IT appears Guyana’s southern neighbour could learn a thing or two about attracting international investments in oil development. Home to some of the most sought-after real estate in the oil world in its offshore basins, Brazil has capitalised on that desirability with some of the strictest contract terms in the world. The country’s production sharing agreements for new leasing acreage include high royalties, strict local content provisions and mandatory participation of the state oil company Petrobras.

For a time in the early 2010s, companies were willing to pay. But a tough price environment and a supply glut have changed the equation, leaving Brazil without buyers willing to accept such strict terms. Once oil’s fastest rising player, Brazil is now a case study on the difficult balance that needs to be struck in order to attract major investment in deepwater offshore areas.

The Brazilian government appeared stunned in 2019 when two major auctions for offshore leases, which were expected to bring in billions, returned only one minimum bid from foreign investors. The government had hyped the auctions as record breaking events expected to draw huge interest and tens of billions of US dollars in signing bonuses alone. Instead, the struggling state-owned oil company Petrobras was left with most of the acreage for minimum bids while foreign companies stayed on the sidelines.

The verdict from the investor community: overly stringent contract terms on the part of the government had made the fields a bad deal for companies, no matter how much oil was there. Marcelo de Assis, head of Latin America upstream for energy consultancy, Wood Mackenzie, told Reuters at the time, “All majors are focused on capital discipline and value versus volume. They will not bid at any cost.”

Brazil, like many deepwater offshore regions, faces relatively high production costs compared to onshore regions. Combined with high government royalties and taxes and low global oil prices, buying new leases to explore there had simply ceased to be economical. In plain terms, companies ran the math and it just didn’t check out, so they took their investments elsewhere.

The government responded by moderating their contract terms slightly and reducing Petrobras’s role, in what was seen by the analyst community as an admission that their initial estimates had been overconfident.

Brazil now has to face the grim reality that those terms still might not be generous enough to attract investment dollars in 2020, as oil markets are still in a tough spot and the transition away from oil is accelerating.

The government held another auction in early December and again was disappointed to receive only one bid for offshore. More than 30 other blocks remained unsold, even in areas where Petrobras had already found oil.

Now, for the second time in as many years, Brazil is looking to revise its contract terms to reflect harsh market realities. Brazil’s Congress is debating sweeping changes to relax the country’s production-sharing regime and bring in much needed international investment in 2021.

Brazil is likely to look to Guyana’s success in this area. Despite a major downturn in global energy investment—especially in high cost areas like deepwater offshore—Guyana has managed to attract major multi-billion US dollar commitments over the last year.

Exxon is continuing with major drilling programmes on the Stabroek and Kaieteur blocks despite a recent non-economic find at the Tangager-1 site. In September, Guyana attracted a commitment from Exxon to invest more than $9 billion US to develop the Payara project.

That’s a testament to Guyana’s own contract terms and production sharing arrangement, which international investors widely agree helped attract companies to drill in the deep and unproven waters off Guyana’s coast in the first place.

The prize is significant for contract terms that balance incentives for investors and benefits for the country. Guyana gains new revenues, additional jobs and business for local companies. Most importantly, major new investments and increased capacity are the foundation of a strong economy over the long term.