How Brazil is creating the conditions for the rebirth of the oil and gas industry

Friday, March 2, 2018

Décio Oddone, the general director of Brazil's oil and gas watchdog ANP, spoke to BNamericas about measures underway to unlock new investments in the country. He said October's general elections are unlikely to affect measures to bolster the industry. "First because they have generated concrete results; second because Brazil has a tradition of respecting established contracts."

BNamericas: You have just completed a year as ANP's general director and during this time several regulatory changes were put into effect. Has Brazil become more market friendly?

Oddone: Definitely, yes. Brazil started a reform cycle at the end of 2016, after a period of sharp decline in exploration and production, resulting from a five-year hiatus of licensing tenders, followed by a serious institutional and financial crisis faced by Petrobras and the reduction of oil prices. So a series of measures, like the Repetro [tax incentive program's renewal], were implemented to increase the attractiveness of the sector. And, today I'm glad to say we have managed to overcome this challenging scenario, as the bidding rounds held in 2017 showed. We are confident we'll have new successful tenders this year.

BNamericas: What else needs to be done in regulatory terms?

Oddone: Concerning ANP, the waiver [local content exemption] regulation, which is set to be implemented in April. In relation to the federal government, the negotiations with Petrobras regarding the transfer of rights to surplus volumes and the scheduling of its tender process. Besides that, Brazil needs to improve the environmental licensing process in a general sense.

BNamericas: The waiver resolution is also designed to allow operators to reduce local content requirements of past licensing contracts. This is a controversial subject, and local industry associations have said they will appeal against it in the courts if it is approved. How is ANP dealing with this issue?

Oddone: We have held a public hearing on this new resolution and have proposed increasing local content, to 40% from the original 25%, for the construction of offshore platforms. But no issue is bulletproof when it comes to legal cases. What we focus on is giving the resolution legal solidity and taking the necessary steps to defend our proposal in the event of a court case.

BNamericas: The Mexican government held a successful offshore licensing round in February, while oil prices keep recovering. Are these good signs for this year's auctions in Brazil?

Oddone: We're already seeing oil companies needing to replace reservoirs and a consequent increase in their interest in new exploration assets. The auctions we held last year and the recent Mexican tender confirm this trend, as will the next bidding rounds in Brazil, where good quality assets will be offered.

BNamericas: New frontier areas will be tendered in this year's rounds. Do you believe these assets will attract the attention of oil companies?

Oddone: It's important to provide some context. Petrobras, which was the only company eligible to carry out E&P in Brazil until 1997, is now starting to let some assets go [via its divestment program]. So for the first time there's an opportunity to create a secondary market of E&P areas and actually build up an industry in the country. We have three different exploration environments in Brazil: first, the pre-salt, with output of 1.5Mb/d from 86 wells, averaging 20,000b/d per well. Then you have the remaining offshore coastal areas, where average production per well is around 1,700b/d, and in addition onshore mature areas averaging 17b/d per well. Our goal, therefore, is to provide the conditions so each of these environments attracts suitable players.

BNamericas: Which means...?

Oddone: The pre-salt is an environment for large companies who are familiar with it and have enough capital to develop it. So we're splitting the bidding rounds, holding production sharing [pre-salt] and concession tenders, separating, in the latter case, onshore and offshore concessions. For the 15th round we will offer 49 offshore licenses in the CearáPotiguarSergipe-AlagoasCampos and Santos basins. Onshore we have the Parnaíba and Paraná basins, where there is a great potential for new natural gas finds. Mature areas in states like Rio Grande do Norte, Sergipe, Espírito Santo and Bahia have been withdrawn from the rounds and included in the permanent offer regime...

BNamericas: That will be up for bidding as of when?

Oddone: May. So we expect an offshore auction that will be attracting big players and, perhaps, some independent companies, while others should be focusing on these new frontier areas with potential for natural gas developments. Smaller companies are likely to migrate to the permanent offer regime. With this, we hope to see a larger number of groups operating in Brazil. This is revolutionary, as it will allow companies that, in the past, didn't have time or the conditions to invest in the country to enter the market and create new ventures here.

BNamericas: Which other measures is ANP working on to foster the interest of smaller groups in Brazil?

Oddone: We're facilitating the participation of financial institutions as partners of oil companies in the bidding rounds; working on a new resolution to allow hydrocarbon reserves to be used as a financial guarantee [reserve based lending]; and making available exploration assets near the areas that are being divested by Petrobras, giving the new concessionaires access to upside.

BNamericas: Also on the agency's agenda was the reduction of royalties on additional production and shared decommissioning costs...

Oddone: Indeed. If the new concessionaire presents us with an investment commitment and, after that, gets to increase the field's production, we can reduce the royalties to 5%. In the event that such a plan justifies an extension of the concession contract, we will also be open to discuss that. Finally, we're working on how to split future decommissioning costs in the case of an ownership transfer between Petrobras and a new concessionaire. By doing so, we'll be creating the conditions for the rebirth of the oil and gas industry in Brazil in the medium term.

BNamericas: Is it possible for Brazil to develop new onshore natural gas projects under different models than the reservoir-to-wire one, which has been successfully adopted by Eneva in the Paranaíba basin?

Oddone: Sure it is. One example is the Mato Grosso do Sul state block acquired by Petrobras at the 14th bidding round, in 2017. This asset is close to the Bolivia-Brazil [Gasbol] gas pipeline and, if the oil company finds gas there, it will be just a matter of connecting the field to that line. Paraná state is another region where there is a robust network of pipelines, so this possibility also exists there.

BNamericas: We're seeing Argentina gradually developing its shale gas reserves. What are the expectations in Brazil?

Oddone: There are legal issues that are making it difficult to handle fracking operations here. But the government is aware and is planning to carry out pilot projects to test shale plays in the country. There is still plenty unknown about shale in Brazil, so it's necessary to discuss it and inform society.

BNamericas: Could the results of October's general elections affect or lead to a review of measures implemented by the current government and ANP itself in the oil and gas sector since 2016?

Oddone: The risk exists, but I reckon we're unlikely to see a reversion of the initiatives. First because they have generated concrete results; second because Brazil has a tradition of respecting established contracts. Even during the governments of Lula and Dilma [Rousseff] the change involved future pre-salt projects [with the establishment of the production sharing regime], so past deals were kept untouched.

About Décio Oddone

Décio Fabricio Oddone da Costa has a degree in electrical engineering from Rio Grande do Sul federal university (UFRGS), in addition to business degrees from Harvard Business School and Europe's Insead. He is a retired employee of Petrobras, for whom he has worked in Brazil, Angola, Argentina and Bolivia, where he headed the state-run oil firm's local subsidiary. Between 2015 and 2016 he acted as Brazilian logistics group Prumo Logística's oil and gas projects director.

About the company

Brazil's national agency of petroleum, natural gas and biofuels (ANP) is the regulatory body that oversees the oil, natural gas and biofuel industries in the country. It is in charge of issuing non-statutory regulations (resolution, norms), awarding exploration, development and production licenses and concessions, and conducting regulatory inspections, directly or through other state entities. Created in 1997 and linked to the mines and energy ministry, the agency publishes statistics and sponsors geological and geophysical surveys to define areas with production potential. Additionally, the contracts for oil and gas exploration and production include an RD&I clause, which requires a commitment from the signatory companies to invest in research, development and innovation projects and programs. Based on oil and gas production metrics, the Rio de Janeiro-headquartered agency also defines interests for the government and third parties, as well as taxes such as royalties, that oil companies are obliged to pay.