Majors dig deep as Brazil's PSC Round 4 sets record

LONDON/HOUSTON/SINGAPORE, 7 June 2018 – Brazil held its fourth pre-salt auction on 7 June, just eight months after the highly competitive second and third pre-salt rounds.

PSC Round 4 offered four blocks covering 4,232 square kilometres in the heart of the pre-salt polygon, holding more than 14 billion barrels of unrisked in-place prospective resources.

Three of the four areas were awarded, all of which with Petrobras as the operator, with bids from 11 of the 16 registered companies, setting a record for participation in a PSC auction.

Juliana Miguez, senior research analyst with Wood Mackenzie’s Latin America upstream oil and gas team, said: “With industry heavyweights again leading the competition, Brazil’s pre-salt has consolidated as the playground for those with deep pockets.

“High interest from a select group of companies and strong competition in the rounds are a reflection of the prospectivity of the acreage. The crown however still belongs to Petrobras.” 

Partnering with Petrobras is the key to success when bidding in pre-salt blocks. Petrobras has a right of first refusal to petition the government to operate all pre-salt block offered, ensuring that companies must partner with the NOC for blocks where it is granted operatorship.

Ms Miguez added: “Companies benefit from Petrobras’ operational expertise, superior access to the supply chain and offshore gas transport infrastructure, which can help drive down costs and speed up first oil.

“At the same time, for Petrobras, partnerships with respected deepwater players with deep pockets like BP, ExxonMobil, Equinor and Shell reduce exposure and dilute risks. The partnerships established in this round will be of paramount importance to maximising the pre-salt’s returns, especially for areas won under high bids.”

This round also saw continued aggressive bidding for pre-salt acreage, setting new profit share bid records. Uirapuru, the most prospective block in the round with almost 8 billion barrels of prospective unrisked volumes, saw heavy competition. The highest bid came from a consortium formed by Petrobras (operator, 30%), Petrogal (14%), Equinor (28%), ExxonMobil (28%), which won the block offering a 75.49% profit share bid, against the minimum 22.18%.

With profit share bid levels reaching 75%, companies are clearly bullish about potential discovery sizes and development pace. Their ability to deliver will also be critical to the Brazilian government, as blocks left undeveloped will not bring future revenues to the country.

“Companies are very optimistic about pre-salt productivity,” said Ms Miguez. “The large resource base and impressive well deliverability produce some of the most attractive development economics outside of tight oil.

“However, high costs and high risk counterbalance this vast resource potential. In the case of PSC blocks, the economics are very sensitive to profit share levels, and high bids, such as that for Uirapuru, will require significant discoveries, low costs and a fast pace of development in order to generate value.”

PSC Round 4 was another big success for Brazil, resulting in US$818 million in signature bonuses. For the majors, the round offered the chance to significantly deepen their pre-salt exposure.

With the successful conclusion of five licensing rounds in less than a year, and a fifth PSC Round set for September, interest in Brazil's upstream sector continues to be very strong.