Understand how the auction departure auctions impact the brazilian oil and gas market

  • 22/04/2021
  • 9 minutes

The Covid-19 pandemic affected all sectors of the global economy and that would be no different for those who serve as infrastructure for the world to function.

The postponement of oil auctions in Brazil, therefore, was not a surprise. But it is a complex moment that requires professionals from the area of preparation, productive efficiency and, mainly, information about the current scenario.

To help you understand what we are going through, we invite Celso Magarão Costa, from Wilson Sons’ Market Intelligence and Business Development area, to answer all questions about the moment and what we can expect for the coming years. Follow!

What is the status of oil auctions?

A pandemic scenario like never seen in the world would obviously affect the very foundations of the global economy.

The concern with keeping the population at home to flatten the contagion curve, restrictions on the movement of people and trade, all of this led to a general reduction in market indicators – from the smallest countries to the great powers.

And, of course, such an impact is felt even more in the sectors that serve as the basis for the functioning of all others. With a sudden unprecedented reduction in demand for oil, the O&G (Oil & Gas) sector was one of the most affected.

Less movement of vehicles and cargo resulted in the barrel price dropping. In a few days, the value that was 60 dollars reached 20, to stabilize at 40, a few weeks later.

Over time, the market itself has been calming down and starting the recovery that should happen only after registration for the use of vaccines against the new coronavirus. But the actions taken, such as decisions on oil auctions, have yet to be discussed.

Why are oil auctions being postponed?

The seventh round of auctions by sharing scheme, which would take place at the end of 2020, was postponed by the government in April, in response to market fluctuations and the difficulty of predicting results in the short term.

With the agreement to decrease production and uncompetitive prices, it was natural that the feasible moment for carrying out these procedures was not considered. But that was not the only reason for the postponements.

According to Celso, the regulatory discussion of auctions in Brazil may have reinforced the need for government and entities to move these dates forward. For him, “the current scenario in Brazil is a little complex because before there were models of concession, sharing and transfer of rights. Now, there is only concession and sharing, and this, for the legal model, was a little confusing. Most prefer only the concession model”.

For this reason, even managers in the sector prefer time to trim the edges of the discussion. 

There are still other impasses at this point. Last year, four areas were auctioned off for consideration. “Petrobras paid for the right to explore one billion barrels and then it was discovered that it had much more oil than previously projected. This generated a surplus with a bid, “Celso explains.

There is still legal uncertainty as to how Petrobras’ costs will be paid on what it had already invested. In addition, the uncertainty about the Sépia and Atapu auctions (now scheduled for the third quarter of 2021) further complicated the auction schedule in Brazil.

What are the short-term impacts of these postponements?

The biggest impacts for the Oil and Gas sector are already being felt, with the reduction of production and the suspension of projects pending the new dates for the next auctions.

The expectation of the current sector, including the same opinion of the market intelligence leader of WS, is that the 17th round of concession and the 7th round of sharing will remain for 2021.

The moment is not one of despair, but of attention. The best approach for companies has been to cut short-term investments and focus on operational stability, while the pandemic is still a reality.

The most positive point to be considered is that the big initial thud is already behind us. Gradually, institutions in the sector are reorganizing the production of Oil and Gas and turning to areas already granted that are waiting to be explored.

Therefore, it may be an important moment for the reevaluation of projects and for a resumption soon for the further development of the Brazilian market.

What are the biggest challenges for companies in the sector?

Many challenges that are currently being faced existed well before the pandemic, such as the complexity of the Brazilian system for the management and concession of these areas to be explored.

“The pre-salt region has a rule, which is not the same as other regions. In addition, there is an inefficiency of analysis and response by environmental agencies. This ends up alienating some investors,” Celso explains.

But these issues could be overcome soon, in parallel with post-pandemic recovery. At the end of July, the Chamber approved the urgency to vote on the New Gas Law, which should facilitate the development of reserves and modernize Brazilian legislation.

It is a chance to further increase the volume and efficiency of an energy matrix that should gain strength in the coming years as a transition fuel in the world – in addition to providing more predictability for the generation of electric energy.

What is the outlook for the future of the Oil and Gas sector in Brazil?

What we see is that, even during the crisis, the O&G sector is facing its challenges head-on. With a well-managed harmony between public agencies and private groups, it is possible to resume development and point the country on a path among the world’s energy leaders.

We are not saying that the impacts will not be felt. Celso himself predicts that these postponements of oil auctions will cause consequences that will be noticed even in three to five years in the market, since the whole process is usually slow.

But, dampening the biggest impacts and seeing opportunities for the future, the sector points to an ever-lesser dependence on Petrobras, more competitiveness and, consequently, development of everyone in the market, even with the postponement of oil auctions.

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