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Brazil sells five blocks in lackluster 17th oil, gas bid round

Highlights

Pandemic, energy transition undermine auction

Shell dominates, takes stakes in all blocks

Brazil to sell Atapu, Sepia fields in December

Brazil slogged through another lackluster sale of oil and natural gas exploration and production concessions, selling five of the 92 blocks on offer Oct. 7 as the ongoing pandemic and global energy transition undermined the country's 17th bid round.

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Officials downplayed the lack of interest, especially among big international oil companies as heavyweights such as BP Energy, Equinor and ExxonMobil sat out the sale. Nine companies registered for the auction, down from 17 for the 16th bid round held in 2019.

"It's important that we keep in mind the context in which this auction took place," said Rodolfo Saboia, director general at Brazil's National Petroleum Agency, or ANP, after the sale. "Oil companies are still recovering from the pandemic."

Despite the results, officials called the sale a success given the volatility the industry has weathered over the past two years. Uncertainties about global oil demand remain as the pandemic continues to churn despite expanding COVID-19 vaccination rates, exacerbated by an acceleration in the transition to low-carbon energy also caused by the global outbreak.

The shift was especially felt in the lack of bids submitted for new frontier areas in the Pelotas, Potiguar and Santos basins, Saboia said. That included Brazil's first offer of exploration acreage more than 200 nautical miles from the coast as three superblocks containing an estimated 7 billion barrels of crude in place failed to elicit an offer.

"These are new frontiers, so that implies elevated exploration risk," Saboia said, who added that the ANP's focus for the sale was aimed at opening new exploration frontiers. "During this difficult time, companies are going to be very selective about assets and this affected the interest in these areas."

Environmental concerns also could have played a role in the shortfall of offers for the Pelotas and Potiguar basins, officials said. Regulators removed blocks in the Para-Maranhao and Pelotas basins ahead of the sale, for instance. In addition, there were fears that several blocks in the Potiguar Basin could be subject to environmental lawsuits because they were located close to Brazil's Fernando de Noronha island reserve in the Atlantic Ocean.

Brazil will evaluate the environmental concerns related to the basins, Mines and Energy Minister Bento Albuquerque said. He noted that the government had already created working groups of regulators and industry officials to evaluate similar questions, as well as other improvements aimed at creating a better business environment in Brazil.

The blocks that failed to sell at the 17th bid round will now be further evaluated for inclusion in Brazil's Open Acreage program. The program includes all blocks and mature fields that failed to sell at previous auctions or were returned to the ANP. An Open Acreage bid round is triggered when an oil company submits a declaration of interest in a block or a mature field, kicking off a 90-day countdown to the auction.

The Open Acreage program is also the only way for oil companies to acquire onshore acreage. Brazil's annual bid rounds now only include offshore blocks. The ANP expects a third cycle of the Open Acreage program to be triggered before the end of 2021, Saboia said.

In addition, Brazil will hold its second subsalt transfer-of-rights sale Dec. 17. The sale will feature the Atapu and Sepia fields, which failed to generate offers at the first auction held in November 2019. Brazil, however, dramatically improved terms for the sale by slashing signing bonuses and profit-oil guarantees from the previous auction. The two fields also are now in production, with Atapu pumping first oil in 2020 and Sepia in September.

Shell dominates

Anglo-Dutch powerhouse Shell dominated the sale, snapping up stakes in five blocks in the Santos Basin. That was the lowest total number of blocks sold at an auction in the ANP's 20-year history, officials said. The oil-and-gas rich Santos Basin is home to many of Brazil's biggest subsalt discoveries, including the Gato do Mato and Sul de Gato do Mato subsalt fields operated by Shell.

Shell purchased 100% operating stakes in the S-M-1707, S-M-1715, S-M-1717 and S-M-1719 blocks, paying total signing bonuses of about $5.5 million. That included the auction's highest signing bonus offer of about $1.7 million for the S-M-1707 block.

In addition, Shell teamed with Colombia's Ecopetrol to buy the Santos Basin's S-M-1709 block. Shell will hold a 70% operating stake while Ecopetrol will retain a 30% minority share.

The blocks were located primarily in the southern portion of the Santos Basin and more-prospective for gas, according to industry officials. That would put the blocks in line with Shell's transition-focused investment strategy, with Shell Brasil CEO Andre Araujo underscoring the company's interest in Brazilian gas during a series of recent webinars.

Shell and Ecopetrol did not immediately respond to a request for comment.