Background

The Uruguayan National Oil Company (ANCAP) and the Ministry of Industry, Energy and Mining (MIEM) is calling, in the framework of a continuously Open Regime for the presentation of proposals: “Open Uruguay Round”, to Oil Companies interested in carrying out activities of exploration and exploitation of Hydrocarbons in onshore and offshore areas of the Uruguay, under Production Sharing Agreements.

Given the interest shown by the upstream industry, in addition to the present existence of a vast geological and geophysical database, ANCAP and MIEM understood it was convenient to review the system for awarding areas for the exploration of hydrocarbons, in order to make it more competitive with regards to the fiscal regime offered in other frontier exploration destinations; being able to continue attracting the risk capital from oil companies and increasing the knowledge of the prospective resources lying in the country’s sedimentary basins.

The Open Uruguay Round system accomplishes this by offering the most valued factors by oil companies at the moment of participating in a bidding round: transparency in the process of decision making, previously available database and a clear and predictable schedule.

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General conditions and participation payment

Only qualified companies might submit offers as operators for a maximum of: 4 areas, or 15.000 square kilometres onshore or 30.000 square kilometres offshore. However, proposals are independent for each area. Offers must be prepared in Spanish (except for technical documents and/or annual reports that may be submitted in English). Furthermore, ANCAP is the only one to interpret the Bidding Round Terms, and if a consortium submits offers, the operator must qualify on technical aspects, and participate with a minimum of 35%.

Also, USD $5,000 and USD $10,000 are needed for onshore and offshore submission of proposals, respectively; this enables the presentation of the company in all the areas for which it submits proposals, for all instances. The participation payment by a company of an economic group allows the participation of any company that is part of the same economic group. In the event that the proposal is made by a consortium, each of the members of the same must make the participation payment; this grants companies the right to a disk with basic onshore or offshore data as applicable, subject to the subscription of a confidentiality agreement.

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Validity of qualification

Companies qualified according to what is established in this numeral, will be able to present proposals in 10 consecutive instances counted from the date of notification by ANCAP that has been qualified. Furthermore, companies that have the status of operator of current contracts granted in the Open Uruguay Round Regime may submit proposals while they are of such quality, beyond the term established in the previous paragraph, for the same type of areas and stage of the contract in execution.

Contract terms and parties’ obligations

Contract terms are 30 years, which can be extended to 40 years. Exploration has 2 pathways; Pathway A: 11 years (4 + 3 + 3 + 1*), and Pathway B: 10 years (4 + 2 + 3 + 1*).

*In case there is a discovery in the last year of the Extension Period, the Contractor can have the option for an extra year for the appraisal.

Exploitation contract terms are for 25 years, subject to maximum contract terms.

A Production Sharing Agreement (PSA) is that in which a contractor assumes all risks, costs and responsibilities of the activity; no royalties are applied; there are no signature or production bonuses; there are no surface rentals; no taxes paid to provinces or municipalities; and there is no ring fencing inside the contract area.

In regards to parties’ obligations, a contractor must perform, on behalf of ANCAP, all operations (exploration, development, exploitation, supplementary and ancillary operations) in the area allocated. On the other hand, ANCAP will pay contractors their compensation and assist it in the fulfillment of their obligations.

Contractor’s Economy

The following is the contractor’s compensation:

Cost oil

• Recovery limit is 60% in case of oil production, and 80% in case of natural gas production;
• Costs recovered quarterly and investments recovered in 20 quarterly installments.

Profit oil

• Variable according to the R factor; profit oil split is biddable.

Moreover, a contractor has the right to freely dispose of hydrocarbons warranted from its compensations, while ANCAP has the preferential right to purchase such hydrocarbons for domestic demand only, and hydrocarbons are valued at international market prices.

ANCAP’s Association Option

ANCAP has the right to an association option, and the limit of ANCAP’s association is biddable. This right must be exercised within 120 days as from the demarcation of the exploitation lot, payment must be made within 180 days as of the execution agreement, % of:

• Productive exploratory wells; plus
• Evaluation wells (up to 25% non productive wells); plus
• 15% of the above for indirect costs.

Taxation

In regards to taxation, there’s a Corporate Income Tax (IRAE), and an Income Tax on Non Residents (IRNR); nevertheless, IRNR in the exploration phase was exempted for subcontractors by a special decree.

Also, Tax on Net Worth (IPAT) – Consumption Taxes and Value Added Tax (IVA) – Specific Consumption Tax (IMESI), and Custom Taxes are all exempted by the Uruguayan Hydrocarbons Law.

