brazil’s oil and gas industry evolve through the downturn the country faced in 2014?
The oil and gas industry in Brazil has gone through a large transformation. Petrobras was created in the 1950s, and the company was a legal or practical monopoly in the industry for at least 60 years. The first opening in Brazil’s oil and gas industry occurred in 1997 when Petrobras’ monopoly was legally extinguished. At that time, the ANP was created.
We started with bidding rounds to attract investors in the petroleum sector, and we were very successful in this regard. We had several discoveries and eventually, we discovered the very large – and now famous – pre-salt reserves. As a result of this success, the government started discussing a new contract model for the exploration and production of these reserves. Because of this process, we had about five years without any bidding rounds, and then they were resumed in 2013.
Petrobras has faced a deep crisis with the discussion of corruption. Petrobras investments were affected, and to make things even worse, we had an oil price crash in 2014. Because of this, Brazil’s oil and gas industry came to a sudden halt, especially in the upstream sector. The number of wells drilled dropped dramatically. Exploration activities dropped and almost stopped. Development plans were postponed. Petrobras’ investments in the whole oil and gas supply chain were canceled, and refinery projects were also canceled.
What has been done to help Brazil come out of this situation?
In 2016, the ANP started changing things to help the industry resume activities. In 2010, when the government decided to change regulations applying to the pre-salt reserves, one of the measures it took was to oblige Petrobras to be the sole operator there. By the end of 2016, Congress had passed a bill that authorised other companies to compete with Petrobras in the pre-salt bidding rounds.
Moreover, the ANP established a bidding round calendar. We discussed and changed a lot of the contents of the regulations. We simplified contracts and the documentation done in preparation for the bidding rounds. We’ve started to implement the permanent offer system, which includes open acreage that had been previously awarded and relinquished. These areas are made available on a permanent basis to companies so they can study them and make offers.
All these efforts have resulted in the ANP conducting a few bidding rounds: two rounds for the concession model – the 14th and 15th bidding rounds – followed by three rounds for production-sharing agreements for the pre-salt, with the most recent one taking place in June 2018.
What do the results of these bidding rounds signal for Brazil’s E&P future?
The results are very exciting, not only in terms of signing bonuses that we are able to collect, but also in terms of the investments we have granted for the country in the mid-to-long term. The next 10 years will be different from the past 10.
We haven’t explored the pre-salt reserves the way we should have, but now we will do that. We anticipate Brazilian oil production growing to around 5.5 million bopd by 2027-2028. We estimate that we will install around 40 new production platforms on the Brazilian coastline, generating around BRL 100 billion [USD 26.4 billion] every year in government revenues and bringing almost BRL 1 trillion [USD 264 billion] in investments in exploration and development.
What is the ANP’s strategy for managing new discoveries?
The pre-salt reserves have astounding potential. We now have one well in the Mero field, which used to be part of the Libra project. Production there is about 51,000 boepd.
We don’t only have pre-salt reserves; we also have the conventional offshore basins, from the south up to Amazonas. We have the old, traditional, producing basins onshore, and several frontier basins where we lack exploration.
We haven’t explored and drilled that much in Brazil. We’ve drilled less than 30,000 wells in our history, compared to more than 4 million wells in the United States and 60,000 wells in Argentina. We have two basins in which we’ve never drilled a single well: the Madre de Dios Basin on the border with Bolivia in the state of Acre, and the offshore Pernambuco-Paraíba Basin in the northeastern part of Brazil.
We must develop knowledge of our prospective resources and discover our potential before we pass out of the oil age. We all understand that we are on the way to a less carbon-intensive economy in which the importance of hydrocarbons and oil in the global energy mix could be reduced. Forecasts point to demand for oil peaking around 2040. Therefore, we don’t have a lot of time to explore and produce oil in Brazil, and that’s why we’re trying to expedite knowledge of our basins and the production of our reserves.
How do you assess the results of the 4th Pre-Salt Bidding Round?
The result we saw was a result of competition. When Congress authorised other companies to compete with Petrobras in the pre-salt bidding rounds, it gave Petrobras pre-emption rights. Petrobras has the right to select the blocks in which it wants to participate, but the company participates in the bidding rounds with the right to adhere to a different consortium if there is a winning offer that it is not part of.
We have seen this process occur for the first time. In two of the blocks, the winning offer was from a consortium not including Petrobras. The NOC had the right to decide if it wanted to adhere to the winning offer or not, and it did. As a result of that, government revenues increased substantially.
