With urbanization and population growth trending upward, Brazil has increased its demand for energy, especially in the areas of oil, natural gas and electricity. On the supply side, oil and gas production has increased and there have been several well-publicized, large deepwater finds that have generated much excitement. These include the pre-salt reserves off the coast of Rio de Janeiro state where the potential reserves total over 50 billion barrels of oil. Brazil has only approximately 14 billion barrels of proven reserves, making these finds quite significant.
However, without foreign investment, Brazil will be unable to effectively and efficiently extract the potential oil and gas because of the size and complexity of the untapped reserves. Shale gas and shale oil present an added layer of complexity for development. Because the extraction of shale relies on horizontal drilling and hydraulic fracturing (“fracking”), only companies experienced in these sophisticated techniques are able to extract the shale gas.
To generate investment interest, the Ministéria de Minas e Energia (Ministry of Mines and Energy), in conjunction with the Agência Nacionaldo Petróleo, Gas Natural e Biocombustíveis (National Agency of Petroleum, Natural Gas and Biofuels—ANP), is publicizing the oil and gas bidding rounds that will take place this year. Interestingly, as part of its effort, the ANP has been looking to target small and medium-size oil producers with auctions either in mature basins or inactive fields where there still may be accumulations of oil and gas.
Nevertheless, the principal focus of the rounds is to attract large-scale foreign investment to the sector. The ANP is planning its 11th-round auction on May 14 to 15, 2013, which consists of 13 sedimentary basins and 289 exploratory blocks, spanning more than 150,000 square kilometers. More than 70 companies have presented their intentions and participation fees to be considered to bid in the 11th round. These companies are prepared to pay 10 percent of royalties for a license to operate.
The 12th round has also attracted a lot of interest because it focuses on areas with potential for unconventional oil and gas, i.e., shale. This round of bidding will take place on October 29-30, 2013. As for now, government royalties are expected to be between 5 and 10 percent, with percentages for local content and special participation yet to be determined.
The final bidding round contemplated for this year is the first-round of bidding for the pre-salt layer, representing 149,000 square kilometers of off-shore blocks. For this round, which is also very capital intensive for investors, royalties for the government are 15 percent.
The Brazilian government has traveled abroad to present these opportunities to foreign investors. The combination of the country’s rich energy resources and significant opportunities forinvestment could make these fruitful transactions for both parties.