Brazil's independent oil, gas producers push ANP reforms to survive pandemic

Brazilian independent oil and natural gas producers this week urged the government and industry regulators to continue reform efforts during the ongoing coronavirus pandemic as a way to boost output from mature and marginal fields once the global economy starts to rebound.

"We understand that it's a difficult time, but I think that it's time we faced some of the historic distortions in the Brazilian market," Marcelo Magalhaes, chief executive of onshore producer PetroReconcavo, said during a webinar featuring the independent producer and larger offshore rivals Enauta and Petro Rio.

Brazil started a massive overhaul of its oil and gas regulatory regime in mid-2016, shifting course from a state-led model topped by government-controlled producer Petrobras to one that actively sought out international oil companies. Brazil allowed foreign oil companies to operate subsalt fields under production-sharing contracts, reduced requirements to use locally produced goods and services, and returned to a regular schedule of annual acreage sales. The efforts were rewarded with a series of hotly contested licensing sales that featured record-setting signing bonuses and profit-oil guarantees to the government.

But much of the focus was on heavyweight players with the deep pockets and technology to operate in the subsalt region, where light-oil deposits are located more than 300 kilometers offshore and more than 7,000 meters below the ocean's surface. More progress needs to be made if Brazil wants to create a robust oil industry flush with small and medium-size players, especially given the financial challenges posed by the coronavirus-related collapse in oil prices and demand, officials said.

"Now is the time for the government to act to keep Brazil on the oil industry's radar," said Lincoln Guardado, CEO of oil and gas producer Enauta.

Brazil's National Petroleum Agency has already implemented some changes, including extending deadlines to submit audits and reports or eliminating the need for some tasks to avoid unnecessary coronavirus exposure. That needs to continue, but the regulator also needs to take a more hands-off approach to smaller companies.

"The ANP is very demanding," said Timothee de Reynal, general manager at Perenco Brazil. "The regulator needs to adapt and be more limited with independents."

The heavy-handed approach to smaller players is related to the ANP's creation in 2000 after Brazil ended Petrobras' monopoly in oil exploration and production in 1997. But by that time, Petrobras had basically moved most of its efforts offshore and into ever-deeper waters.

"All of our regulatory regime for onshore production is based on offshore," Magalhaes said. "It's very complex, very costly, and very bureaucratic."

The smaller size of onshore assets and lower environmental impact needs to be recognized by reducing regulations and bureaucracy, Magalhaes said.

PETROBRAS SALES

In addition, the government and ANP need to maintain pressure on Petrobras to complete the sale of the company's legacy onshore and offshore assets as well as end the company's monopoly in the refining sector, executives said. Petrobras, however, received a reprieve in April, when the ANP extended until December 31, 2020, a deadline to sell off more than 100 mature and marginal oil and gas fields or return them to the ANP because of the coronavirus pandemic.

"Any regulation that helps the process of consolidating these assets is very welcome, especially at this time," Roberto Monteiro, CEO at Petro Rio, said during the event. Petro Rio, which is the lone Brazilian independent focused on revitalizing mature offshore assets, suffered through the drawn-out sales process with Petrobras in past attempts to buy fields. Petro Rio is currently in the process of buying out Petrobras' 30% minority stake in the Frade Field.

The asset sales are seen as a way to get active production assets into the hands of companies that will focus on redevelopment and revitalization. Many of the fields produce such low volumes that Petrobras stopped investments or plans to hibernate the fields, but smaller, more-agile players would devote the time to make the economics work, executives said.

"It's been five years, and we have one deal closed and one deal signed," Magalhaes said about Petrobras' sale of onshore assets. "Petrobras needs to look at this and the ANP needs to look at it."

"We need to link these sales less to cash value and much more to investment commitments aimed at increasing production," Magalhaes added.

One of the issues slowing rights transfers was the lack of clear field and well abandonment rules, with the ANP publishing the rules earlier this year in a potential breakthrough. In addition, other measures, such as allowing reserve-based lending and production guarantees to cover end-of-life financial commitments, should also ease transitions.

Petrobras' plan to sell eight of the company's 13 operated refineries also could make Brazil's onshore segment more attractive, executives said. That's because Petrobras' monopoly in refining means it can play hardball with independent producers. Petrobras currently offers independent producers dated Brent minus a $10/b discount, which would peg prices at about $13/b given current benchmarks, Magalhaes said, adding, "almost universally that is below the cost of production in Brazil's mature basins."