Petrobras faults high price, regulatory uncertainties for auction failure

By Sabrina Valle on 11/7/2019

RIO DE JANEIRO (Bloomberg) - Petrobras CEO Roberto Castello Branco said the reason most major oil companies didn’t show up for Brazil’s massive auction was because of the astronomic price tag and regulatory uncertainties.

“The amount that companies would need to commit upfront, with license fees and compensation to Petrobras, was too high,” Castello Branco said in an interview Wednesday at the Petroleo Brasileiro SA headquarters in Rio de Janeiro. “We haven’t given up on our partners; they’ve given up on us.”

Fourteen companies had signed up to bid Wednesday, for an area that’s estimated to hold as much as 20 billion barrels of oil. It was the priciest auction of reserves since the end of the second Gulf War. But in the end, it was mostly Petrobras doing the bidding: the state-run company won the largest block by offering the minimum with two Chinese partners and it won another block for which it was the sole bidder. Two more blocks didn’t attract any bids.

A smaller auction on Thursday saw Petrobras and its Chinese partner scoop up a block at the minimum offer while four others received no bids.

The auctions were meant to be part of Brazil’s shift away from nationalistic oil policies and help it shake off some of the toughest years in the country’s history, with an injection of foreign cash to help develop reserves. The government had estimated the auction would raise about $25 billion in fees and another $25 billion in compensation for Petrobras, which has already invested in drilling and platforms. The total for licensing was $17 billion, and Petrobras is expected to receive just a fraction of what it expected initially.

The results hit Brazil’s currency and the share price for Petrobras, which fell more than 5% before finishing the day little changed. An analyst called the auction a “total disaster” for the government. Energy Minister Bento Albuquerque, who declared the auction a success, told reporters Wednesday that “we will need to evaluate why oil majors didn’t participate.”

As the day of the auction neared, BP Plc and Total SA said they wouldn’t bid. Exxon Mobil Corp., which has built the largest offshore exploration portfolio in Brazil after Petrobras, expressed concern about the high costs.

Seeing the oil majors that have long partnered with the company dropping out or wavering, Castello Branco said he called Chief Financial Officer Andrea Marques de Almeida into his office as the day of the auction approached.

“If we want to go it alone -- can we?” he asked. The reply: “We can.”

Castello Branco said Petrobras can develop the giant Buzios deepwater field it won on its own without compromising financial discipline. The company has funds to pay for all the fees and still reduce debt this year. Petrobras ended the third quarter with a strong cash position, and it also has 34.1 billion reais ($8.3 billion) of credit with the government it can use to pay for the fees, Castello Branco said.

The company was aiming for at least 30% of the field, not the 90% it ended up with, he said. Chinese partners only took a 10% stake.

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