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CORRECTED-UPDATE 3-Brazil gets strong bids at 1st oil, gas auction in 5 yrs
May 14, 2013 / 3:55 PM / in 5 years

CORRECTED-UPDATE 3-Brazil gets strong bids at 1st oil, gas auction in 5 yrs

(Corrects number of blocks to which OGX had secured rights up to that point to 8, not 78, paragraph 7)

* Comes as govt intervention mounts, global supply seen up

* Petrobras, Galp, OGX, Total, BP, BG win blocksmk

* Areas offered believed to hold at least 35 bln barrels

By Jeb Blount and Sabrina Lorenzi

RIO DE JANEIRO, May 14 (Reuters) - Global energy companies were strong bidders on Tuesday at Brazil’s first auction for oil and natural gas rights in five years, alleviating fears that government intervention and growth in new global supplies might crimp enthusiasm for the South American country’s oil sector.

By mid-day Tuesday, only a quarter of the way through the two-day auction, Brazil’s oil agency had accepted 1.7 billion reais ($846 million) in bids - or four times the value of the minimum bids established for those rights. Some offers for the most sought-after blocks were up to 40 times the minimum values, and regulators predicted the sale could raise as much as 2 billion reais by the time it wraps up Wednesday.

The auction comes one day after state-run energy company Petroleo Brasileiro SA, or Petrobras, successfully sold $11 billion worth of global debt despite heavy criticism from investors in recent years because of missed production targets and sagging profits. Demand for the bonds, coupled with strong demand in the ongoing auction, indicate investors remain eager to be in Brazil following discoveries of massive new offshore reserves in 2007.

After an anxious lead-up to the auction, with doubts persisting about the interest in Brazilian oil, Brazil’s government expressed joy over the soaring bids. “We never saw anything like this,” said Marco Antonio Martins Almeida, Brazil’s oil secretary, in an interview.

The auction kicked off with the sale of onshore blocks in the northeastern Parnaiba basin, followed by offshore blocks in the Foz do Amazonas basin, near the mouth of the Amazon river, and in the Barreirinhas basin further south.

Petrobras, Portugal’s Galp Energia SGPS SA and OGX Petroleo e Gas SA, the oil startup controlled by Brazilian billionaire Eike Batista, won early onshore blocks.

OGX, which has lost nearly 90 percent of its market value since the company failed to meet initial production targets, aggressively charged into the auction securing rights to 8 blocks so far, both onshore and off, through bids totalling about 158 million reais.

Britain’s BP Group Plc and France’s Total SA were among the successful bidders for the offshore Amazon blocks, located just south of a major 2012 oil discovery off the coast of French Guyana. Other successful bidders included Australia’s BHP Billiton Plc, until now not a big player in Brazilian oil, and Britain’s BG Group Plc.

On offer are rights to 289 onshore and offshore exploration and production blocks that add up to an area roughly the size of Bangladesh. The blocks, in regions outside the offshore swath near Rio de Janeiro where the big recent reserves were discovered, are estimated to contain at least 35 billion barrels of oil, or just over a year’s worth of global crude oil demand.


Though a record number of participants signed up to take part in the auction, government officials, industry suppliers and others were unsure before the sale how much the 64 Brazilian and international companies that registered would be willing to bet on Brazilian oil and gas.

Officials have been eager to know whether interest would remain strong among major multinational energy companies or whether smaller, adventuresome investors would prove more willing than bigger competitors.

Also of interest is how much appetite may come from the state-run energy companies of other developing countries, which are increasingly seeking cross-border ventures with like-minded enterprises.

Doubts ahead of the auction reflect what is a dramatically different energy landscape compared with the last time oil and gas rights were sold in Brazil, a promising oil frontier where production has nonetheless fallen in recent years as the government halted sales of new blocks and reworked the rules for its most promising reserves.

For starters, the world appears to have more oil than what investors had believed five years go. A shale-oil boom in the United States - and increasingly successful efforts to extract once hard-to-reach oil in Canada, Venezuela and elsewhere - mean that bidders no longer see an industry defined by dwindling supplies.

And Brazil has startled many investors since the huge reserves near Rio were discovered. Seeking greater control over future concessions, and a greater share of oil produced in the so-called subsalt region where the big new discoveries lie, the government upended a regulatory model that had proven popular with foreign investors since the 1990s.


Still, the potential for profit appears to be motivating bidders, many of whom are used to operating in countries far less investor-friendly than Brazil. In addition to whatever upside the blocks on auction this week offer, many investors are eager to gain or increase exposure in a country that could still boast vast undiscovered reserves.

“The size of the prize in the country is really too big for companies to ignore,” said Ruaraidh Montgomery, a Latin America analyst for energy consultancy Wood Mackenzie. “The opportunity’s just too great.”

Investors are being selective, though.

While they bid fiercely for the offshore Amazon blocks, located in promising deepwater fields, the regulator said bidders showed little interest in more speculative blocks. Only two companies, for instance, made bids for three of 26 blocks offered in shallow water closer to shore in the same basin.

Brazil’s government had initially said it expected to raise little more than 1 billion reais from the sale.

Brazilian companies are taking part despite production delays and sluggish development of new fields. Petrobras, for instance, in the second quarter of 2012 posted its first quarterly loss since 1999 and this year has struggled to ramp up output.

OGX, meanwhile, symbolizes the mundane new reality for Batista, the once high-flying commodities and energy magnate who has lost billions of dollars in net worth over the past year as investors sold off shares in the oil company and other ventures, which are taking longer to pay returns than initially promised.

Other registered foreign bidders include Chevron Corp , Exxon Mobil Corp, Royal Dutch Shell Plc , Norway’s Statoil ASA, Spain’s Repsol SA , China’s CNOOC Ltd and Angola’s Sonangol.

Most blocks being sold are in frontier regions, or under explored areas with little or no existing oil or gas output.

The blocks, mostly in north and northeast Brazil, have been broken into four onshore and seven offshore zones across 11 sedimentary basins. In addition to the Foz do Amazonas and Parnaiba basins, another area likely to attract heavy interest is the offshore blocks in the Ceara basin, off the coast near the northeastern city of Fortaleza.

Like the rest of Brazil’s offshore oil bounty, geologists believe the blocks could mirror the deep subsea oil deposits off the west coast of Africa. The deposits, scientists say, were formed over millions of years as biological matter settled in sediments deep in the rift between South America and Africa as the two continents, once contiguous, drifted apart.

$1 = 2.01 Brazilian reais Additional reporting by Kristen Hays in Houston and Pedro Fonseca and Walter Brandimarte in Rio de Janeiro; Writing by Paulo Prada; editing by Todd Benson, Dale Hudson and Bob Burgdorfer

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