How oil auctions affect the O&G market

  • 03/03/2020
  • 8 minutes

It is undeniable that oil auctions can greatly affect the O&G (Oil & Gas) market. However, how does this happen? How do these changes manifest themselves? Is there more relevant information in this regard for those who work in the area?

Taking these issues into consideration, we talked to Diogo Salomão, Commercial & Marketing Manager at Brasco Logística Offshore — an onshore and offshore logistics support company, which offers integrated logistics solutions. Follow the text to the end to learn more!

How long did the oil auction suspension last and how to explain it?

According to the expert, in relation to offshore areas, the suspension was, in practice, the discontinuity of the concession auction schedule. “This operation format deals with the offer of exploratory blocks on the Brazilian coast outside the pre-salt polygon and, mainly, by the non-auction of the sharing blocks, which are in the pre-salt, whose auction schedule became effective from 2017”, comments Diogo. That is, in a nutshell, the slow down of this schedule began in 2008 and only ended in 2017.

For Diogo, the interruption of the auction schedule during the period can be explained by the Federal Government’s stance, which was not in favor of private capital investment in the sector, especially foreign. “This prevented the entry of new players, diverting the application from abroad to other countries, to the detriment of resources allocated in Brazil,” he argues.

As reported by Agência Brasil in the second half of 2018, both oil and gas auctions contributed to the industries going through a kind of revival. In an interview with the portal, the director-general of the National Agency of Petroleum, Natural Gas and Biofuels (ANP), Décio Odonne mentioned that the warming that the market went through was, at least initially, concentrated in the pre-salt polygon. He also considered that the next challenge would be to attract investments to other exploratory areas that have not received the same attention in recent years.

Also in this publication, José Pedro Firmo, president of the Brazilian Petroleum, Gas and Biofuels Institute (IBP), drew attention to the areas of onshore exploration in mature fields. 

What were the main impacts?

In Diogo’s view, the suspension of the auctions had a very large impact on the Brazilian O&G industry, generating discontinuity in the production and service chains and promoting the lack of investments. As a result, the sector has completely stagnated — rising unemployment and the reduction in government revenue collection represent this. “It is estimated that the industry lost about 360,000 jobs between 2013 and 2018, the most severe period of the crisis in the sector,” he says.

What to expect from the resumption of oil auctions?

According to Diogo, it is possible to expect the resumption of investment by new oil operators. This would revitalize the production chain and, in the short and medium term, increase installed capacity and, as a result, create more jobs and increase government revenues through royalties, etc. 

“In addition to the auction schedule, it is of paramount importance that other aspects are addressed by the Government with the sector, promoting legal certainty for the investor,” says the Brasco’s manager. He also cites, as examples of this, the environmental licensing process, the attractiveness of the blocks offered, public policies, such as local content, among others.

In short, auctions act as indispensable gears to keep the O&G market active. In the first instance, oil operators need to manage their portfolio in order to maintain constant investment in new fields, as many of them have a limited productive life cycle. “It should be noted that the lack of auctions shortens the life of these operators in Brazil, encouraging them to invest in other places to have a healthy and balanced portfolio,” says Diogo.

What are the benefits of the oil auction for the O&G market?

Overall, the prospects for the resumption of auctions is very positive. For Diogo, there is not even a negative point in this movement. “To get an idea of the great benefits of this schedule, there are studies that predict the generation of more than 700 thousand jobs between 2019 and 2026, besides government revenues of over R$ 1 trillion (distributed among the union, state and municipalities)”, he projects.

According to estimates by the National Agency of Petroleum (ANP) and of the McKinsey consulting, published by O Globo newspaper in July 2019, it is likely that the country will not only triple daily production, but also double the volume of proven reserves over the next decade.

Also according to the article and surveys conducted by the Brazilian Petroleum Institute (IBP), the segment should reach R$ 24 billion in investments in 2019, which would represent a 20% increase compared to the year 2018. By 2020, there is an expectation of reaching the R$ 30 billion mark.

In this context, the country held 3 offshore auctions in 2019, one for concession in October and another two in November related to the pre-salt (onerous assignment and sharing auction). In total, they reached a signing bonus of almost R$ 85 billion, and around 7% of that amount came from offers in which an IOC (International Oil Company) is the operator.

A G1 publication in June 2019 also reports similar figures in commenting on speeches by the Infrastructure Minister, Tarcísio de Freitas. On the occasion, he also mentioned that the government met the concession auction target and said that R$ 2.3 billion of infrastructure debentures had already been issued, for investments of R$ 5 billion, reaching a record.

How could the attacks on Saudi Arabia’s facilities affect auctions in Brazil?

“This type of event is not desirable,” says Diogo, “even if they may appear to benefit. There may even be some kind of short-term reaction to the rising price of the barrel, but it is not a sustainable benefit and, therefore, will never be beneficial.”

Finally, it is a fact that oil auctions symbolize new avenues for Brazil’s economy in general and for the Oil & Gas sector specifically.

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