Home' Trinidad and Tobago Guardian : October 24th 2013 Contents BG8 | ENERGY
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 2013 • WEEK FOUR
RIO DE JANEIRO---A consortium
including Shell, Total, two Chinese
firms and Brazil s state-run petro-
leum company Petrobras won the
right to develop an offshore field
that could hold up to 12 billion barrels, Brazil s
government said Monday.
It was the first auction held under a new
legal framework meant to give Petrobras and
Brazil more control over its finds in recent
years, oil buried deep under water and a for-
midable layer of salt, reserves that could hold
100 billion barrels.
The decision managed to discourage both
critics, who say the rules will scared off poten-
tial investors, as well as leftist protesters who
tried to stop the sale.
About 300 demonstrators calling for nation-
alisation of Brazil s oil industry clashed with
police outside the hotel where the bidding
took place before the auction, with security
officials firing tear gas and rubber bullets.
The protest was originally called by striking
oil workers, whose union has long opposed
any foreign involvement in Brazil s petroleum
Protesters overturned the car of one local
TV channel and set it aflame. Among the
demonstrators were the masked, black-clad
"Black Bloc" anarchists who have a growing
role in Brazil s steady drumbeat of protests.
Pro-business critics contend that the law,
which mandates that Petrobras be the sole
operator of the finds and maintain a minimum
30 per cent stake in oil blocks, will scare off
big private firms.
They also say it will slow investment in
and development of the oil --- as much as 100
billion barrels of it --- that Brazil is counting
on to catapult the country to developed-
nation status and fund ambitious education
and health programs.
Government officials are already locked in
arguments about how to share royalties that
haven t surfaced, and the Navy is buying sub-
marines to protect the fields.
There were only 11 participants in the auc-
tion and the winning bid by the consortium
was the only one made, according to the gov-
ernment. Petrobras holds a 40 per cent stake
in that consortium, Shell and Total each
account for 20 per cent and Chinese firms
CNOOC and CNPC have 10 per cent each.
Highlighting the lackluster interest by most
major oil companies in the auction, the com-
panies agreed to give the government the
minimum legal amount of so-called "profit
oil" from the fields - or oil produced after
initial investment costs are paid. Under the
terms of a new production-sharing contract,
that minimum was set at 41.65 per cent of
Though hailed by the government as the
start of development for its largest-ever oil
discovery, the sole bid reaffirmed the fact that
most multinational oil companies were turned
off by the auction.
Despite the huge potential of the offshore
region, many foreign oil producers and other
potential investors shied away because they
believed the rules for the new concessions
offered little upside for profit and too big a
role for the government and Petrobras.
"An auction supposes a contest," said Carlos
Sampaio, an opposition legislator in the lower
house of Brazil s Congress. "Without that,
the government failed."
Magda Chambriard, the head of Brazil s
national oil regulator, suggested that many
companies had stayed away because they were
daunted by the sheer size of Libra, estimated
to hold as much as 12 billion barrels of recov-
"Even though there was limited interest,
the quality of the (winning) group speaks for
itself and leaves me wanting for nothing bet-
ter," Chambriard said at a news conference,
adding that the next auction for Brazil s big
subsalt region was not expected for at least
another two years.
Shares of Petrobras, a company whose
investors have grown increasingly frustrated
by cost overruns and production delays, surged
after details of the bid emerged and dispelled
fears that the company would overpay. Its
preferred shares rose more than 5 percent just
as the winning the bid was announced.
Adriano Pires, one of Brazil s top energy
analysts, called the new rules "very interven-
tionist" and said the auction was a disap-
pointment even before it began because of the
lack of interest. He chalked that up to the new
rules that will make production expensive.
"We are talking about non-conventional oil
located 6,000 to 7,000 meters deep," he said.
"The $500 billion that will have to be invested
over the next 12 to 15 years made companies
conclude that the rate of return made partic-
ipating in the auction unattractive."
The technological hurdles to reaching the
riches are intensely challenging, even for Petro-
bras, considered a world leader in offshore
The deep-water reservoirs lie some 185 miles
(300 kilometers) offshore in the Atlantic, more
than a mile (kilometer) below the ocean s sur-
face and under another 2.5 miles (4 kilometers)
of earth and corrosive salt. The salt beds can
break loose and shear off piping, making it
among the toughest substances to drill.
With a slowing economy and delays in pro-
ducing that offshore oil, some say the Brazilian
government will loosen rules to make them
more business friendly during the next auction
in two to three years.
The New York-based Eurasia Group said in
a research note that Petrobras "growing oper-
ational and financial constraints" along with
government pressure to stoke a lagging national
economy means changes are expected at the
"Allowing international oil companies to
develop the pre-salt side by side with Petrobras
would kill two birds with one stone," Eurasia
Group wrote. "It would lead to a quicker pace
of production in the pre-salt with more invest-
ments, and provide needed relief to Petrobras."
It added that "it isn t lost on government
officials that the shale gas and tight oil tech-
nological revolution in North America has
reduced Brazil s leverage to attract capital."
But the rules governing the sale, giving
Petrobras at least a 30 per cent stake in
every concession and the lead role in all
production and exploration, were considered
so unattractive by most foreign investors
that only 11 companies signed up for the
auction, a quarter of what the government
Even then, some of those who signed up
did not participate.
Some observers were surprised that Shell
and Total took part, as many had expected
bidders to consist mostly of Petrobras and
other state companies, mostly from China.
"The entry of Total and Shell is a very
good thing because it shows that non-state
international companies are interested in
this project," said Julio Bueno, secretary of
economic development for the state of Rio
de Janeiro, Brazil s top oil producing state.
Under the terms of their bid, Petrobras
and its partners offered to pay 15 billion reais
($6.88 billion) up front for the rights. They
also agreed to spend at least 610.9 million
reais on further exploration in the area.
On offer in Libra were production rights
to a massive offshore field that holds
between 8 billion and 12 billion barrels of
recoverable oil, according to Brazil s oil reg-
ulator and Dallas-based oil certification
company Degolyer & MacNaughton. Brazil
estimates it will receive at least $400 billion
in taxes and other revenue from Libra over
The auction was the first under a three-
year-old legal framework that expands state
control over Brazil s most prolific oil region,
the subsalt reserves off the coast of Rio that
hold billions of barrels of oil under a thick
layer of salt beneath the ocean floor. Under
the new law, Petrobras must lead development
of the fields as operator. (AP, Reuters)
($1 = 2.18 Brazilian reais)
Brazil oil block goes to
Shell, Total, China firms
People protesting against the auction of the Libra oil field, Brazil's largest single offshore find, surround a official government car before the
auction at the Barra da Tijuca beach in Rio de Janeiro, Brazil, on Monday. The oil auction is the first in Brazil since the government created new
production-sharing agreements. AP PHOTO
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