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Brazil Oilfield Bid Falling Flat Is Boon for Petrobras

Members of Pre-Sal Petroleo, known as the PPSA, the state-run company created to manage the development of Brazil's pre-salt oilfields, wait for bids to be delivered during an auction in Rio de Janeiro, on Monday, Oct. 21. Photographer: Dado Galdieri/Bloomberg
Members of Pre-Sal Petroleo, known as the PPSA, the state-run company created to manage the development of Brazil's pre-salt oilfields, wait for bids to be delivered during an auction in Rio de Janeiro, on Monday, Oct. 21. Photographer: Dado Galdieri/Bloomberg

Oct. 22 (Bloomberg) -- Brazil’s failure to attract more than one bid for a license to develop the country’s biggest oil discovery is a windfall for state-run Petroleo Brasileiro SA.

Petrobras rose the most in two months yesterday after partnering Royal Dutch Shell Plc and Total SA to win a 35-year concession for the Libra prospect. Without any other offers, the group picked up what could become one of the two largest deep-water fields for the minimum government profit pledge.

While Chief Oil Regulator Magda Chambriard described the auction as “a big success,” authorities said last month they were looking for two or three bidding groups from the 11 registered companies. Contract terms, including requirements that Petrobras operate the field and own at least 30 percent, helped attract other state companies including China National Petroleum Corp. and Cnooc Ltd. No U.S. companies participated.

“We beat very low expectations; that doesn’t exactly make it a rousing success,” Tony Volpon, head of emerging-market research for the Americas at Nomura Holdings Inc., said by phone from New York. “They were expecting a competitive auction. What they got was one group, at the minimum.”

Petrobras, which will take a 40 percent stake in the concession, declined 1.8 percent to 18.55 reais at the close in Sao Paulo after jumping 5.3 percent yesterday. The stock is down 16 percent in the past year compared with a 3.8 percent drop by Brazil’s benchmark equity index.

BofA Forecast

Shell, based in The Hague, and France’s Total each have 20 percent stakes in the consortium, while Cnooc and CNPC have 10 percent apiece. The group pledged to the government the minimum 41.65 percent of profit oil, or the barrels remaining after costs. Bank of America Corp. said in an Oct. 14 report that less than 50 percent would be seen as beneficial for Petrobras. The companies will pay a 15 billion-real signing fee.

While Shell advanced 1 percent to 2,102 pence in London today. Total lost 0.4 percent to 44.20 euros in Paris.

Libra is the first auction of subsea prospects known as pre-salt using a production-sharing model. The government’s share of profit oil will rise or fall according to a combination of oil prices and production, Petrobras said in a statement yesterday. The 41.65 percent rate is set to a Brent price range of $100 to $120 a barrel and average output per well of 10,000 to 12,000 barrels a day, it said.

Brazil increased its control of the industry under former President Luiz Inacio Lula da Silva after it announced in 2007 the discovery of at least 50 billion barrels trapped under a layer of salt two miles below the seabed. Legislation also calls for a new state company to represent the government with the power to veto decisions at pre-salt projects, including Libra.

‘Respects Contracts’

Libra will generate 1 trillion reais for the government over the life of the project and serve as a model for other pre-salt licenses, President Dilma Rousseff said in a televised address yesterday.

“Brazil is, and will continue to be, a country open to national and foreign investment that respects contracts,” Rousseff said. Foreign partners “will have significant profits in line with the risk taken and the investments.”

Petrobras, the biggest producer in waters deeper than 1,000 feet, plans to double crude output by 2020 with most of the gains coming from the pre-salt that contains the biggest discoveries this century. The Libra group will invest 611 million reais ($280 million) in initial exploration, according to regulator ANP. Barclays Plc estimates development costs of $100 billion, analyst Lydia Rainforth said in a research report today. As many as 15 offshore platforms will pump about 1.4 million barrels a day when fully ramped up, the ANP said.

‘Good Surprise’

While there is nothing stopping Brazil from improving the license model, the government is satisfied with results of Libra, Finance Minister Guido Mantega told reporters in Sao Paulo yesterday. The government’s total take from the field, including taxes, will be about 80 percent, which is one of the highest rates in the world, Chambriard told reporters.

“If you only have one participant, it will always offer the minimum - there’s no reason why it would offer more,” David Zylberstajn, a former regulator who helped set up Brazil’s first exploration auctions when Petrobras’s monopoly was broken in the 1990s. “The quality of the consortium, with the quite aggressive entrance of Shell and Total, was a good surprise.”

Composition ‘Logic’

Shell, Total and Cnooc will provide experience with pre-salt projects in Africa to add to Petrobras’ Brazilian knowledge, while CNPC brings much-needed cash, said T.J. Conway, a research and advisory manager at New York-based Energy Intelligence Group.

“The consortium brings both experience and capital,” he said in e-mailed comments. “When considering the global pre-salt play, there is logic to the composition of the consortium.”

ANP doubled reserve estimates at Libra to 8 billion to 12 billion barrels on May 23 after CGG Veritas, a geophysical services company, conducted a study of the first exploration well. ANP encountered a layer of oil 326 meters deep at the well and did imaging of the surrounding area. Lula, the first producing pre-salt field, has estimated reserves of about 6.5 billion barrels.

Strategy Shift

Petrobras was hired to drill two wells at Libra. The first was abandoned after difficulties with well construction.

The participation of only one group “reflects the uncertainties surrounding the field and questionable economics of the development,” Exane BNP Paribas analysts led by Alejandro Demichelis said in a research note today. “We see these expected returns ranking quite poorly against those available in other deepwater provinces such as the Golf of Mexico or Angola.”

Yesterday’s auction result was “satisfactory,” although work is needed, including seismic studies, Andre Araujo, who heads Shell’s Brazilian operations, told reporters in Rio.

For Cnooc and CNPC, Libra represents a shift in strategy to one of drilling and developing new deposits, after years of Chinese companies buying into operating fields and more advanced exploration projects in Latin America.

Total’s relationship with Shell and Petrobras meant forming the group was “easy” for what was always a strategic asset for the Paris-based company, country manager Denis Paullat said. “It’s hard to imagine a team with more expertise than this,” he said from Rio yesterday.

The result gives an estimated return on investment of 18 percent and it could be “a very attractive project” for the group if it can mitigate the “big challenges” ahead, Deutsche Bank AG Marcus Sequeira said by phone from New York.

To contact the reporters on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net; Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net; Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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