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Brazil’s oil auction
Cheap at the price
A single bid for a vast field shows the weakness of Brazil’s state-led approach to developing its oil reserves
SIX years after discovering giant offshore“pré-sal” oil deposits, so called because they lie beneath a thick layer of salt under the ocean bed, Brazil has finally auctioned the rights to develop some of its deeply buried wealth. On October 21st the Libra field, off Rio de Janeiro’s coast (see map), was sold to a consortium led by Petrobras, Brazil’s state-controlled oil firm, and including France’s Total, Anglo-Dutch Shell and China’s state-owned CNOOC and CNPC. Libra’s estimated 8 billion-12 billion barrels of recoverable oil make it the biggest oil prospect in the world to be auctioned this year. Once it reaches peak production, sometime in the next decade, it should increase Brazil’s output from 2.1m to about 3.5m barrels per day.
At times simply holding the auction seemed an achievement. A flurry of unsuccessful legal challenges marked the run-up. As it was under way in a Rio beachside hotel, soldiers outside used rubber bullets and tear gas to hold back striking oil workers, masked anarchists and union activists opposed to private-sector participation in the oil business. Hundreds of troops formed a human chain to the water’s edge, pushing bemused sunbathers and surfers aside. Warned that trouble was likely, Dilma Rousseff, who had planned to attend, instead watched by video-link from the presidential palace in Brasília.
The presence of Shell and Total in the winning consortium allowed the government to declare the auction a success. But whereas it had expected more than 40 firms to register to take part, only 11 did. And although it had expected at least six consortia to bid, the winning offer—of the minimum eligible amount—was the only one made. The lack of competition was a let-down after the euphoria of six years ago, when the president of the day, Luiz Inácio Lula da Silva, described thepré-sal finds as a “winning lottery ticket”. During the long wait while auction rules were rewritten and federal and local governments squabbled over how to share the eventual proceeds, shale oil and gas displaced pré-sal as the world’s most exciting energy prospect. Most private-sector interest evaporated. BG, BP, Chevron and Exxon, which have spent heavily in Brazil, did not register to bid.
Even so, the auction’s outcome came as a relief to Petrobras. A spurt of resource nationalism unleashed by the pré-sal finds led the government to redraft auction rules that had been in force since the firm was part-privatised and lost its national monopoly at the end of the 1990s. Instead of all firms bidding on equal terms, Petrobras must now operate all pré-sal blocks, with other firms taking at most a 70% financial stake. Once a consortium has sold enough oil to recoup its costs, profits are split with the government. The bidder that offers to hand over the biggest share of this “profit oil” wins.
The government’s aim was to avoid sellingpré-sal rights too cheaply. Drilling through thick layers of shifting, corrosive salt is hugely expensive—developing Libra will cost around 400 billion reais ($184 billion) over the next 35 years—but the pré-sal deposits are so vast that exploration risks are thought to be very low, meaning firms should be ready to pay handsomely for development rights. Yet it might have been simpler merely to raise taxes on production: Credit Suisse, a bank, says that the winning Libra bid to pay 41.65% in “profit oil” will result in three-quarters of the field’s value going to government coffers when taxes are included, little more than the 70% total take under the previous rules. Offering Libra as an old-style concession would have attracted more bidders, pushing up the price paid, reckons Paula Kovarsky of Itaú BBA bank.
Worse, the new rules have set a hidden trap for Petrobras. By putting it in charge of all operations in pré-sal areas and forcing it to buy at least a 30% stake in all winning bids, the government has turned pré-sal auctions into nail-biting waits for Petrobras to learn the terms to which other bidders have committed it. The fear this time was that Chinese state-owned firms, more interested in a stable long-term energy supply than in negotiating a low price, would bid aggressively for Libra, committing Petrobras to terms it found unreasonable.
That such an outcome did not happen comforted Petrobras’s long-suffering investors, who have seen the firm’s share price plummet since a record-breaking $70 billion stock offering in 2010, intended to prepare it for the pré-sal era. Since then the government’s insistence on capping petrol prices to tackle inflation has caused the firm to haemorrhage cash. Brazil is a big importer of oil derivatives, so not only does Petrobras get below the world price for its own oil; it must also top up abroad, and sell at a loss. Strict requirements to buy local equipment have further burdened its balance-sheet and slowed down its investment programme.
The Libra auction was not the disaster it could have been for Petrobras, says Ms Kovarsky. But developing the field will mean the company has to delay or drop other projects that would have had higher returns. And a rise in the price of fuel is now essential. “Petrobras needs not just a one-off price rise, but international price-parity,” she says. On top of all this, unless the bidding rules are changed the next pré-salauction, pencilled in for 2015, may see the firm committed to a pricey deal that it would not have chosen itself.
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