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Majors come calling for Brazil's pre-salt

Shell and Petrobras were the big winners in Brazil's latest upstream bid round, along with backers of Brazil's oil reforms

Big oil is ready to bet on Brazil again. That was the takeaway from October's pre-salt bid round, the first since 2013 which follows a raft of investor-friendly reforms earlier this year which overhauled the oil industry's regulatory landscape.

Six of eight blocks potentially holding more than 10bn barrels of reserves were awarded to a raft of international majors. The government expects the round to draw in tens of billions of dollars in investment. It should also set the stage for exploration to pick up again in the pre-salt after a long lull in bid rounds for new areas.

State-run Petrobras was the pre-salt round's big winner, flexing its muscles as it looks to lift itself from undoubtedly its darkest period. The company is starting to show signs of getting out from under its heavy debt load and moving on from the massive Lava Jato corruption scandal. Petrobras won operatorship over three blocks, leading three separate consortia.

It bid alongside the Repsol-Sinopec Brazilian venture and Shell to snap up the Sapinhoá block. The same group is already pumping oil from the billion-barrel pre-salt Sapinhoá field in a neighbouring block and will continue pumping billions of dollars to develop the field. The 80% profit oil the group offered was the highest in the round and showed the confidence the group has in the economics of the field.

Petrobras also led consortia to win operatorship over the Peroba and Alto de Cabo Frio Central blocks. Peroba, where Petrobras will be joined by PetroChina and BP, is an unexplored area, but its location just south of the huge Lula discovery makes it an enticing prospect. The government said the block could hold more than 5bn barrels.

Shell was the big winner among the international oil companies, upping its stakes in a country that's now front and centre of its portfolio. It will lead a consortium that includes China's Cnooc and Qatar Petroleum, a newcomer to Brazil's deep waters, to explore the untested Alto de Cabo Frio Oeste prospect, which sits next to the massive Libra project. It also won rights alongside Total to the Wild Cat South prospect, which sits at the northern edge of the Lula field.

Statoil also had a good day, solidifying its control over the 2bn-barrel Carcara field, while also bringing ExxonMobil's deep pockets and deep-water expertise into the project. The Carcara field straddles Block BM-S-8, where Statoil bought an operating 66% interest from Petrobras for $2.5bn last year, and the Carcara North Block, which Statoil, joined by Galp and ExxonMobil, won the rights to in the bid round. In a separate deal, Statoil agreed to sell down 33% of its share in BM-S-8 to ExxonMobil for as much as $1.3bn. The companies look well-placed to push forward development of the field, with Statoil hinting at first production sometime in the mid-2020s.

The pre-salt is proving its worth. Production hasn't come anywhere near Petrobras' lofty predictions from a few years ago, but that doesn't mean pre-salt growth hasn't been strong. Output has doubled over the past two years to around 1.7m barrels a day, overtaking production from the country's mature post-salt fields. The economics also look better in a $50-oil world than expected, thanks to the pre-salt's highly productive wells and broader cost deflation in the offshore oil business. Shell said after the bid round that it can profitably pump pre-salt crude at $40/b.

Bidders were also no doubt looking at the political calendar. Presidential elections in 2018 will have a deep effect on the industry. With the Worker's Party, historically oil-nationalist in outlook, leading early polls, operators were keen to snap up acreage while the terms were good. There's no guarantee Brazil will be as welcoming this time next year.

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