Brazil's tarnished oil industry polishes image with rights sale

Wed May 15, 2013 2:26am EDT

* BG Group, OGX, Total, BP among big winners at Brazil auction

* Sale comes after years of sluggish oil growth, rising debt

* Last auction held in 2008, after which oil interest waned

* U.S., European companies rush in, but Asian rivals wary

By Jeb Blount

RIO DE JANEIRO, May 15 (Reuters) - For the first time in nearly five years, Brazil's flagging oil industry has received a jolt of serious interest from private investors.

Brazil's oil agency, the ANP, sold 142 exploration areas to 39 companies from 12 countries on Tuesday, wrapping up the scheduled two-day auction in just one day. It was the first auction since a decade of annual sales ended in 2008.

Winners agreed to pay a record 2.82 billion reais ($1.4 billion) in cash for the rights and committed to invest about 7 billion reais over about five years in exploration, the ANP said. Most of the areas are in high-risk frontier regions with little or no oil output.

Brazil has failed to lived up to is promise as a major new producer as increased government intervention and a new regulatory model discouraged foreign and domestic private investors. Oil production has stagnated in recent years and imports have risen.

But analysts said the results of the auction showed Brazil was simply too big an opportunity to ignore.

"Sure, Brazil messed up, but the auction puts things in perspective," said Cleveland Jones, an oil geologist and mathematician with the Brazilian Petroleum Institute at Rio de Janeiro-State University. "Brazil has huge potential and is a much less risky place than Nigeria, Venezuela or Russia."

Brazil's undiscovered oil reserves in the Campos and Santos basins, an extension of the area where giant reserves were found in 2007, may contain as much as 100 billion barrels, he said, enough for about three years of world needs.

The ANP estimated the amount of oil on sale at Tuesday's auction at about 35 billion barrels in place.

Among the biggest winners were Britain's BG Group Plc , which offered to pay 416 million reais for stakes in 10 blocks, Brazil's OGX Petroleo e Gas SA, which will pay 376 million reais for stakes in 13 blocks, and France's Total SA, which agreed to pay 372 million reais for a share in 10, according to Reuters and preliminary ANP data. Companies from Australia, Norway, Colombia and Spain also won.

HARSH ENVIRONMENT

Since the last auction, Brazil has had trouble fulfilling its potential as an oil power.

In 2008, state-controlled Petroleo Brasileiro SA, or Petrobras said it would spend $112 billion over five years to boost output 50 percent to almost 3.5 million barrels a day in 2012, an amount that would have seen it pass Mexico and Venezuela as Latin America's top producer.

However, production rose only 13 percent in five years to about 2.68 million barrels, while Petrobras' shares are worth less than before the giant 2007 discoveries.

Petrobras agreed to pay 540 million reais for stakes in 35 blocks, the largest of all winning bidders on Tuesday, but proportionally less than in previous auctions.

Non-state companies have also had it hard. Chevron Corp. and its drilling contractor Transocean Ltd. face about $20 billion in civil lawsuits for a 3,500 barrel oil spill in 2011, even though the ANP said no discernible environmental damage was done and that Chevron cleaned up quickly.

Despite these difficulties, Chevron jumped in on Tuesday to pay 31.4 million reais for a stake in a block.

The auction, though, may help Brazil break from a cycle of negative news and provide companies with the future reserves needed to keep investment flowing, João Carlos de Luca, head of the IBP, Brazil's petroleum industry association said.

"I think we can put a lot of the difficulties of the last few years behind us," he said. "Demand was very strong at the auction about 40 percent above my own estimates."

PENT-UP DEMAND

In the end, the world's growing demand for oil and Brazil's relative appeal as an oil frontier drew investors back.

After an anxious lead-up to the auction, Brazil's government expressed joy over the soaring bids. "We never saw anything like this," Marco Antonio Martins Almeida, the oil secretary at Brazil's energy ministry said on Tuesday.

Brazil's OGX Petroleo e Gas SA, hurt by unfulfilled promises, came out of the auction looking stronger. Controlled by Brazilian billionaire Eike Batista, OGX saw its shares soar on optimism over Brazil's oil potential only to see them slump to nearly penny stock levels as output failed to meet targets.

OGX won 13 blocks at auction, 10 alone and three in partnership, and was the main partner in the auction for Exxon Mobil Corp. the No. 1 U.S. oil company.

Exxon picked up 50 percent stakes in two blocks with OGX for 63.9 million reais, according to Reuters and the ANP.

OGX rose 5.4 percent in Sao Paulo on Tuesday.

Oil companies from fast-growing Asian nations, though stayed away. Only Malaysia's Petronas, which recently bought a stake in an OGX field was very active, but it won no blocks.

"I think the Chinese and Asian oil companies want reserves with more promise of fast development," the petroleum association's De Luca said. "These frontier areas will take time to develop."

He expected Asian companies to show up for a planned November auction, under stricter rules, greater state control and Petrobras control. The areas will be near the giant discoveries of 2007 that started Brazil's five-year oil debate.

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