Prices, Petrobras Woes, Rules May Undermine Brazil Oil Auction


OCTOBER 07, 2015

Rio de Janeiro. Low oil prices and a massive corruption scandal are expected to dampen interest on Wednesday in Brazil's first auction of oil and natural gas exploration and production rights in nearly two years.

Despite official hopes that the auction could ease pressure on Brazil's once-booming, now embattled petroleum industry, few outside the government expect it to be anything close to the success sought by industry regulator ANP, which is running it.

Not only has the price of oil fallen more than 50 percent since the last auction, slashing industry revenue and potential profit, Brazil's principal oil company, state-run Petroleo Brasileiro SA, is mired in a giant kickback scandal.

With $130 billion in debt and a backlog of existing projects, Petrobras, as the company is known, has not said if it will bid. In all previous auctions Petrobras, alone or as a member of a group, was responsible for half or more of sales.

"I'm afraid the auction is going to be a catastrophe," said Adriano Pires, president of the Brazilian Infrastructure Institute, a Rio de Janeiro energy think tank. "Petrobras is in such bad shape that if it actually buys something its stock will probably fall."

While confident the auction will keep investment flowing to Brazil, ANP President Magda Chambriard has warned that lower oil prices and a sluggish world economy mean Brazil "is in a different environment" than in past auctions.

Unpopular rules

Investor interest in auctions was tested less than three months ago when Mexico, in a long-awaited opening of its state-run industry, sold only two of 14 contracts on offer.

Mexico was able to boost interest at a second auction on Sept. 30, selling three of five areas on offer after it eased contract requirements at the behest of bidders.

In Brazil, though, President Dilma Rousseff and the ANP have resisted changes to national content rules and concession contracts that many in the oil industry say raise costs and heighten political risk.

Wednesday's auction will offer 266 exploration and production blocks in 10 sedimentary basins.

All of the areas will be sold under a concession system to the highest bidder. Bidders will be required to commit to a minimum exploration program and minimum purchases of Brazilian goods and services.

Winners will own any oil produced in exchange for payment of royalty.

The 125,000 square km of concession blocks represent an area more than half the size of the United Kingdom. The area is all outside the Subsalt Polygon, an offshore district near Rio de Janeiro and Sao Paulo where some of the world's largest recent discoveries have been made.

All new development in the Polygon is governed by production-sharing contracts with the Brazilian government, not concessions.

The greatest interest is expected for offshore areas in the Sergipe Basin, near where Petrobras has made massive oil and gas discoveries with partners including India's Oil and Natural Gas Corp. and IBV Brasil SA, a 50-50 joint venture between Videocon Industries Ltd and Bharat Petroleum Corp .

Interest could also come in the Pelotas Basin, where there have been recent natural gas discoveries.

Although 37 companies from 17 countries — including Petrobras, ExxonMobil Corp, BP Plc and Royal Dutch Shell Plc — have signed up to examine ANP geological data on the areas, many are expect to pass on bidding.

"I've never seen so little interest," said Paulo Valois, an oil lawyer with L.O. Baptista in Rio de Janeiro. "I doubt that many of the companies that signed up will make any bids."