Brazil Said Planning Oilfield Auction to Bolster Ailing Industry

Brazil plans to auction onshore fields in the second half of the year to encourage foreign oil companies to remain active in the country, according to two government officials with direct knowledge of the matter.

Foreign explorers already operating in Brazil have expressed interest in participating in the so-called Round 13 auction, said one of the officials, who asked not to be named because discussions are ongoing and haven’t been made public. Any participation by Petroleo Brasileiro SA would be marginal as the state-run producer cuts investments and focuses on the deep-water fields where it has already found oil, the officials said.

Fresh foreign investment would be a welcome boost for an industry buffeted by a corruption scandal surrounding Petrobras and its contractors, six-year-low crude prices and a stagnant local economy.

The terms for the auction, including the areas to be offered, will be published within the next two months, one of the officials said. While upfront fees paid by successful bidders will be lower than in past auctions, requirements to hire local labor and use Brazilian-made parts, which make operating in the country more expensive, will remain in place, one of the officials said.

Industry Suggestions

Still, Brazil’s government is reviewing suggestions from the industry on how local content requirements could be improved, the official said. A group of Brazilian contractors are being investigated for allegedly funneling hundreds of millions of dollars from Petrobras contracts to political parties, making it more difficult for operators to secure goods and services locally.

The government could make these rules less onerous by using investments in research and development to help meet local content requirements, and allowing most of the local participation to be focused on less complex parts of the supply chain, said Joao Augusto de Castro Neves, a political analyst from Eurasia Group.

“There are ways that you can tweak the current rule, giving more flexibility without just outright lowering the target,” Neves said in a telephone interview from Washington. “You can’t overhaul completely the local-content framework like that without creating legal uncertainties in existing contracts.”

Petrobras, whose credit outlook was cut Monday by Standard & Poor’s, has delayed releasing audited earnings because of difficulties deciding on the size of corruption-related writedowns.

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