Energy interests in Houston and elsewhere will be watching closely Monday as Brazil announces the winning bidder for its gigantic Libra field, estimated to hold up to 12 billion barrels of oil.
The auction in Rio de Janeiro will be the first since Brazil adopted new laws governing contracts for its vast pre-salt offshore regions, estimated to hold billions of barrels of crude trapped under layers of salt that once obscured their existence.
The Brazilian government says the lease terms will help the country develop its promising but nascent energy industry. Some prospective international bidders, however, contend the contracts require them to take on too much of the cost and risk of the new fields.
“The Libra auction itself is an experiment for the Brazilian government,” said Geerd Aalbers, a Rio de Janeiro-based official of Control Risks, a global risk consultant.
Strategic moves: Two companies drop individual bids for Brazil’s Libra auction
He said it will be the first time Brazil enters into a production sharing agreement — an arrangement under which the government’s partners bear the costs of exploration and production. Once oil starts flowing, they deduct their costs from the proceeds and split the remaining crude, called profit oil, with the government.
The Brazilian government will award the contract to the bidder that agrees to take the lowest percentage of profit oil in exchange for the investment.
“The government has tried to make it as attractive as possible to investors, but it will look at the outcome of Libra, and go back to the drawing table if it turns out it is not as successful as hoped,” Aalbers said.
Brazil will require the winning bidder to pay a $6 billion signing bonus, enter into a production-sharing arrangement and agree to meet significant local content requirements.
And a new law requires that Brazilian national oil company Petrobras be the operator of the project and own at least a 30 percent share.
Prospective participants can bid for up to 30 percent of project ownership, with the Brazilian government retaining the remaining share.
The required Petrobras share has given pause to some potential investors, who fear that the Brazilian company’s limited resources could slow work down and escalate costs.
Jose Valera, a Houston-based partner in Mayer Brown’s global energy group, said Petrobras already has the largest backlog of projects of any oil company in the world. “Bidders risk being put in the back of the line after having been required to pay what probably is the largest signature bonus in history,” Valera said.
Besides Petrobras, 11 companies, Brazilian and international, are expected to submit bids.
The production sharing requirement would transfers enormous risk to Brazil’s partners, along with the potential for riches.
The aim is to attract badly needed international capital for Brazil’s offshore fields, develop the Brazilian industry and fund other government priorities, such as education and health care.
Brazilian officials have said that greater certainty of oil in its pre-salt plays means bidders face lower risks, so a contract that amply shares the rewards is more justifiable.
Some investors also are wary of local content requirements that mandate in-country sourcing of goods and services on the project, in some cases up to 90 percent.
“There has been a lot of skepticism around local content requirements,” Aalbers said, because Brazil doesn’t have the equipment and suppliers necessary to meet the contract’s terms.
The auction also has sparked protests within the country against the participation of international companies in Brazil’s oil industry. Thousands of oil company workers declared a strike on Thursday, according to the Associated Press.
Houston consular official Roberto Ardenghy, said the government will not delay or cancel the bid because of the strikes, though it does plan to beef up security around the auction.
“We have some political groups that are complaining about this bid,” said Ardenghy, who heads the Brazilian consulate’s Trade Promotion Bureau. “It has happened with every bid we have done in the last 10 years, because there are some groups that do not accept private investors in the oil industry.”
Yet some observers suggest the terms of the auction make it hostile to private investment.
“The look, touch and feel of this auction model are those of a left-leaning, populist government; not those of a government that deeply believes in market-driven solutions,” wrote George Baker, publisher of Mexico Energy Intelligence, in an assessment of the proposal.
Aalbers, the risk manager in Rio de Janeiro, is more measured, noting that the Brazilian government has a track record of balancing its desire to build a local industry and its social aims with a business climate that is still attractive for foreign investment.
“It is not an unsafe bet that things will probably pan out in favor of investors,” Aalbers said. “Just because it is extremely complex and uncertain, it puts off some investors, but it doesn’t mean you can’t safely navigate that environment.”
Meanwhile, Brazilian officials point to the presence of multiple international players as evidence that the auction has been accepted by the markets.
“I am optimistic that we are going to have a good bid on Monday,” Ardenghy said.
A stake in Brazil’s bounty
Eleven companies will bid in the auction of Brazil’s offshore Libra field*:
Repsol Sinopec Brazil
Oil Shell Brazil
CNOOC International (China)
CNPC International (China)
Mitsui & Co. (Japan)
ONGC Videsh (India)
Petronas Carigali (Malaysia)
* Petrobras, Brazil’s state oil company, is required by law to have a minimum 30 percent stake in the project, but may participate in a bid for a larger share. Ecopetrol and ONGC Videsh may participate only as part of a group bid, because they did not pay the $74 million guarantee deposit required for individual bids.
Source: Brazilian National Petroleum Agency
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