Brazil’s Best Counsel 2021 - Chapter Opening: Oil & Gas

Posted Tuesday, November 24th 2020
Brazil’s Best Counsel 2021 - Chapter Opening: Oil & Gas

Oil & Gas

The oil and gas industry in Brazil has been steadily growing over the years, which is not to say there have not been mishaps and difficulties along the way. In June 2020, Brazil produced 3.013 MBBL/d of oil, representing growth of 17.8% compared to June 2019, and 128 million m³ of gas per day, a 15.6% increase in production compared with June 2019 levels. Total proven reserves are estimated at 12.7 billion barrels of oil and approximately 364 billion m³ of gas. Output in the pre-salt layer reached 2.125 MBBL/d of oil and 86.766 million m³ per day of natural gas in June 2020, an amount of 37.2% more than in June 2019, representing 69.9% of the total production in Brazil.

In recent times, the Brazilian oil and gas industry has been profoundly affected by external factors. The most critical factor was the Covid-19 outbreak and the resulting plunge of oil prices earlier this year due to the fall of global oil demand.

 

The Effects of the Coronavirus Pandemic on the Oil Industry

The increase in the availability of oil combined with the low demand from countries in quarantine led to a record-breaking drop in international oil prices in the second quarter of 2020.

Like every other oil-producing country, Brazil has been deeply impacted by the economic fallout of the pandemic, with oil companies operating in Brazil forced to reassess their plans for the foreseeable future.

Due to the devaluation of oil, projects with low profitability are more likely to lose strength. The impact of the coronavirus pandemic has reduced the attractiveness of many ongoing divestment processes. The impact is exemplified by Petrobras’ current dilemma. It’s strategic plan depends  on positive NPV, but with the price of a barrel of Brent crude hovering between $45 and $50, and Petrobras’ breakeven pre-salt production in the range of $35 and $45 per barrel, margins have been squeezed considerably.

ANP, Brazil’s National Agency for Petroleum, Gas, and Biofuels has issued several emergency resolutions in light of the pandemic and has extended deadlines of upstream agreements, loosened contractual commitments in the exploration and production stages, as well as suspended certain obligations regarding demobilization of operational personnel.

More recently, although oil prices have since started inching back up, they are still far from the quotation reached in January 2020. Looking on the bright side this steady climb is increasing the feasibility of new endeavors or even of projects which were halted during the pandemic.

 

Petrobras' Divestment Plan

In November 2019, Petrobras announced its 2020–24 investment plan, with a new budget of approximately $75.7 billion, of which approximately 85%is allocated to exploration and production, 11% to refining and gas, and 4% to other areas.

Despite the crisis, Petrobras has continued with its divestment procedure of certain upstream, midstream, and downstream assets, which has opened up new opportunities for foreign investment.

In these uncertain times, Petrobras and other oil market companies must focus on their core activities and projects and divest ancillary ventures, such as onshore and shallow-water assets. This focus will enable these companies to reduce expenses while at the same time generate income from the sale of non-critical assets. Such a course of action also opens opportunities for small, independent new players to develop projects in these sectors.

Petrobras is projected to earn between $20 and $30 billion from the sale of assets in 2020–24. Since 2019, the company divested over $20 billion in assets. These sales included, amongst others, (i) 30% of its participating interest in BR Distribuidora, a listed company in charge of Petrobras’ retail business, reducing its participation from 70% to approximately 40%; (ii) the totality of its participating interest in Transportadora Associada de Gás – TAG, a natural gas pipeline company.

Among the ongoing divestment processes that are being carried out by Petrobras, it is worth mentioning: (i) the sale of refineries by agreement with the Administrative Council of Economic Defense (“CADE”); (ii) the sale of its participating interest in BSBios, the country’s largest biodiesel producer, (iii) the sale of 51% of its participating interest in Gaspetro, the Petrobras gas holding, with participating interest in several local distribution companies; (iv) the sale of the totality of its participating interest in Petrobras Biocombustível S.A., a biodiesel producer, subsidiary of Petrobras; (v) the divestment of power plants; and (vi) the sale of non-core onshore and offshore fields, with the newest teasers published by Petrobras regarding the concessions of BM-S-51 (Pre-Salt Espírito Santos Basin), ES-M-596_R11, ES-M-598_R11, ES-M-671_R11, ES-M-673_R11 and ES-M-743_R11 (Espírito Santos Basin), the fields (Araracanga, Arara Azul, Carapanaúba, Cupiúba, Leste do Urucu, Rio Urucu and Sudoeste Urucu (Solimões Basin), Tartaruga (Sergipe-Alagoas Basin)Espada, Curimã, Xaréu and Atum (Ceará Basin) and Anambé, Arapaçu, Cidade de São Miguel dos Campos, Furado, Paru, Pilar and São Miguel dos Campos (State of Alagoas), as well as regarding the Tayrona Block in Colômbia, amongst others.

 

ANP Bidding Rounds

On November 6th 2019, a production sharing bidding round for surplus volume exceeding 5 billion barrels was held by the ANP. Of the four areas in the Santos Basin offered, the areas acquired were (i) Itapu by a consortium formed by Petrobras (90%), CNOOC (5%), and CNODC (5%); and (ii) Búzios entirely by Petrobras, with a total signature bonus of R$69.9 billion. The Atapu and Sépia areas received no offers. The results illustrate supermajors´ wariness in the face of legal uncertainty surrounding the production sharing regime.

Despite the gloomy market environment, the ANP kept the first cycle of the “Permanent Offer”, which consists of the continuous offer of fields returned (or in the process of relinquishment) and exploratory blocks offered in previous tenders, which were not acquired or returned to the agency.

More recently, Brazil’s National Energy Policy Committee (CNPE) has started discussing restarting bidding rounds suspended due to Covid-19, planning the 17th and 18th bidding rounds for 2021 and 2022, respectively.

 

Gas Market in Brazil

It is worth mentioning LNG opportunities. The size of the gas market in 2019 continued to grow, showing an increase of 8.5% when compared to 2018, totaling approximately 44.7 billion cubic meters. Regarding the importation of natural gas, imports amounted to nearly 9.8 billion cubic meters.

The Gas to Grow Program (Gás para Crescer) is a Ministry of Mines and Energy initiative that aims to improve  the legal and regulatory framework of the natural gas sector in Brazil, as well as encourage the entry of new players.

More recently, Bill # 6407/2013, to revoke the current Gas Law, was approved by the Chamber of Deputies and is currently under debate in the Senate. The purpose of Bill # 6407/2013 is to foster the development of gas transportation activities in Brazil via the creation of a more friendly market environment for investment in the construction of natural gas transportation systems.

Currently, different public agencies are working towards a review of several aspects of the natural gas sector. For instance, the CNPE has published Resolution No. 16/2019, establishing guidelines and improvements to energy policies aimed at fostering free competition in the natural gas market.

 

ABOUT THE AUTHOR

Paulo Valois Pires' practice involves the representation of IOCs, NOCs, private equities, financial institutions, suppliers of oil and gas, mergers and acquisitions, private placements, offshore supply, pipeline construction, LNG projects, infrastructure and tax-related matters. He represents international and domestic clients in global tenders promoted by the Petroleum Agency and Petrobras for the divestment of onshore and offshore blocks, as well as in complex bidding procedures for the charter of FPSOs, FSRUs, and FSOs. He started his career in 1989 as an in-house counsel for Shell in Brazil. He is the co-head of the oil and gas practice group of the firm and managing partner of the Rio de Janeiro office.

E-mail: pvalois@svmfa.com.br  Phone: +55 21 2114 1700