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John Lyons and Jeff Fick : Auction of multibillion-
barrel field puts Brasília on exporter path


RIO DE JANEIRO—Brazil’s bid to develop its biggest oil discovery and join the globe’s oil exporting majors took a big step forward Monday when the country awarded a consortium rights to explore the find.

In the first auction since the broader discovery was unveiled, authorities said state-owned Petroleo Brasileiro SA, European oil giants Royal Dutch Shell SA and Total SA, plus two Chinese firms, Cnooc Ltd. and China National Petroleum Corp., will develop an area off Rio de Janeiro called “Libra.”

Officials say Libra holds up to 12 billion barrels, which would potentially make it one of the world’s largest fields. “This is a huge block,” said André Araujo, Shell Brasil’s president.

Underscoring the oil’s importance for Brazil, the question of how best to develop the new fields has become highly charged. As officials read the results inside a posh Rio hotel, police fired tear gas at hundreds of protesters, including oil workers and nationalist student groups, who opposed the auction as a giveaway to foreign corporations.

President Dilma Rousseff defended the auction results in televised remarks. “The Libra auction is a landmark in the history of Brazil, transforming a limited resource, oil, into an undebateable gain, that is investment in education,” she said late Monday.

In 2006, Petrobras found oil in an ultra-deep water oil field that some experts say could hold 50 billion barrels or more of high-quality crude, which if proven would make it the biggest discovery in the hemisphere since Mexico tapped its Cantarell field in 1976.

What sets the Libra field apart is that it is among the few fields in the world that lie not only below the ocean floor, but even further beneath a miles-deep layer of salt that is tricky to drill, oil executives say. The field auctioned Monday is one block in the broader region and could alone represent 75% of Brazil’s current output of about two million barrels a day.

Brazil is still a net importer of oil, so the fields are crucial for Brazil’s aspirations to be an exporter—and for the political future of its left-wing Workers Party, in power for more than a decade. When the oil was discovered, then-President Luiz Inácio Lula da Silva promised to use it to erase poverty and lift the country into the industrialized world, saying “God has given us another chance.”

Officials named the first block from 2006 “Lula” after the president and are now extracting oil from it, though it hasn’t reached its potential.

Officials drew up a government-led development strategy based on the fields, including creating a shipbuilding industry around the oil industry. Legislators changed the laws to require Petrobras to have a major role in all wells.

Brazil’s state-heavy strategy may have frightened away some potential oil allies. Of the 10 foreign companies that indicated they may bid Monday, only four did. Notable major oil companies with technological expertise in deep water who didn’t even indicate they would bid included Exxon Mobil Corp., Chevron Corp. and BP PLC.

While the companies’ officials have declined to comment on why they skipped the auction, observers said Brazil’s approach simply means there is less in it for them. Brazil required the winning bidder to make a hefty $7 billion upfront payment to Brazil’s Treasury and comply with other rules such as sourcing much of their equipment in Brazil. Adding uncertainty, Brazil started a new state-run company to oversee the fields, Petroleo Presal SA, and it is still unclear exactly what it will do.

“It’s a big question mark, a point of insecurity that added to everyone’s wariness about having Petrobras running everything,” said Danielle Valois, a lawyer who specializes in oil and gas at Brazilian law firm Trench, Rossi & Watanabe.

Meantime, the oil industry has changed in the years since Brazil made the discoveries. Back then, oil was starting a climb toward record highs as analysts debated a “peak oil” theory about whether the world was running out, making Brazil’s big find more tantalizing. Since then, technologies such as hydraulic fracturing, or fracking, have opened up new frontiers, giving oil companies other options.

Denis Palluat de Besset, managing director of Total’s Brazilian unit, said the consortium’s technical expertise would allow the venture to succeed.

U.S. and most European major oil companies sat out the auction, but the result deepens energy ties between Brazil and China, which is on pace to become the world’s biggest oil importer. While the deal is the first for both Cnooc and China National Petroleum in Brazil, sister firm Sinopec has invested $13.5 billion to buy stakes in Brazilian oil firms and complete a pipeline.

“It makes sense for China because China needs to secure energy resources, and can spare the massive investments, meanwhile Brazil doesn’t have the savings and needs the investment,” said Charles Tang, chairman of the Brazil-China chamber of commerce.

In the past, big deals by Chinese firms in Latin America have elicited concerns in the U.S. about China’s growing presence in a region with close American economic ties. But Elizabeth Economy, the director for Asia studies at the Council on Foreign Relations, said these Chinese companies were motivated by economic incentives, rather than regional power aspirations

“Overall, it is probably time to view the Chinese major oil companies as simply global competitors—who sometimes compete among themselves—and not as a foreign species unto themselves.”

Brazilian officials have said they are justified in seeking high premiums for participating in the fields in part because conventional wisdom in Brazil has been that extracting the oil will be relatively straightforward. In the past, some officials have used terms such as “near-zero risk” to describe the odds. And Petrobras is widely recognized as a global leader in deep-water drilling.

All the same, oil industry officials say the technical and financial demands of exploiting the field are considerable. Brazilian officials estimate that the Libra field will need $180 billion of investment over the next 35 years.

The demands are so high that the economic research firm Eurasia predicted Monday that Brazil would likely loosen its demands on oil firms next year in order to attract a bigger mix of participants to future auctions.

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Editor's Note: This commentary was published by The Wall Street Journal , on Sept 21, 2013. Petroleumworld reprint this article in the interest of our readers.

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