Social Security Contributions (CESS) are also considered under taxation.

Final remarks

• Uruguay is a reliable country, and above ground risks are minimized;
• Success in previous bidding rounds and MC agreements allowed a huge increase in the available database, reducing exploratory risks; ANCAP markets a lot of such data;
• ANCAP and Uruguay were able to deliver in complex projects such as >40.000 square kilometres of 3D seismic;
• Many play types yet to be tested both onshore and offshore;
• 5 onshore areas and 6 offshore areas will be offered in the Open Uruguay Round;
• Participants can book data rooms or meetings with ANCAP, anywhere, at any time;
• Excellent opportunity to acquire an asset with extremely low exploratory program requirements;
• The area will be awarded to the highest scored offer;
• If qualification of the awardee company is more than 6 instances older, the awarding is subject to the certification by the company that still fulfills the qualification requirements;
• In case there are similar offers (less than 5% in the total score), ANCAP will invite the companies to improve their offers, in a term of 5 days;
• Offer guarantee is USD $30.000;
• The Executive Branch has to authorize by decree the signature of the contract;
• The awardee company has to register a Uruguayan company. If the area is awarded to a consortium, it has to be formed by Uruguayan companies.

Current bidding results

According to a June 2023 ANCAP news release, the company has recently awarded 3 offshore blocks under its 2022 Open Bidding Round.

Shell secured area OFF-2, a shallow offshore block adjacent to Challenger Energy’s OFF-1 concession, and deepwater block OFF-7. Commitments during the initial 4 year exploration period include the acquisition of new 3D seismic.

APA Corp. gained deepwater block OFF-6, with a program that includes the drilling of an exploratory well in the initial 4 year period, the evaluation of oil geology and prospective resources and the licensing of information.

ANCAP estimates the total investments of the associated technical and exploration activities at about USD $200 million.

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Uruguay’s offshore green hydrogen and wind tender rounds

According to an estimate by the World Bank, Uruguay has a theoretical potential for 190GW in bottom-fixed offshore wind, and another 85GW in floating wind, as well as wind speeds that exceed 9 m/s.

ANCAP’s ambition to build a maritime hydrogen production hub driven by its large offshore wind potential calls for businesses with experience in offshore wind, hydrogen, or deepwater oil and gas. Juan Tomasini, the company’s E&P Chief, stated that “rolling applications will be used for the tender rounds, which will open offers in 2 stages in May and November 2023”.

According to Tomasini, “ANCAP has written a draft of the tender’s terms as a result of discussions with the private sector, but approval by the Ministry of Industry, Energy, and Mining is still pending”.

Furthermore, according to the company, the tender would initially offer 10 blocks of 500 square kilometres each, each of which has the potential to install 2-3 GW of wind power and produce 320,000 tons per year of green hydrogen.

The business will be based on contracts for the exploration and production of hydrocarbons. Successful bidders will have 10 years to investigate, evaluate, and undertake testing in the area; they can then either provide a comprehensive development plan or surrender the land.  

Offshore hydrogen production avoids many of the barriers that the developing sector faces, such as community opposition (projects often cover huge land areas and require access to the coast), and the requirement for extensive port infrastructure; it is more expensive and technically difficult, though.  Along with 30GW on land, Uruguay is thought to have a 250GW offshore wind potential. A tender for an onshore green hydrogen pilot project is also being prepared by the nation for later this year.

According to ANCAP ​​Chairman, Alejandro Stipanicic, he’s optimistic that some of the more than 40 oil drillers and renewable firms that inquired about the auction will submit bids. The power is earmarked for electrolyzers that strip hydrogen from water.

Stipanicic also added that “ANCAP is offering blocks that have a certain potential that in our judgment justifies multibillion-dollar investments. It’s an offer that has attracted the attention of players that already said ‘we are decided to go for those blocs’”.

According to Bloomberg, oil majors like BP and Shell are pivoting to hydrogen at a time when countries are seeking to limit global warming and bolster energy security after Russia’s invasion of Ukraine. Global output of clean hydrogen could surge as much as 18-fold to 11.6 million metric tons a year by 2030 with strong backing by governments.

According to ANCAP, each of the blocks tendered by the company could generate at least 2.1GW of electricity, enough to make 187,000 tons of hydrogen a year. Ancap chose waters no deeper than 60 metres (197 feet) for its first auction so the blocks would be compatible with existing offshore wind power systems.

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