We will be happy to see revenues increasing in the future as a result of competition. It’s very simple proof that when you have competition, it is also better for society.
When will activity start to pick up in the pre-salt blocks that have been awarded?
We expect to see pre-salt investments coming up more quickly than those for the concession bidding rounds, especially because for the pre-salt reserves, we have much more detailed seismic information than we normally have for the blocks outside the pre-salt polygon.
For the second and third bidding rounds, which we had in October 2017, we already have companies planning to drill wildcat wells in 2018. It’s proof that things can speed up in the pre-salt, and I expect that within 12 months we’ll see movements from companies towards drilling in those blocks.
Real investments should be much higher than the committed investments companies make when they submit offers. If companies find large oil reserves, we expect to see at least USD 6 billion-7 billion in investments for each of those blocks.
Will local content requirements remain at current levels for upcoming bidding rounds?
From 2005 onward, we had very strict and demanding local content regulations, and they proved difficult for companies to comply with. From 2016, the government decided to reduce local content requirements, so they are no longer part of the bidding criteria. The same type of local content approach was adopted for the bidding rounds in 2016, 2017 and 2018. In September 2018, we will have the 5th Pre-Salt Bidding Round, and the rules are the same.
For past bidding rounds, we conducted a series of discussions with the local industry and came up with a regulation that took all this into consideration: waivers, transfers and other matters related to local content.
We already have a bidding round calendar establishing the areas that we will be offering from 2019 to 2021. By the end of 2018, we expect the CNPE [National Council for Energy Policy] to have approved a five-year bidding round calendar going through 2023. Eventually, through work done by the entity in charge of local content discussions known as Pedefor, the CNPE will deliberate on the local content regulations for each one of these bidding rounds, but we don’t expect any big changes. I think that the model we have worked with is a winner.
How attractive is the 5th Pre-Salt Bidding Round?
The pre-salt bidding rounds are very attractive. The results of the last bidding rounds have confirmed that.
Two of the most interesting blocks that were to be offered in the 15th bidding round in March 2018 will instead be offered in the round for production-sharing agreements. We were confident that the competition for these two blocks would be intense in the 15th bidding round, and we hope that we’ll see the same in the production-sharing agreement bidding round.
One of them, Southwest Tartaruga Verde, is not a pre-salt play, but it’s located inside the pre-salt polygon, so we are obliged to offer it under a production-sharing agreement in the 5th Pre-Salt Bidding Round. Petrobras exercised its right to be the operator in that field.
The Pau-Brasil block was initially offered in the 3rd Pre-Salt Bidding Round in October 2017. We expect to have an offer on that block as well.
We have reasons to believe that the 5th Pre-Salt Bidding Round will be a success, just like the fourth.
What measures are being applied to develop mature fields?
We want to increase the recovery factor in our fields, which is low. Globally, the average recovery rate is about 35%, and in Brazil it is around 21%. We see enormous opportunity there, so we are working on a series of measures to extend contracts. Right now, we are discussing a new regulation that establishes incentives in terms of royalties reductions for additional production in mature fields, as well as a series of other measures that will make it easier for companies to invest in our mature fields to increase recovery.
How have recent events impacted fuel pricing in the country?
We don’t have a pricing policy in Brazil. According to the law, prices are established by companies in a competitive market, but as a result of the situation that Petrobras faced a few years ago, the company decided to announce its pricing policy. Since Petrobras is a company in which the government has a controlling stake, it looks like these policies come from the government or the ANP.
Petrobras is free to make decisions and because of its decision on pricing policy, Brazilian society is now complaining about the frequency of price changes applied by Petrobras. We have fuel distribution competition in Brazil, mostly from imports. About 20% of fuel is distributed by other players in the retail market, but that’s not strong enough to seen as real competition for the public. The truck drivers went on strike in May 2018, and the government stepped in and established a subsidy for diesel oil.
The ANP decided to open a public consultation to discuss the convenience of having a minimum period of time for companies to transfer the volatility of oil prices and the exchange rate to the public. We are entering this process now, and hope to have it concluded within 40-60 days, by July or August 2018.
It is not our intention to interfere with the way companies price their products. In Brazil, that is free by law and will continue to be. We would like to see more competition and a functioning market because that’s the way to get the best prices for consumers.
However, I would like to emphasise that even in a situation like this, where the government decides to establish a subsidy for fuel, this subsidy comes from the treasury, without interfering with Petrobras or any of the other companies that furnish the market with diesel oil, petrol or any other oil byproducts.
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