Internationals win big in last Brazil oil auction before elections

Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados, Demarest Advogados and Tauil & Chequer Advogados in association with Mayer Brown have advised some of the winning bidders in Brazil’s latest pre-salt auction, the latest in a new era in which Petrobras ceases to be the sole operator of pre-salt oil exploration and production in Brazil.

Internationals win big in last Brazil oil auction before elections Credit: iStock.com/luoman

Four blocks were auctioned on 28 September, with international companies leading consortia that snapped up the three biggest blocks. Brazil’s government collected 6.8 billion reais (US$1.7 billion) in signing bonuses from successful bidders. Mattos Filho client ExonMobil joined with Qatari oil company QP, represented by Demarest, to score the Titã block. The consortium paid 3.1 billion reais (US$791 million) for the block. ExonMobil, which has a 65% stake in the consortia against 36% belonging to QP, will operate the oil field. Shell, which is believed to have relied on in-house counsel, and Chevron paid the same amount to win the Saturno block. Both companies share an equal stake in the block and Shell will be responsible for the operation. The third Santos Basin block auctioned, Pau Brasil, was acquired by a consortium formed by Mattos Filho clients BP and Ecopetrol and by Chinese corporation CNOOC, which retained Tauil & Chequer. The winning bidders offered 500 million reais (US$127 million) for the Pau Brasil block. The only block snapped up by Petrobras was the Sudoeste de Tartaruga Verde, in the Campos Basin. The company, which relied on in-house counsel, won the bid with a 70 million reais (US$17 million) offer. Brazil’s state-controlled oil company also bid for the Pau Brazil block, with a 40% stake in a consortium with Total (which also held 40%) and Chinese company CNODC, which took counsel from Mattos Filho. This bid was unsuccessful. The final oil auction before Brazil’s presidential elections on Sunday closes a two-year period in which the sector operated under a changed regulatory framework where Petrobras ceased to be the sole operator of pre-salt block areas. “It was a cycle that saw the government collect 28 billion reais (US$7 billion) in signing bonuses and the participation of first-tier international companies in Brazil’s exploration market at a level never seen before,” says Mattos Filho partner Giovani Loss. “As soon as Brazil adopted an open market mentality for the oil sector, we had two years of good results that are not even close to being matched by any country in Latin America.” Vieira Rezende oil and gas partner Carlos Maurício Ribeiro says the results of the latest auction were possible because of a combination of improved oil prices, the excellent condition of Brazil’s offshore basins, confidence in Brazil’s respect of contracts and a revamp in the regulatory landscape.  The last two years have seen Brazil’s oil and gas market make space for international players. Petrobras’ participation in the latest auction was even smaller than in previous ones. The state-owned company acquired just one block and had a comparatively marginal role, while big international names like Shell, ExxonMobil, BP, and Chevron took centre stage. In 2016, Brazil passed a law removing the requirement of state-controlled Petrobras to be the sole operator of pre-salt blocks. At the time, Petrobras was reorganising its finances and carrying out an extensive divestment programme amid low oil prices, political instability and the consequences of the Car Wash scandal. Still, Petrobras continues to be a major player in Brazil’s oil and gas market. Schmidt, Valois, Miranda, Ferreira, Agel Advogados’ Sonia Agel says Petrobras opted to shy away from further investment because of its existing commitments. “Petrobras’ reduced participation makes sense as the company is already committed to a strong position in pre-salt areas which demand huge investments,” she said. Loss says diversity in the sector should be celebrated. “The multiplicity of operators working on oil exploration in Brazil will bring enormous benefits to the sector,” he says. “Services providers will no longer have to rely on a single contractor and the diversity will bring about efficiency to execute the projects.” Regulatory stability is also a crucial factor for the sector. But even as Brazil edges towards an unpredictable general election — the first round of which takes place on Sunday — Loss says it will be hard for the next government, whoever becomes president in January 2019, to backtrack on contracts already awarded. “The government’s revenue from the oil industry helps a lot with the public fiscal balance, so even if a non-liberal government takes over it will be cautious about changing things,” says Loss. But minor changes could occur. Loss points to local content requirements for exploration and production, which have recently been made more flexible but face resistance from local industry groups. “Local content regulations promoted during Michel Temer’s government have been some of the most contested changes and there is pressure from certain social groups,” he acknowledges. Temer opted to make local content rules more flexible to woo private investors. Vieria Rezende’s Ribeiro says the next government should think twice before introducing major changes. “Although there are many things to be done, the recovery of the oil industry in Brazil is a reality, so it is up to the next government and Congress to recognise the value of the partnership between the industry and the government,” he says. Counsel to ExonMobilMattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados

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