Brazilian bid evaluation: need more sales, more domestic firms, withhold restrictions

A history of bidding for petroleum exploration blocks offshore Brazil provides some comparisons between recent and past processes. In the past (1976-1985), the Petrobras bidding process provided risk contracts. During that period, eight bid rounds were undertaken in which the majority of the companies currently participating in the ANP, also participated.

The initial procedures for the bids are basically the same: publication of invitations, pre-qualification of companies, sale of the available technical data, and receiving of bids. The significant differences take place after the opening of the envelopes:

Previously, the complex model of risk contracts and some variables in the form of the bid required a more lengthy analysis of the bid. The analysis culminated in the classification of bids and the beginning of negotiations with the company that was the most qualified. If an agreement was not reached with this first company, a second company would be invited to begin the same round of negotiations. In this way, approximately 250 risk contracts were signed. In the first bidding process (1976), eight blocks were offered and four contracts were signed with foreign companies.
The recent ANP auction allowed for a quicker analysis of the proposals because the principal deciding factor was the value of the signing bonus. The concession contracts, prepared according to international models, do not require exhaustive negotiations on a case-by-case basis. They are free from the heavy legal restrictions that were in force in the past. In the first ANP auction, 27 blocks were offered and 12 concessions were granted.

At the end of the first ANP bid, the Minister of Mines and Energy and the General Director of the ANP said the results were satisfactory. For those Petrobras administrative personnel who had worked with petroleum exploration bids in the past, the results exceeded expectations.

Don't mix blocks

As a result of the bidding process, one important observation made was that the offer of blocks with different interests - such as deepwater, shallow water, and onshore - should not be mixed in one round.

Diversity in the offer allows for a range of opportunities for small, medium, and large-scale companies. Many concentrate on shallow water or onshore blocks, while the large companies search for larger prospects in deepwater.

An offer of blocks, all with the same physical characteristics, would not increase the number of participants. It doesn't matter where an area is located. What makes an area attractive, is its petroleum potential, as demonstrated by the technical data and interpretation. Without strong prospects, the block will be rejected, whether it comes alone or in good company.

Relax restrictions

Such was the case with the Parandot Basin Block - a basin that is still without a commercial discovery. The block has frequent hard rock (basalt) obstacles that hamper the acquisition of good seismic data and high drilling costs, which result in an increased exploration risk. The available technical data for the block shows a subtle relief structure, proven by only two seismic lines with, however, a degree of freedom that could mean that there is no structural closure.

With such data, the drilling of a high-cost well should not have been mandatory at the first phase of its exploration program. Almost certainly, this block would have received bids if the minimum commitment in the first phase had been restricted to a seismic survey, with well drilling dependent on confirmation of the structure initially noted and/or others that come to be identified in the concession area.

The same treatment could be applied to virgin and high-risk frontier basins in order to encourage companies to invest in them. After all, the one that pays a substantial signing bonus is the first one interested in drilling one or more exploratory wells in the concession, provided that it is technically well-justified.

Brazilian involvement

With respect to the lack of bids from Brazilian companies in this first ANP bids, it seemed to relate more to financial scale rather than any other factor.

Perhaps the ANP may in the future stimulate strengthening of domestic companies and the creation of new ones, through the use of contractual conditions compatible with the financial capacity of those companies. On the other hand, petroleum exploration should be carried out by companies with financial resources sufficient to sustain various attempts until achieving commercial success. Our assessment is that, under current conditions, the participation of these companies in the ANP bids is difficult, unless they associate with others to form consortia.

Better balance

In addressing the question of incentives for encouraging the creation of Brazilian petroleum companies, or even the policy of a national petroleum corporation in another country, the Brazilian process now provides a better opportunity both at the financing end as well as drilling.

For example, if a private domestic oil company decides to participate in a round of bids, like that offered by ANP, it pre-qualifies, acquires the technical data, undertakes the relevant studies, and if it considers it worthwhile, will follow the process to win a concession for a certain block. It then submits its project to the national petroleum corporation, which pending approval, finances a major part of investment in the undertaking.

If the oil company obtains the concession and is successful in its search for oil, the "corporation" will participate in the results on terms compatible with the financing. The remainder goes to the private company. In the case of success, everyone profits. In the case of failure, both the "corporation" and the private company suffer a loss, but both survive.;