Brazil oil auction piques industry interest despite hurdles
Jeff Fick, Dow Jones Newswires
RIO DE JANEIRO -- Brazil' s planned 11th auction of oil and natural gas concessions will likely generate intense interest from across the industry, but the bidding still faces hurdles ahead of the government' s May 2013 deadline.
The September announcement by the Mines and Energy Ministry and the National Petroleum Agency, or ANP, that the 11th round would be held in May and followed by the country' s first auction of government-held areas in much-anticipated subsalt region in November was "very positive," said Ruaraidh Montgomery, senior analyst at consulting group Wood Mackenzie, in an interview.
Oil companies large and small will likely jump at the chance to get into Brazil, which turned into one of the world' s hottest oil frontiers after the first subsalt discovery was announced in 2007. The ultra-deepwater oil fields were found more than five miles under sand, rock and a shifting layer of salt in the Santos Basin off the coast of Rio de Janeiro and Sao Paulo states.
The auctions, however, still depend on the passage of a bill by Brazil' s Congress over how to share the country' s oil royalties. The bidding round has been held up as oil-producing states that currently receive the most royalties resist a movement by other states to claim a slice of the royalties pie.
Brazil' s lower house could vote as early as this week. President Dilma Rousseff has pledged to push for a vote on the bill before the end of 2012.
Announcing a date for the auctions before the royalties dispute is settled "suggests that the government is putting pressure on the states and parties arguing on different sides of the debate to reach a resolution," Mr. Montgomery said. Despite plans for an early vote, the oil industry is doubtful the royalties debate can be resolved in time to meet the May 2013 deadline, Mr. Montgomery said.
Major oil companies and smaller exploration firms interested in bidding expect the 11th round auction to be held by mid-2013 at the earliest, given that the ANP needs about five or six months to complete preparations for the tender, the analyst said. Legal action fighting the new royalties scheme by large producing states such as Espirito Santo, Rio de Janeiro or Sao Paulo could delay the auction further.
"Should one of the producing states appeal the royalties bill in the courts, we may not see an auction for three years or possibly longer," Mr. Montgomery said.
That would be devastating to an industry that desperately needs fresh exploration acreage. Industry officials have warned that Brazil, which last held a concession auction in December 2008, could see exploration in the country dry up by 2015 should the 11th bidding round not be held soon--sapping the country of much-needed investment in the sector.
While the ANP has not yet announced which blocks will be included in the 11th round, the agency previously said it would contain offshore blocks in the equatorial margin off Brazil' s northern coast and a natural gas-rich inland area known as the Sao Francisco Basin.
Should the equatorial margin remain part of the bid round, "there will be lots of interest and the bidding will be competitive," Mr. Montgomery said. The interest will be driven by the success of Tullow Oil PLC (TLW.LN) off the coast of French Guiana in September 2011. Tullow replicated its success offshore Ghana, which many geologists believe shares similarities with the northern coast of South America due to the separation of the continents millions of years ago.
The first subsalt auction will also generate interest because of the size of the potential resources held by the Libra field, expected to be sold in the auction, Mr. Montgomery said. Initial drilling by the government indicated that Libra could hold about 5 billions of barrels of crude. Brazilian state-run energy giant Petroleo Brasileiro (PBR, PETR4.BR), or Petrobras, is guaranteed a 30% operator stake in the subsalt field, but other terms still haven' t been made public.
The subsalt will be auctioned off under new production-sharing agreements, with the winning bidder the company that offers the most profit, or barrels of crude after discounting development costs, to the government. "That makes the round interesting and quite tricky to judge who is going to get involved, because they are essentially bidding on a discovered resource," Mr. Montgomery said.