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Brazil' s oil, gas concession auction breathes fresh life into aector

BY JEFF FICK 

RIO DE JANEIRO -- Brazil' s much-anticipated new auction of oil and natural gas exploration concessions will breathe fresh life into the country' s oil industry, the superintendent of the National Oil Industry Organization, or ONIP, said.

The fresh round of bidding, the country' s first since December 2008, is expected to generate a surge in activity across Brazil' s oil industry. Brazil' s National Petroleum Agency, or ANP, will put 289 oil and natural gas exploration blocks up for sale at the auction, which will be held May 14-15.

"Brazil is very attractive to the oil sector because of the recent discoveries, and some of the areas that are being offered are very interesting frontier areas--especially for large international companies," said Alfredo Renault, ONIP' s superintendent. "The auction will be very successful with a lot of areas acquired by the market."

Brazil had halted new lease sales after the discovery of the massive oil deposits off the country' s coast, Mr. Renault said. New legislation was drawn up to keep the subsalt region under government control: The subsalt potentially holds as much as 100 billion barrels of oil trapped deep beneath the ocean floor under a thick layer of salt.

Brazil' s oil industry had warned that exploration in Latin America' s largest country could dry up as soon as 2015 without new sales of exploration acreage.

Oil companies operating in Brazil were "losing scale because of the lack of new areas to explore, which is fundamental to the industry," Mr. Renault said. "I think the auctions will renew the industry' s spirit. The expectation is these new areas will attract new investments to the country."

The 11th round of bidding could also open the door to new players in Brazil, especially given tight finances at local companies. Petrobras is focused on its $237 billion investment plan over the next five years. Chief Executive Maria das Gracas Foster said recently the firm will take a "selective and focused" view of the auction that will include partnerships with other major oil companies, with Petrobras likely in a secondary role.

OGX and HRT, meanwhile, both have limited cash positions that will keep them from bidding aggressively.

The 11th round will likely have large signing bonuses and exploration commitments that could make it more difficult for the three firms to participate strongly, Mr. Renault said. While it' s "premature" to say that Petrobras will be less of a player in the auction than in previous bidding rounds, Mr. Renault said the sale would likely "bring opportunities for new national and international companies to enter Brazil."

The auction should further accelerate investments from service companies attracted by the subsalt discoveries, despite challenges associated with establishing operations in Brazil, Mr. Renault added. High taxes, cumbersome bureaucracy and aging infrastructure increase local operating costs, but local demand is built in because concession contracts in Brazil include strict requirements to use a percentage of locally produced goods and services.

"Companies are having difficulties, they understand producing in Brazil is complex," Mr. Renault said. "But a majority of the relevant players are investing to produce in Brazil."

Brazil wants to use the local content rules not only to meet the challenge of developing its oil riches, but also to create a local industry that can compete globally, Mr. Renault said, noting Norway' s use of the North Sea discoveries as an example.

Despite the challenges, Brazil will likely continue to grow in importance in the global oil sector, Mr. Renault said. "The outlook for growth in production and an increase in proven reserves is very clear," Mr. Renault added. "Brazil is going to move to a new level much different from right now."

Brazil currently produces a little more than 2 MMbopd, but Petrobras alone plans to raise output to 4.2 MMbopd by 2020.

Dow Jones Newswires

05/01/2013

 

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