Brazil to sell the right to explore and develop its largest-ever oil discovery

May 24, 2013

Business, International

Brazil to sell the right to explore and develop its largest-ever oil discovery


Brazil Oil

By Jeb Blount

RIO DE JANEIRO – Brazil plans to sell the right to explore and develop its largest-ever oil discovery in October, auctioning an offshore petroleum prospect that is expected to produce about 12 billion barrels of oil over 35 years.

The sale of the Libra prospect, which Brazil on Thursday said would be held a month earlier than expected, will be the first under new “production-sharing” rules that tighten state control and raise government participation in a Bangladesh-sized offshore area near Rio de Janeiro.

Known as the Subsalt Polygon, the area is home to several giant discoveries, including Libra, as well as more than 80 percent of Brazil’s current oil output. The name refers to Libra and other giant strikes where oil is trapped in rock under a salt layer.

Much of the oil in the region, though, is trapped in reservoirs above the salt band.

Brazil’s oil agency, the ANP (KOSDAQ: 121600.KQ – news) , discovered Libra in May 2010. With certification agency Veritas, the ANP estimates Libra holds 26 billion to 42 billion barrels of oil in place. Of that, production could recover 8 billion to 12 billion barrels, or an amount equivalent to three to five months of world oil demand.

“In my 30 years in the oil business, I’ve never seen someone auction off something of this magnitude,” Magda Chambriard, director-general, of the ANP told reporters. “This is a big, major prospect.”

The auction was moved up from November (Xetra: A0Z24E – news) to conform with Brazilian President Dilma Rousseff’s schedule, Chambriard said. Unlike previous auctions, the sale will be held in Brasilia, the capital, rather than Rio de Janeiro, the center of Brazil’s oil industry.

“Something of this size clearly requires the presence of the president,” Chambriard said. “This is a very significant area.

According to Denis Palluat, head of the Brazilian operations of France’s Total SA (Paris: FR0000120271 – news) , Libra is an “enormous area” that offers almost no exploration risk. Its sale will attract interest from oil companies around the world, he said.

The announcement comes on the heels of a sale of higher-risk frontier exploration areas last week, Brazil’s first oil-rights sale in five years.

The auction sold 142 areas to 30 companies from 12 countries. It raised $1.4 billion in cash and promises to invest at least $3.4 billion in exploration, easing concern that growing government intervention in the oil industry would curb the appetite of foreign and domestic oil companies and investors.

Total picked up some of the most expensive and high-risk areas at last week’s auction.

That auction was held under Brazil’s longstanding concession system, which still applies to all future sales in areas outside of the Subsalt Polygon. Under the concession system, winners own the rights to all output in exchange for the payment of a royalty, and in the case of unexpectedly large discoveries, an additional “windfall” payment on the excess.

In the Subsalt Polygon, winners will be those companies that offer the government the largest share of future oil output to sell on its own account. This “profit oil” will only be paid to the government after the winning bidder or group has paid off the initial costs of exploration and development.

Additionally, state-controlled oil company Petroleo Brasileiro SA, or Petrobras, will have to take a minimum 30 percent stake – as well as pay 30 percent of all investment – in any winning bid group.

Petrobras will be the only company licensed as operator of new Subsalt Polygon areas, meaning it will have control of most exploration and development decisions. Other partners will be primarily financial investors.

“The great challenge for the government will be making production sharing as attractive as the concession model,” said João Carlos de Luca, head of Brazil’s Petroleum Institute, the country’s main industry organization. “It’s a good start.”

The industry had also expected the government offer more areas in the Subsalt Polygon, he said.

If Petrobras wants a bigger stake it will have to bid for it like any other company, the ANP’s Chambriard said. When the rules were passed in 2010, analysts said the new system would primarily be attractive to large state-owned oil companies more interested in long-term supply than in developing the prospect.

Because the government is more interested in maximizing its share of future oil output than winning a large up-front payment, the auction will have a fixed entry fee and bidding will focus on the amount of oil companies are willing to give Brazil’s government, Chambriard said.

The size of the potential new fields in the Subsalt Polygon make it unlikely that the government would sell areas in its borders more than once every two years, Chambriard said.

The Subsalt Polygon may contain as much as 100 billion barrels of oil, according to the Brazilian Petroleum Institute of Rio de Janeiro-State University.

A separate auction for natural gas prospects, both shale and conventional, was pushed back until November so the subsalt auction could be moved up, Energy Minister Edison Lobão said Thursday.

The government hopes to hold auctions for oil and gas prospects outside the Subsalt Polygon on an annual basis, returning to a schedule that was in effect from 1999 to 2008. Auctions were halted for five years as the government drafted new rules to boost its control of giant new offshore reserves in the Subsalt Polygon.


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