Oil auction falling flat is boon for Petrobras


Oil auction falling flat is boon for Petrobras


RIO DE JANEIRO (Bloomberg) -- Brazil’s failure to attract more than one bid for a license to develop the country’s biggest oil discovery is a windfall for Petroleo Brasileiro.

Petrobras rose the most in two months after partnering Royal Dutch Shell and Total to win a 35 year concession for the Libra prospect. Without any other offers, the group picked up what could become one of the two largest deep water fields for the minimum government profit pledge.

While Chief Oil Regulator Magda Chambriard described the auction as “a big success,” authorities said last month they were looking for two or three bidding groups from the 11 registered companies. Contract terms, including requirements that Petrobras operate the field and own at least 30 %, helped attract other state companies including China National Petroleum Corporation and Cnooc. No United States companies participated.

“We beat very low expectations; that doesn’t exactly make it a rousing success,” Tony Volpon, head of emerging-market research for the Americas at Nomura Holdings, said by phone. “They were expecting a competitive auction. What they got was one group, at the minimum.”

BofA Forecast

Shell, and Total each have 20 % stakes in the consortium, while Cnooc and CNPC have 10 % apiece. The group pledged to the government the minimum 41.65 % of profit oil, or the barrels remaining after costs. Bank of America Corp. said in an October 14 report that less than 50 % would be seen as beneficial for Petrobras. The companies will pay a $6.90 billion signing fee.

Libra is the first auction of subsea prospects known as pre-salt using a production-sharing model. The government’s share of profit oil will rise or fall according to a combination of oil prices and production, Petrobras said in a statement. The 41.65 % rate is set to a Brent price range of $100 to $120 a bbl and average output per well of 10,000 to 12,000 bpd, it said.

Brazil increased its control of the industry under former President Luiz Inacio Lula da Silva after it announced in 2007 the discovery of at least 50 Bbbl trapped under a layer of salt two miles below the seabed. Legislation also calls for a new state company to represent the government with the power to veto decisions at pre-salt projects, including Libra.

Libra will generate $460 billion for the government over the life of the project and serve as a model for other pre- salt licenses, President Dilma Rousseff said in a televised address.

‘Respect Contracts’

“Brazil is, and will continue to be, a country open to national and foreign investment that respects contracts,” Rousseff said. Foreign partners “will have significant profits in line with the risk taken and the investments.”

Petrobras, the biggest producer in waters deeper than 1,000 ft, plans to double crude output by 2020 with most of the gains coming from the pre-salt that contains the biggest discoveries this century. Libra will require total spending of about $184 billion over 35 years, including 12 to 15 offshore platforms pumping about 1.4 MMbpd when fully ramped up, according to regulator ANP.

While there is nothing stopping Brazil from improving the license model, the government is satisfied with results of Libra, Finance Minister Guido Mantega told reporters in Sao Paulo. The government’s total take from the field, including taxes, will be about 80 %, which is one of the highest rates in the world, Chambriard told reporters.

‘Good Surprise’

“If you only have one participant, it will always offer the minimum - there’s no reason why it would offer more,” David Zylberstajn, a former regulator who helped set up Brazil’s first exploration auctions when Petrobras’s monopoly was broken in the 1990s. “The quality of the consortium, with the quite aggressive entrance of Shell and Total, was a good surprise.”

Shell, Total and Cnooc will provide experience with pre- salt projects in Africa to add to Petrobras’ Brazilian knowledge, while CNPC brings much-needed cash, said T.J. Conway, a research and advisory manager at Energy Intelligence Group.

“The consortium brings both experience and capital,” he said in e-mailed comments. “When considering the global pre- salt play, there is logic to the composition of the consortium.”

ANP doubled reserve estimates at Libra to 8 to 12 Bbbl on May 23 after CGG Veritas, a geophysical services company, conducted a study of the first exploration well. ANP encountered a layer of oil 326 meters deep at the well and did imaging of the surrounding area. Lula, the first producing pre-salt field, has estimated reserves of about 6.5 Bbbls.

Strategy Shift

Petrobras was hired to drill two wells at Libra. The first was abandoned after problems with well construction. Yesterday’s auction result was “satisfactory,” although work is needed, including seismic studies, Andre Araujo, who heads Shell’s Brazilian operations, told reporters in Rio.

For Cnooc and CNPC, Libra represents a shift in strategy to one of drilling and developing new deposits, after years of Chinese companies buying into operating fields and more advanced exploration projects in Latin America.

Total’s relationship with Shell and Petrobras meant forming the group was “easy” for what was always a strategic asset for the company, country manager Denis Paullat said. “It’s hard to imagine a team with more expertise than this,” he said from Rio.

The result gives an estimated return on investment of 18 % and it could be “a very attractive project” for the group if it can mitigate the “big challenges” ahead, Deutsche Bank Marcus Sequeira said by phone.

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