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Bumpy start for Brazil's auction

ExxonMobil bet big in the Campos Basin, but foreign interest was tepid and just 13% of blocks drew winning bids

Brazil's 14th oil and natural gas exploration and production rights auction set a financial record for the country's recession-battered Treasury, but it did little to realise government hopes of getting new investors to jump-start its once booming oil industry.

The 3.8bn reais ($1.2bn) raised from winning bids was the largest local-currency haul (but not in US dollars) in two decades of auctions and the government was quick to declare victory. For a government trying to balance its budget and lift the economy out of its worst downturn in a century, the windfall was an achievement, especially as a massive corruption scandal forces it to beg and barter for its political life.

But as the first real test of investor interest, following a raft of industry-friendly oil reforms, it was far from a rousing success. Brazil's oil regulator ANP sold only 37, or 13%, of the 287 areas offered and a whopping 89% of the total auction revenue came from the sale of just two blocks. Competition for what did get bought was anemic: 80% of the areas sold received just one bid.

In the end, industry enthusiasm for the government's reversal of a decade of oil nationalism, whose costs and restrictions helped bust Brazil's oil boom, wasn't enough to overcome concern over lingering regulatory and political risk.

Take the fallout from the last successful ANP concession auction in 2013. That round drew dozens of bids on promising areas from established basins to more frontier prospects and looked to have set the stage for a new exploration boom. Four years later, though, with the original deadline to start work expired and extended, none has been granted licenses to start work, sowing doubt about when, or even if, buyers can exploit their concessions.

Meanwhile oil prices remain low and Brazil's corruption scandal is far from over. Most major parties and politicians, including president Michel Temer, have been implicated, charged or jailed during the probe. With elections a year away, the country's political future, and the survival of Temer's oil reforms, are far from certain.

Even the government's financial victory was partial. Around 47% of the auction's revenue came from Petrobras, which is controlled by the government itself.

Petrobras insisted its largest bids, all for areas adjacent to existing production areas in the offshore Campos Basin, were based on sound economic analysis and free of political interference. But with the largest offers coming at the tail end of the auction, some participants openly speculated that Petrobras turbo-charged its bids to help the Treasury meet its targets.

The big Petrobras bids also froze out well-capitalised majors such as China National Offshore Oil Corporation (Cnooc) and Shell from the only blocks in which they showed significant interest, blunting the effort to bring in major foreign investors.

Courting investors

The main objective of Brazil's oil-rule changes, and the aggressive, multi-year oil auction schedule kicked off by the 14th Round, was to pull in foreign and domestic private investment. Petrobras, hobbled by corruption and the largest debt of any traded oil company, has been forced to scale back its ambitions.

The only significant success on this front came from ExxonMobil, which won eight Campos Basin blocks, two on its own and six in a 50-50 partnership with Petrobras. It also bought half of two blocks in the Sergipe-Alagoas Basin, ending the day spending slightly more than Petrobras, or 50% of the round's total. The remaining 17 companies only paid 3% of the total bid value.

$1.2bn - Cash raised for the Brazilian government from the winning bids

Brazil will test investor interest again on 27 October when it holds its 2nd and 3rd pre-salt production-sharing auctions. Rights will go to the company or group offering the government the most favourable combination of up-front cash and physical share of all oil produced in exchange for minimum investments and a 10% royalty.

All areas are in the pre-salt quadrangle, an area that covers most of the Campos and Santos Basins, Brazil's two top producing regions. The quadrangle holds some of the world's largest discoveries trapped under a salt layer thousands of metres beneath the ocean surface and seabed.

The 2nd round will offer four pre-salt areas with resources extending out from and subject to unitisation with other presalt fields. The 3rd Round will offer rights to four stand-alone prospects.

For the first time since the quadrangle was created in 2010, Petrobras will be freed from a requirement that it lead all pre-salt investment and take a minimum 30% stake in all groups, opening control of Brazil's most promising prospects to foreign companies for the first time. Under the Temer reforms, the requirement has been replaced with a right of first refusal. Petrobras has declined that right in all but one area on offer in the 2nd Round and two areas in the 3rd round.

Qualified bidders so far include Norway's Statoil, Shell, France's Total, Britain's BP, ExxonMobil, Portugal's Galp Energia, Spain's Repsol, China's Sinopec and Malaysia's Petronas. It's a who's who of global offshore specialists, and Brazil will be hoping they can inject fresh momentum into its pre-salt prize.

Source: Petroleum Economist
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