Negative surprises sparks warning for Brazilian oil auctions, says Wood Mack

(Reuters) – Brazil has had a boom in oil and gas auctions since 2017, before the pandemic postponed new bids, but the first wells drilled by the winners of these disputes have disappointed, which sparks alerts for the government in relation to the next rounds, Wood Mackenzie analysts told Reuters.

The initial results considered “disappointing” still come at a time when oil companies around the world have cut investments in exploration and production due to the impacts of the coronavirus on the industry, given the strong retraction in fuel consumption, highlighted the consultancy experts.

“So far, there are five blocks in which they started (drilling) from these auctions since 2017. There are a number of regions in the pre-salt polygon and one block already outside the polygon… we are in five drilling and no major case of success, ”said Wood Mackenzie’s upstream analyst for Latin America, Marcelo de Assis.

He mentioned the areas of Peroba, Alto do Cabo Frio Oeste, Uirapuru and Saturno, all tendered under a pre-salt sharing regime, in addition to Naru, under a concession regime.

In Peroba, the information is that the first well found “a mixture of gas with carbon dioxide”, which means that the asset is not considered very attractive, said Assis, even more so given the high oil surplus promised to the government in the auction (77%).

In Alto de Cabo Frio Oeste the results point to “small amount of oil”, while in Uirapuru there are reports that the reservoir found was “smaller than expected”, and the bid for the area was also aggressive, added Assis.

On Saturno, the evidence is that the first well drilled was “dry”, that is, it found no oil, said the analyst at Wood Mackenzie, and in Naru the results point to gas reserves, “which is not an encouraging result. “, according to him.

Petrobras leads the consortia responsible for the exploration of Uirapuru – together with Petrogal, Equinor and Exxon – and Peroba, with CNODC and BP, in addition to Naru, in association with Equinor and Exxon.

Shell is the operator in Alto de Cabo Frio Oeste, with CNOOC and QPI, and in Saturno, with Chevron.

The challenges are greater for the pre-salt blocks in which consortia offered installments in excess of 70% of the so-called “oil surplus” to the government to win the competition, pointed out Wood Mackenzie’s upstream analysis manager, Juliana Miguez.

These are the cases of Saturno, Uirapuru and Peroba, which could have difficulties in making economically attractive production feasible.

“Considering these aggressive moves that we have seen since 2017, the development of the field would only be justified, in fact, if it is a gigantic discovery,” said the executive.

“Expectations were very high in relation to the pre-salt layer and what we are seeing now is that, despite all this success in the last decade, it is still a frontier area, it still has many uncertainties, many challenges.”

NEXT AUCTIONS

With the coronavirus, the National Energy Policy Council (CNPE) postponed to 2021 and 2022 the planned auctions of new areas under a concession regime, while pre-salt competitions under a sharing regime have not yet had a new date set.

These competitions in Brazil should take place in an environment where many oil companies have cut investments by around 30% amid the deterioration of the oil markets due to the pandemic.

“The expectation is that you already have smaller budgets for exploratory areas, with fewer people to evaluate these areas. And then, these negative results (from the first wells) also cool interest, ”said Assis, from Wood Mackenzie.

He added that the next areas to be offered are smaller structures or close to regions already seen as complex, which should also generate challenges for the government to attract investors and achieve the expected results with the tenders.

Renegotiate

For Wood Mackenzie analysts, the continuity of the current scenario of wells without major discoveries could lead oil companies to press for the revision of bidding terms, such as the oil surplus promised to the government, in order to allow the exploration of assets instead of just return them.

The issue is delicate, because the offer of the surplus was a tiebreaker in the disputes, but Brazil has previously allowed the renegotiation of the terms of local content, which also influenced the auctions, they pointed out.

“It will not be an easy discussion, especially since there were other participants. But it has already had a similar discussion with local content and ended up revising itself, ”said Assis.

In parallel, President Jair Bolsonaro’s government has discussed a review of rules in the oil sector to foster interest in upcoming auctions.

The Minister of Economy, Paulo Guedes, has stated on several recent occasions that the government is evaluating the bidding of new areas in the pre-salt as a concession model, rather than sharing, a change that was defended by oil and gas companies last year.

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